Checkit — Adapting growth strategy to market conditions

Checkit (AIM: CKT)

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Research: TMT

Checkit — Adapting growth strategy to market conditions

Over the last few years, Checkit has evolved its business to a subscription-based revenue model and adapted its operations to drive and support growth. Providing intelligent operations software for deskless workers, Checkit is focused on driving adoption of its software by large, multinational enterprises. Recent contract wins and upsells in the US show progress towards the target of generating the majority of annualised recurring revenue (ARR) in the US.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Adapting growth strategy to market conditions

Company outlook

Software and comp services

19 July 2023

Price

21p

Market cap

£23m

$1.31/£

Net cash (£m) at end FY23

15.6

Shares in issue

108.0m

Free float

56%

Code

CKT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.7)

(25.0)

(34.4)

Rel (local)

(4.3)

(20.8)

(35.8)

52-week high/low

42.5p

14.0p

Business description

Checkit optimises the performance of people, processes and physical assets with its intelligent operations software. It is headquartered in Cambridge, UK, and has operations centres in Fleet, UK, and Tampa, US.

Next events

H124 trading update

10 August 2023

Analyst

Katherine Thompson

+44 203 077 5730

Checkit is a research client of Edison Investment Research Limited

Over the last few years, Checkit has evolved its business to a subscription-based revenue model and adapted its operations to drive and support growth. Providing intelligent operations software for deskless workers, Checkit is focused on driving adoption of its software by large, multinational enterprises. Recent contract wins and upsells in the US show progress towards the target of generating the majority of annualised recurring revenue (ARR) in the US.

Year
end

Revenue
(£m)

ARR
(£m)

PBT*
(p)

EPS*
(p)

DPS
(p)

EV/sales
(x)

01/22**

8.4

9.0

(6.1)

(9.0)

0.0

0.8

01/23**

10.3

11.5

(7.3)

(6.9)

0.0

0.7

01/24e

12.5

13.3

(5.2)

(4.9)

0.0

0.6

01/25e

14.6

15.9

(3.8)

(3.5)

0.0

0.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing operations only; FY22 restated.

Addressing a large, underserved market

Checkit’s intelligent operations software platform is an end-to-end solution designed to automate the interaction between people, assets and buildings. Benefits include better oversight, improved productivity and energy efficiency, and the ability to identify missed sales opportunities as well as risks. The company estimates that it has an addressable market of 800 million deskless workers across its target verticals (retail, healthcare, facilities management, franchise and pharmaceuticals), a market traditionally neglected by enterprise software vendors.

Pure-play subscription business focused on ARR growth

Checkit has completed its transition to a pure-play subscription business with the phasing out of one-off project work. In FY23, recurring revenue made up 93% of continuing revenue and we forecast this to increase to 96% for FY24. The company is focused on growing its subscriber base, particularly in the US, through signing up new customers and encouraging existing customers to broaden their adoption of Checkit’s software. In the current tougher economic environment, the company is maintaining its growth strategy while reducing operating costs and preserving cash in order to accelerate its path to profitability.

Valuation: Large discount to peers

On an EV/sales multiple of 0.6x for FY24e and 0.5x FY25e, Checkit trades at a material discount to the UK software sector (2.5x current year sales, 2.2x next year sales) and US SaaS peers (6.9x current year, 5.8x next year). If Checkit were to trade on the UK average for FY24e, it would be worth 43p per share and moving to trade in line with US SaaS peers would imply a valuation of 94p. Sustained ARR growth will be the key trigger for Checkit to attract a multiple more in line with SaaS peers, evidenced by customers signing up to use its software and existing customers expanding their usage. Faster movement towards break-even should also support the share price.

Investment summary

Company description: Adding intelligence to deskless operations

Checkit provides software and services that optimise the performance of people, processes and physical assets in large and complex organisations. Checkit’s intelligent operations software platform is designed to connect people, assets and buildings in real time via workflow management, automated monitoring and buildings management applications. The main focus of the group is to encourage adoption of its platform, both signing up new customers and expanding usage within its existing blue-chip customer base. The company has now completed the transition to a pure-play subscription business with high levels of recurring revenue (93% in FY23).

Financials: Growth in recurring revenues

Checkit reported ARR growth of 28% in FY23, helped by upsells to its existing customer base and price increases (which resulted in net revenue retention of 116%), new customer wins and the transition of some US maintenance contracts to a subscription basis. We expect ARR growth of 16% in FY24, accelerating to 19% in FY25. Revenue from continuing operations increased by 22% y-o-y to £10.3m in FY23 and recurring revenue increased 41% y-o-y; we forecast revenue growth of 21% in FY24 and 17% in FY25. The adjusted EBITDA loss widened to £6.4m in FY23 but was lower in H2 than H1 as the company reduced headcount and improved gross margins. We forecast an EBITDA loss of £3.7m in FY24, reducing to £2.3m in FY25. The company remains well funded: cash at the end of FY23 stood at £15.6m and we forecast this to reduce to £9.5m by the end of FY24 and £6.2m by the end of FY25.

Valuation: Not reflective of SaaS potential

On EV/sales multiples of 0.6x for FY24e and 0.5x for FY25e, Checkit trades at a significant discount to the UK software sector (2.5x current year sales, 2.2x next year sales) and US SaaS peers (6.9x current year, 5.8x next year sales. In our view, this reflects its current loss-making position and size. Valuing the company at the average of UK software peers for FY24e would result in a per-share value of 43p and moving to trade in line with US SaaS peers would imply a valuation of 94p. Sustained ARR growth will be the key trigger for Checkit to attract a multiple more in line with SaaS peers, evidenced by new customers signing up to use its software and existing customers expanding their usage. In the current environment, faster movement towards break-even is also likely to support the share price.

Sensitivities: Ability to scale

The main factors that will influence our estimates and the share price include the group’s ability to scale, the dependence on a number of large customers, competition, supply chain and shareholder concentration.


Company description: Intelligent operations software

Checkit designs, builds and operates cloud-based services and devices that connect people, processes and places in real time. The Checkit software platform supports several workplace applications: workflow management for remote workers, automated sensors and buildings management.

Company background

Checkit has evolved out of the company previously called Elektron Technology (Elektron). In May 2019, Elektron acquired Next Control Systems (a provider of high-end, service-based temperature monitoring for healthcare and life sciences in the UK, as well as data-related buildings energy management system, BEMS, services) for cash of £10.5m and renamed it Checkit UK. In July 2019, Elektron announced that it was selling Elektron Technology UK, which included the Bulgin business, for a cash consideration of £105m. The deal completed in September 2019. The disposal left two businesses within Elektron: Checkit software and Elektron Eye Technology (EET). Of the net proceeds of £94m, Elektron returned £81m to shareholders in a tender offer for shares (two shares for every three held) at 65p per share. This reduced the number of shares outstanding from 186m to 62m. On 2 October 2019, Elektron changed its name to Checkit and in July 2020, Checkit sold the EET assets for total proceeds of £0.9m. In February 2021, Checkit acquired Tutela Monitoring Systems for £0.6m (see Building foundations in the US), expanding its presence in the United States. In November 2021, the company raised gross proceeds of £21m through issuing 45,561,020 shares at 46p per share.

Business description

Checkit has developed an intelligent operations platform for deskless workers, combining software, sensors and services. The software is licensed on a subscription basis and is available via the cloud. The group is headquartered and has its product development in Cambridge, with operations centres in Fleet, Hampshire and Florida, US. The group has more than 160 employees and c 400 customers.

Group strategy: Accelerate platform adoption

The group’s goal is to be the global leader in solutions that improve the productivity of the billions of deskless workers around the globe. Its intelligent operations software platform helps businesses to improve efficiency by capturing, connecting and comprehending actionable insights from what it calls ‘dark operations’ (ie the hidden activity of the deskless workforce and their interactions with critical equipment and buildings).

The main focus of the group is to encourage adoption of its platform, both signing up new customers and expanding usage within its existing customer base. The company is a more recent entrant to the United States, where it is keen to build its presence. The company has more than doubled ARR over the last two years and is targeting ARR of £100m in the longer term.

We outline below the company’s planned areas of focus when it raised funds in 2021 and the current status of those plans:

Expand the company’s sales reach to address the global market opportunity. The company has hired in sales and marketing, particularly in the United States, and now believes it has sufficient headcount to achieve its growth targets.

Target the opportunity to expand within the existing customer base: ongoing.

Develop strategic alliances and partnerships to further accelerate customer acquisition. The partnership strategy has soft launched and Checkit has signed up two partners to date.

Create marketing initiatives to communicate the brand and value proposition: ongoing.

Increase market share in North America, with the target of this region becoming the largest ARR contributor: ongoing. In H123 the company realised its first $1m+ ARR customer in the United States and the company recently highlighted three material contracts in the United States worth a minimum of $1m over their three-year terms. By the end of FY23, the US made up 24% of ARR.

Product development to expand the set of use cases, improve platform compatibility to integrate with more Internet of Things (IoT) sensors and enhance the analytics and insights dashboard: ongoing (discussed in more depth in the product development section).

Transition the BEMS business unit to a SaaS model: done.

Focus on verticals with high numbers of deskless workers

The group is focused on three main verticals that meet the criteria of having multi-site operations with a high number of non-desk-based workers. Verticals and selected customers include:

Healthcare: NHS, Grifols, Nuffield Health.

Retail: Waitrose, BP, Compass.

Hospitality: Dishoom, Tenpin, Center Parcs.

The table below shows the market focus and the type of solution offered by size of company.

Exhibit 1: Checkit’s go-to-market strategy

Source: Checkit

Management

The board consists of Non-executive Chairman Keith Daley, CEO Kit Kyte and CFO Greg Price (see biographies at the end of the report). Daley was the chairman of Elektron for 15 years and is a 19.4% shareholder of Checkit. Non-executive directors include Simon Greenman (an AI specialist with 25 years of global technology leadership experience) and Alex Curran (regional CEO, North America, for Aptitude Software, an LSE-listed company).

Market background

Bringing clarity and oversight to deskless workers

With its workflow management software, the company is focused on connecting and empowering deskless mobile workers who are not able to use desktop software in their day-to-day working environment. Roughly 80% of the global workforce (2.7 billion people) does not work at a desk, instead working on the front line in sectors such as retail, hospitality, facilities management, healthcare, manufacturing, agriculture and leisure. These workers are not able to make use of the typical software packages that office workers rely on such as ERP, CRM, HCM,2 accounting, communications or productivity software. Instead, front-line workers may use pen and paper to complete checklists, spreadsheets, one-off apps, legacy solutions or simple task management systems. The use of these methods results in what Checkit calls ‘dark operations’. Management has little oversight of what employees are doing and fails to capture operational intelligence from workers’ activities. It can be difficult for those workers to feel engaged with the companies they work for and it also makes it more complicated to ensure that company procedures and policies are followed, which can have implications for a company’s brand. As well as helping companies gain oversight of their deskless workers’ activities, other demand drivers include:

  ERP: enterprise resource planning, CRM: customer relationship management, HCM: human capital management.

Labour shortages and wage inflation: even while global economies are moving into recession, companies are struggling to find staff with the necessary qualifications and experience and wage inflation is high. Software that can help existing employees to work as efficiently as possible, while improving their working environment, should help counteract these pressures.

Increasing energy costs: Checkit’s software helps companies manage energy usage more efficiently.

Underserved software market

Of the current enterprise software market (estimated at $247bn in 2022, source: Statista), only a small proportion is designed for this group of workers. Venture capital investment firm Emergence Capital has estimated that only 1% of software venture funding is focused on this type of software. The large enterprise software vendors may add some mobile functionality to their applications but have not developed applications that are specifically focused on the workflows of deskless workers. Software companies tend to develop applications for specific processes when there is a high volume of similar types of transactions, for example supply chain software for purchasing, CRM software for customer interaction. Checkit’s sweet spot is supporting workers who perform a combination of routine tasks, and infrequent but important tasks where the volume and variety of tasks is such that it is difficult to build a targeted application.

Served addressable market of 800 million workers

Checkit targets three of the seven sectors described above (retail, hospitality, healthcare) and estimates this is a market of 800 million workers. The company breaks down the addressable market into solutions for developing ‘Smarter People’ and ‘Smarter Assets and Buildings’. Smarter People software tools include workforce management, micro-learning, field service and employee communication, with Checkit focused mainly on the first area. Smarter Assets and Buildings encompasses global IoT and smart buildings software.

Limited competition for an integrated solution

The software that has been developed for the Smarter People market has come from smaller private companies, typically with a vertical focus. In Exhibit 2, we detail a number of competitors for the workflow management application, all of which are private companies. Looking at Exhibit 2, Checkit views its competitive advantages as having the ability to scale, sensor integration, collaboration and analytics strength, and the growing number of pre-built processes and dashboards. Management believes that it would require the combined solutions of two or three other vendors to match Checkit’s end-to-end functionality.

Exhibit 2: Selected competitors

Company (product)

HQ

Customers

Users

Sectors served

Sensors

Funding

Comment

FORM (FORM MarketX)

US

>225 brands in 70 countries including Beam Suntory, Compass Group, Diageo, Under Armour

400k

Beer, wine & spirits; retail; consumer goods; restaurants; facilities management; healthcare

Temperature

$72m

Acquired by FORM.com in December 2020; was previously called GoSpotCheck.

SafetyCulture (iAuditor, EdApp)

Australia

70k in 85 countries including BHP Billiton, Burger King, IKEA, Sofitel

500k

Construction, hospitality, manufacturing, retail, transport & logistics, facilities management

Temperature, humidity, carbon monoxide, air particulate, door open/closed, air pressure

$223m

Health & safety focused, 680 staff. FY22 revenue $92.4m (+24% y-o-y). Valued at A$2.2bn in May 2021 funding round.

Jolt

US

Includes Chick-fil-A, McDonald’s, Burger King, Marriott

N/A

Restaurants, hotels, car washes, retail, grocery

Temperature

>3.1bn tasks completed using the software to date

Access Group (Trail)

UK

Includes Wagamama, Bill’s, Leon

N/A

Hospitality, leisure

No

£2m

>90m tasked completed using the software to date. Acquired in August 2021.

UpKeep

US

>3,000 including Yamaha, Siemens, Unilever

400k (most use free version)

Facilities management (maintenance focused)

Temperature

$49m

>10m work orders created on the app. Revenue up 206% in 2019.

YOOBIC

US

>300 brands in 80 countries including Lancôme, Mazda, Puma

335k locations

Retail, restaurants, logistics, manufacturing, fashion, beauty, grocery, pharmaceutical

No

$80m

Retail focused. >1m activities per month on its platform. Task management, staff communication, mobile learning. Valuation in range $300–400m.

Zenput

US

>750 in 100 countries including Chipotle, Domino’s, Five Guys

60k locations

Restaurants, convenience stores, grocery

Temperature

$47m

Acquired by CrunchTime!, a back-of-house operations platform provider to the restaurant industry, in June 2022. Focus on franchise businesses.

Source: Company websites

Product strategy

Checkit’s intelligent operations platform for deskless workers is designed to support smarter operations management – to enable companies to provide a better customer experience and improve efficiency while meeting all compliance requirements.

Checkit intelligent operations platform

Checkit’s intelligent operations platform includes the cloud-based core apps for workflow management and automated monitoring, integrated with sensor networks where appropriate. Information from the apps is fed back to the platform where it can be reviewed by management. The data are available for analysis either within the platform or for use with third-party business intelligence applications. The platform is based on four pillars:

Capture data from people, places and assets in real time.

Connect people, places and assets through connected workflows; give management visibility in real time.

Collaborate – facilitate shared work and task approvals carried out by deskless workers. Often deskless workers need to work on the same tasks at the same time; role-based permissions allow one worker to start a task before handing it over for approval by another worker.

Comprehend – analyse the data produced by workers to make the business more efficient, understand risks and identify revenue opportunities.

Checkit offers software, sensors and services and we describe each in more detail below.

Software – providing a digital assistant

The goal of the software is to create effective workforces, with staff doing the right thing, at the right time and in the right place. It has been developed to be a digital assistant that guides and tracks the actions of deskless workers and it also gives managers the ability to oversee and respond in real time.

Currently, front-line workers may use pen and paper to complete checklists, spreadsheets, one-off apps, legacy solutions or simple task management systems. Often, these methods mean information is not provided to management on a timely basis, work may not be performed in a consistent manner, it is difficult to get an overview of how different sites and teams are performing, and staff can feel disconnected from the rest of the company. Checkit’s software has been developed to address these problems. The app currently can be used on any Android device, and an iOS version is currently being piloted by several customers. Exhibit 3 shows several screen shots of the app.

Exhibit 3: Examples of app functionality

Source: Checkit

The software supports real-time collaboration, so multiple staff can work on a single set of actions at the same time, reducing the amount of duplicated effort.

Bringing insight to management

The diagram below shows the configuration of Checkit’s platform. Workflows and data are all managed in the control centre, with data stored in the cloud. The platform features no-code workflows – new activities or processes can be designed with a drag-and-drop builder. These are then allocated to the relevant sites and roles. Shared workflow libraries allow organisations to build, share and easily update workflow templates. From time to time, Checkit will add new pre-built workflows to the platform based on customer demand. Use cases include health and safety, compliance, workforce management, production planning, and escalation and alerting.

The workflow management app communicates with the control centre, allowing management to review worker activity across the company’s entire estate. Data can be tracked by site, team, individual or process. Checkit provides some standard key performance indicators (KPIs) and dashboards to give an overview of performance and customers can also feed data from the control centre into their own business intelligence (BI) systems. Checkit provides an open API3 to business intelligence tools such as Microsoft Power BI.

  Application programming interface.

Exhibit 4: Checkit platform

Source: Checkit

Case study: Reducing manual processes for the John Lewis Partnership

The two brands operated by the John Lewis Partnership (JLP), John Lewis and Waitrose, work with Checkit to digitise and automate a variety of different processes.

The goal: to maintain a safe and compliant business environment for employees and customers, efficiently delivering high-quality products and an excellent customer experience while maintaining consistent operating margins across locations.

The challenges: rising costs of energy, asset maintenance issues, stock wastage, and time-consuming safety and compliance processes for the thousands of refrigerators across hundreds of stores.

The solution: John Lewis and Waitrose replaced their manual and inefficient procedures with digitised and automated ones. More than 22,000 refrigeration assets are now monitored constantly by advanced sensors, real-time asset monitoring and alarming software, and comprehensive food safety monitoring services. Staff use Checkit’s workforce management software, which serves as a digital assistant to prompt, guide and capture their daily activity. Management can view asset and energy performance via the Checkit platform.

The outcome: JLP has made annual savings of more than £28m: £24m from freeing up staff for other work, £3.6m in reduced food wastage and £0.8m from optimised energy usage. Checkit believes there is potential to expand JLP’s existing sensor ecosystem and increase workflow automation through new software use cases and estimates this could generate a further £7m in annual savings.

Sensors – automated asset monitoring

Checkit provides asset protection and 24/7 compliance via automated monitoring of temperature sensors. Wireless monitoring solutions collect continuous data from multiple sites, enabling trend analysis and live alerts. Connected Automated Monitoring (CAM) can be used for general applications including food safety, general medical and environmental temperature checks. Connected Automated Monitoring + (CAM+) meets the exacting standards of healthcare, pharmaceutical, life science and biotech research, providing temperature control and assurance for samples, reagents and drugs. Customers typically operate in a demanding regulatory regime where there is financial risk to the stock value and potential legal liabilities if any harm arises from improper storage of products/samples.

The solution provides specialist wireless sensors, cloud data recording, compliance process management, manned alert management, calibration and onsite QA processes. Alert to Workflow technology enables users of Checkit’s monitoring technology to feed sensor alerts from equipment or buildings directly into a corrective workflow for action by front-line employees.

The service includes a call centre that provides a monitoring service so that when an alert is triggered, someone calls the customer. The company has started using Twilio to automate some alert calls and the Alert to Workflow feature described above could also reduce the level of manual intervention required. This supports Checkit’s growth ambitions as the company will not need to grow call centre headcount to match growing demand for the software, and existing call centre staff will be able to focus on providing value-added services for customers.

Checkit also sells its workflow management software to existing sensor customers, for example Hallmark Care Homes and University Hospital Southampton. In these cases, functionality is not targeted at clinical applications, but instead is focused on improving operational efficiency within hospitals or care homes, for example ensuring patients are provided meals on time or rooms are checked.

Case study: Helping Octapharma store plasma safely

Switzerland-headquartered Octapharma is one of the world’s largest human protein manufacturers, developing human protein from human plasma and human cell lines. The company has more than 190 donation centres globally and serves hundreds of thousands of patients a year in more than 118 countries.

The goal: protect valuable plasma products by managing temperature safety at scale.

The challenge: temperature was monitored using paper chart records and manual interpretations. The process was inefficient, costly, time-consuming and prone to technical issues. Maintenance and calibration services often involved costly calls to multiple vendors and managing scheduled visits from a variety of technicians. For repairs, it could take 24–28 hours for technicians to address and obtain replacement parts.

The solution: Octapharma uses Checkit’s digital temperature safety solution to replace manual processes. This comprises automated and fully calibrated sensors, digitised reporting, cloud-based compliance records storage and highly responsive customer support.

The outcome: on an annual basis, Octapharma has saved hundreds of hours of staff time. It has also cut management auditing time, reduced costs by consolidating systems and minimised the risk of product spoilage.

Product development

Product development is focused on the following areas:

iOS app. This is important for the US market where Apple devices in the workplace are more common. Several customers are currently trialling this.

Integration with enterprise identity providers to enable customers to manage users at scale.

Integration with third-party IoT networks, to expand the sources of data. In March 2022, Checkit signed a partnership with Disruptive Technologies, a Norwegian developer of wireless sensors and IoT infrastructure. The expanded range of sensors includes air quality and desk occupancy monitoring..

Enhanced data analytics. The company is investing in the data platform, to support the generation of predictive insights for customers and to combine data from the Checkit platform with data from other sources such as third-party sensors.

Strengthening the resilience, performance and scalability of the platform, to ensure that as customers continue to grow, the platform can seamlessly serve their needs at lower unit costs.

Business model

Recurring revenue streams

The software is sold on a subscription basis, with a minimum contract length of three years. Previously, some contracts had been sold with a minimum contract length of one year, and those customers are now on rolling contracts that terminate with 12 months’ notice. Customers are required to pay yearly in advance. Licences are usually based on the number of active devices in use, allowing customers to bring their own handheld devices if so desired. Exhibit 2 shows the segmentation of the market, with Checkit’s offerings sold in three tiers: enterprise, mid-tier and essentials.

Customers can use Checkit-sourced hardware (designed by Checkit and manufactured by a third party) or their own hardware (customers are increasingly using their own smartphones or tablet devices). Checkit-sourced hardware such as the Memo (a rugged handheld device for dedicated use with Checkit’s workflow management software) and a Bluetooth probe for temperature checks can be purchased outright. For sensors, Checkit offers its ‘Peace of Mind’ service – customers can pay one subscription fee to include software, installation, support and maintenance of software and hardware, and provision of hardware.

Over time, Checkit intends to increasingly integrate with third-party sensor networks. This is likely to reduce the need to design proprietary sensors.

Non-recurring revenue streams

For the Checkit software platform, this includes consulting, platform customisation and ad hoc product enhancements. Other non-recurring work includes installation of sensors (first-time and additional), small works and maintenance of equipment, and callouts for engineers. Work tends to be charged on a day rate basis and is mostly undertaken on site.

Building a subscription business

Over the last few years, management has worked to reshape the business to ensure it is built for scale. The company recently completed the transition of the BEMS business to a SaaS business model and now Checkit is a pure-play subscription business. As the company has shifted its focus from a hardware-based business to a subscription business with international ambitions, the structure of the company has evolved to reflect the requirements of a SaaS business.

The key features of SaaS software are as follows:

Multi-tenant: all customers use the same software solution. It is not customised but can be personalised and configured by individual users. The benefit of this to the software developer is that only one version of the software needs to be maintained and software upgrades can be undertaken on an ad hoc basis. Each upgrade is then made available to all users simultaneously. For the customer, this means more frequent small upgrades rather than the disruption of larger upgrade projects.

Cloud-based: the software is accessed via browsers or mobile apps with all data stored in the cloud. This means users can access the software from anywhere, a key benefit for deskless workers and those working from home.

Subscription licensing: rather than buying a perpetual licence upfront with an ongoing maintenance contract, the customer signs up to use the software for a minimum period (in the case of Checkit, typically three years) and can choose to stop using the software at any time after this period (in the case of Checkit, following twelve months’ notice). The subscription fee includes the provision of upgrades and support on an ongoing basis. While SaaS companies highlight the high recurring revenues this business model provides (typically 80%+), this also requires the provision of high levels of ongoing customer service to ensure customer retention. For companies used to the perpetual licence model, this can represent a significant mind shift and the customer service ethos needs to run through the entire company.

Operational rather than capital cost for customers: as customers do not need to sign up for large perpetual licences and potentially complex installation projects, the decision to use SaaS software shifts from being a capital expenditure project to being operational expenditure. Small numbers of employees can sign up to trial software before extending to a wider base if deemed suitable. This can make it easier to sign up new customers, although it also reduces the barriers to entry for competitors.

Successful SaaS software businesses typically focus on growing the number of subscribers as fast as possible, which requires a significant investment in sales and marketing headcount. At the same time, product development is a key investment area, so that software remains competitive and adapts to customer demand for new functionality.

Growing the pipeline

During the course of FY22, the company doubled the size of its sales and marketing teams and appointed a managing director of the US business to spearhead the overall US growth strategy. As the first crucial step to growing its subscriber base, the company focused on the size and quality of the new business pipeline. In the US, the new customer pipeline includes a number of multi-site organisations in the healthcare, food retail and hospitality sectors. The mix by customer type has shifted in favour of tier 1 enterprise customers (see Exhibit 5). In the Financials section below, we discuss how the company has converted this pipeline to grow its subscriber base.

Exhibit 5: Mix of pipeline by size of customer

Source: Checkit

Land and expand strategy

Checkit typically works with a potential new customer to identify and digitalise a single use case as a proof of concept (‘seed’). Once operational, this should demonstrate impact and allows the customer to assess the return on investment. Checkit then ideally works with the customer to identify and deploy additional use cases (‘land’). Checkit’s customer success team works alongside the customer to identify and encourage additional digitalisation opportunities (‘expand’). The ultimate goal is for customers to use Checkit’s platform across their entire deskless workforce and asset base.

Sensitivities

Our forecasts and the share price will be sensitive to the following factors:

Ability to scale: the pace at which the company grows the SaaS business may differ from our forecasts. Our forecasts assume that Checkit is able to grow the SaaS software part of the business without substantially increasing its cost base – if this is not the case, it would push out the timing of cash break-even.

Competition: currently the closest competitors to Checkit are privately owned businesses, many of which are likely to be loss-making. If larger, better-funded software companies decide to target this space, Checkit may struggle to compete.

Reliance on key customers: Checkit has several customers that contribute a material proportion of revenue. The loss of one of these customers could have a significant impact on revenue and profitability.

Supply chain: Checkit designs hardware devices that are manufactured by third parties and will need to manage the availability of product.

Shareholder concentration: Chairman Keith Daley owns 19% and D&A (UK) Holdings owns 22% of the company.

Financials

Income statement

The company discloses revenue split between recurring and non-recurring revenues and period end ARR. Checkit closed down the BEMS one-off project business in FY23 and it is now reported in discontinued operations. The remaining software-related business has fully transitioned to a SaaS business model. We forecast revenue growth of 21% in FY24, reflecting further expansion in the subscription base, and 17% in FY25.

The main KPI to track is ARR, which measures how quickly the company is growing its base of subscription licences. In FY23, the company grew ARR by 28% over the year. It noted that net revenue retention was 116% in FY23, with ARR benefiting from upsells and improved pricing, and gross churn of only 1%. ARR in the US was £2.8m at year-end, up 91% y-o-y, benefiting from contracts with biopharma customers and a large resort and casino operator. We forecast ARR growth of 16% in FY24 and 19% in FY25.

Exhibit 6: Summary forecasts – continuing operations

£m

FY22

FY23

FY24e

FY25e

Revenue

8.4

10.3

12.5

14.6

Recurring

6.8

9.6

12.0

14.1

Non-recurring

6.5

1.2

0.5

0.5

Revenue growth (y-o-y)

22.6%

21.1%

16.9%

Recurring

41.5%

24.6%

17.4%

Non-recurring

-80.9%

-61.0%

5.7%

Recurring/total revenue

81.0%

93.4%

96.1%

96.5%

Gross profit

4.6

6.5

8.2

10.0

Gross margin

54.8%

63.1%

65.5%

68.5%

Operating costs

(10.2)

(12.9)

(11.9)

(12.3)

EBITDA

(5.6)

(6.4)

(3.7)

(2.3)

Depreciation

(0.5)

(0.5)

(0.5)

(0.5)

Amortisation

0.0

(0.5)

(1.0)

(1.0)

Normalised operating profit

(6.1)

(7.4)

(5.2)

(3.8)

Exceptional items

(1.0)

(4.3)

0.0

0.0

Acquired amortisation

(1.4)

(0.5)

0.0

0.0

Share-based payments

0.0

(0.2)

(0.1)

(0.1)

Reported operating profit

(8.5)

(12.4)

(5.3)

(3.9)

Annualised recurring revenue

9.0

11.5

13.3

15.9

ARR growth

57.9%

27.8%

15.9%

19.4%

Source: Checkit, Edison Investment Research

Balance sheet and cash flow

We forecast that Checkit will capitalise £2.0m in development costs in FY24 and FY25. The company spends minimal amounts on tangible fixed assets and has property lease commitments of c £0.3m per year.

As subscription licences are paid for 12 months in advance, the company typically has negative working capital. The company has built up hardware inventory to ensure it can deliver as customer projects are rolled out.

The company expects to break even at the EBITDA level at some point during FY26, which should result in positive EBITDA for FY27, although this is beyond our forecast period. With gross/net cash of £15.6m at the end of FY23, we estimate that the company currently has sufficient funding to reach cash break-even.

Valuation

With Checkit not expected to hit full year EBITDA profitability within our forecast period, comparison with peer multiples is restricted to EV/sales multiples. Exhibit 7 shows how Checkit is trading compared to the UK software sector and to the average of c 100 US SaaS companies. Very few of the UK group are pure-play SaaS companies, with many in the midst of a shift from perpetual to SaaS-based licensing. In Exhibits 8 and 9, we show the valuation of Checkit based on a range of EV/sales multiples for FY24 and FY25.

Checkit trades at a significant discount in both years in our view reflecting its current loss-making position and size. The company recently revised its growth strategy to accelerate the timescale to reaching profitability. By the end of FY25, we expect Checkit will still have a net cash position of £6.2m and reduced EBITDA losses and we estimate the company should have sufficient cash to reach EBITDA break-even.

Exhibit 7: Peer group multiples

EV/sales (x)

Revenue growth (%)

CY

NY

CY

NY

Checkit

0.6

0.5

21.1

16.9

UK software – average

2.5

2.2

15.5

14.2

UK software – median

1.9

1.8

11.7

9.9

US SaaS software – average

6.9

5.8

15.2

16.2

US SaaS software – median

5.9

4.8

15.6

16.4

Source: Edison Investment Research, Refinitiv (as at 03 July)

Exhibit 8: Checkit valuation based on FY24e EV/sales multiples

FY24e sales multiple

1x

2x

4x

6x

2.5x*

6.9x**

EV (£m)

12.5

24.9

49.9

74.8

30.7

85.9

Per share (p)

26.0

37.5

60.6

83.7

42.9

94.0

Source: Edison Investment Research. Note: *UK software average CY. **US SaaS average CY.

Exhibit 9: Checkit valuation based on FY25e EV/sales multiples

FY25e sales multiple

1x

2x

4x

6x

2.2x*

5.8x**

EV (£m)

14.6

29.2

58.3

87.5

32.5

84.7

Per share (p)

27.9

41.4

68.5

95.5

44.5

92.9

Source: Edison Investment Research. Note: *UK software average NY. **US SaaS average NY.

Valuing the company at the average of UK software peers for FY24e would result in a per share value of 43p and moving to trade in line with US SaaS peers would imply a valuation of 94p. Sustained ARR growth will be the key trigger for Checkit to attract a multiple more in line with SaaS peers, evidenced by customers signing up to use its software and existing customers expanding their usage. In the current environment, faster movement towards break-even is also likely to support the share price.

Exhibit 10: Financial summary

£m

2019

2020

2021

2022*

2023*

2024e

2025e

31-January

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.0

9.8

13.2

8.4

10.3

12.5

14.6

Cost of Sales

(1.0)

(7.2)

(6.7)

(3.8)

(3.8)

(4.3)

(4.6)

Gross Profit

0.0

2.6

6.5

4.6

6.5

8.2

10.0

EBITDA

 

 

(2.3)

(4.9)

(2.5)

(5.6)

(6.4)

(3.7)

(2.3)

Normalised operating profit

 

 

(4.4)

(6.5)

(3.1)

(6.1)

(7.4)

(5.2)

(3.8)

Amortisation of acquired intangibles

(0.1)

(1.0)

(1.3)

(1.4)

(0.5)

(0.1)

0.0

Exceptionals

0.0

(1.7)

(0.9)

(1.0)

(4.3)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

(0.2)

(0.1)

(0.1)

Reported operating profit

(4.5)

(9.2)

(5.3)

(8.5)

(12.4)

(5.4)

(3.9)

Net Interest

0.0

0.1

0.0

0.0

0.1

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(4.4)

(6.4)

(3.1)

(6.1)

(7.3)

(5.2)

(3.8)

Profit Before Tax (reported)

 

 

(4.5)

(9.1)

(5.3)

(8.5)

(12.3)

(5.4)

(3.9)

Reported tax

0.0

0.1

0.3

0.3

0.3

0.0

0.0

Profit After Tax (norm)

(4.4)

(6.4)

(3.1)

(6.1)

(7.5)

(5.2)

(3.8)

Profit After Tax (reported)

(4.5)

(9.0)

(5.0)

(8.2)

(12.0)

(5.4)

(3.9)

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

8.6

89.8

0.6

1.4

(0.3)

0.0

0.0

Net income (normalised)

(4.4)

(6.4)

(3.1)

(6.1)

(7.5)

(5.2)

(3.8)

Net income (reported)

4.1

80.8

(4.4)

(6.8)

(12.3)

(5.4)

(3.9)

Basic average number of shares outstanding (m)

178

161

62

68

108

108

108

EPS - basic normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(9.0)

(6.9)

(4.9)

(3.5)

EPS - diluted normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(9.0)

(6.9)

(4.9)

(3.5)

EPS - basic reported (p)

 

 

2.3

50.2

(7.2)

(10.0)

(11.4)

(5.0)

(3.6)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

880.0

34.7

(-36.4)

22.6

21.1

16.9

Gross Margin (%)

0.0

26.5

49.2

54.8

63.1

65.5

68.5

EBITDA Margin (%)

(230.0)

(50.0)

(18.9)

(66.7)

(62.1)

(30.0)

(15.7)

Normalised Operating Margin

(440.0)

(66.3)

(23.5)

(72.6)

(71.8)

(42.1)

(25.9)

BALANCE SHEET

Fixed Assets

 

 

5.0

8.5

6.8

8.3

4.9

5.9

7.0

Intangible Assets

2.9

7.3

6.0

7.3

4.0

4.9

5.9

Tangible Assets

1.7

1.2

0.8

1.0

0.9

1.0

1.1

Investments & other

0.4

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

19.5

19.8

17.5

29.0

22.5

16.3

11.7

Stocks

4.3

1.7

1.1

1.8

2.4

2.4

1.9

Debtors

5.1

3.4

4.4

2.9

4.5

4.4

3.6

Cash & cash equivalents

10.1

14.3

11.5

24.2

15.6

9.5

6.2

Other

0.0

0.4

0.5

0.1

0.0

0.0

0.0

Current Liabilities

 

 

(7.9)

(5.6)

(5.9)

(5.7)

(7.8)

(7.9)

(8.2)

Creditors

(7.6)

(5.1)

(5.6)

(5.2)

(7.5)

(7.6)

(7.9)

Tax and social security

(0.3)

0.0

0.0

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.5)

(0.3)

(0.5)

(0.3)

(0.3)

(0.3)

Long Term Liabilities

 

 

(0.3)

(1.3)

(0.8)

(0.6)

(0.7)

(0.7)

(0.7)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.3)

(1.3)

(0.8)

(0.6)

(0.7)

(0.7)

(0.7)

Net Assets

 

 

16.3

21.4

17.6

31.0

18.9

13.6

9.8

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

16.3

21.4

17.6

31.0

18.9

13.6

9.8

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(4.9)

(2.5)

(5.6)

(6.4)

(3.7)

(2.3)

Working capital

(0.5)

(1.0)

0.3

0.2

0.1

0.2

1.6

Exceptional & other

9.1

5.3

(0.7)

0.4

(0.2)

0.0

0.0

Tax

(0.5)

(0.5)

0.0

0.1

0.1

0.0

0.0

Net operating cash flow

 

 

5.8

(1.1)

(2.9)

(4.9)

(6.4)

(3.5)

(0.7)

Capex

(2.2)

(0.3)

(0.3)

(2.3)

(2.2)

(2.3)

(2.3)

Acquisitions/disposals

1.3

84.2

0.3

0.0

0.2

0.0

0.0

Net interest

0.0

0.1

0.0

0.0

0.1

0.0

0.0

Equity financing

0.0

(77.9)

0.5

20.2

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

(0.4)

(0.3)

(0.3)

(0.3)

(0.3)

Net Cash Flow

4.9

4.2

(2.8)

12.7

(8.6)

(6.1)

(3.3)

Opening net debt/(cash)

 

 

(5.2)

(10.1)

(14.3)

(11.5)

(24.2)

(15.6)

(9.5)

FX

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(10.1)

(14.3)

(11.5)

(24.2)

(15.6)

(9.5)

(6.2)

Source: Checkit, Edison Investment Research. Note: *BEMS treated as discontinued operations.

Contact details

Revenue by geography (FY23)

Broers Building
JJ Thomson Avenue
Cambridge CB3 0FA
UK
www.checkit.net

Contact details

Broers Building
JJ Thomson Avenue
Cambridge CB3 0FA
UK
www.checkit.net

Revenue by geography (FY23)

Management team

CEO: Kit Kyte

CFO: Greg Price

Kyte joined Checkit in February 2021 as chief commercial officer and was appointed CEO in July 2021. He has overseen the transformation of sales and marketing to drive significant growth in prospective revenue. He was previously vice-president of digital transformation services specialist Genpact, where he led European sales. His extensive leadership experience includes numerous combat roles as an army officer in the Royal Gurkha Rifles, as well as a consistent track record of leadership success in the private sector.

Price joined Checkit in April 2020 and was appointed CFO in September 2021. During his time at Checkit, he has led the group’s digital transformation programme to deliver an enhanced customer experience, and increased revenue generation and efficiency for Checkit. After qualifying as a chartered accountant in 2001, Price spent 10 years at Diageo, working in finance roles of increasing responsibility in the UK and US, culminating in the position of UK financial controller. He spent the following 10 years in senior finance roles in technology and aviation businesses, with a focus on cash management and strategic planning.

Non-executive chairman: Keith Daley

Daley was appointed to the board in 2004 and became chairman in 2008. He transitioned to a non-executive role in February 2022. Originally a corporate banker, Daley is a serial entrepreneur and chairman with a strong sales and marketing focus. He has bought, invested in, managed and sold numerous businesses over the past 37 years.

Management team

CEO: Kit Kyte

Kyte joined Checkit in February 2021 as chief commercial officer and was appointed CEO in July 2021. He has overseen the transformation of sales and marketing to drive significant growth in prospective revenue. He was previously vice-president of digital transformation services specialist Genpact, where he led European sales. His extensive leadership experience includes numerous combat roles as an army officer in the Royal Gurkha Rifles, as well as a consistent track record of leadership success in the private sector.

CFO: Greg Price

Price joined Checkit in April 2020 and was appointed CFO in September 2021. During his time at Checkit, he has led the group’s digital transformation programme to deliver an enhanced customer experience, and increased revenue generation and efficiency for Checkit. After qualifying as a chartered accountant in 2001, Price spent 10 years at Diageo, working in finance roles of increasing responsibility in the UK and US, culminating in the position of UK financial controller. He spent the following 10 years in senior finance roles in technology and aviation businesses, with a focus on cash management and strategic planning.

Non-executive chairman: Keith Daley

Daley was appointed to the board in 2004 and became chairman in 2008. He transitioned to a non-executive role in February 2022. Originally a corporate banker, Daley is a serial entrepreneur and chairman with a strong sales and marketing focus. He has bought, invested in, managed and sold numerous businesses over the past 37 years.

Principal shareholders

(%)

D&A (UK) Holdings Limited

21.8

Keith Daley

19.4

Herald Investment Management Limited

9.4

Ruffer LLP

8.2

Chelverton Asset Management

5.1

Interactive Investor Trading

3.9

EdenTree Investment Management

3.9

Hargreaves Landsdown

3.5


General disclaimer and copyright

This report has been commissioned by Checkit and prepared and issued by Edison, in consideration of a fee payable by Checkit. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by Checkit and prepared and issued by Edison, in consideration of a fee payable by Checkit. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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United Kingdom

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Research: Healthcare

Immix Biopharma — IMX-110 interim results in colorectal cancer

Immix has shared interim data from the Phase Ib/IIa trial evaluating IMX-110 in combination with tislelizumab for solid tumors. As of the data cut-off (7 July 2023), it was found that three of four participants with metastatic colorectal cancer (mCRC) showed tumor shrinkage and one of four experienced tumor control; all patients had stage IV relapsed/refractory (r/r) mCRC and had received a median eight lines of prior therapy. Dose escalation is proceeding, and dosing of the second cohort of patients in the Phase Ib portion of this study is complete. The higher dose cohort (Cohort 3) of patients with solid tumors is currently being enrolled, aiming to establish the recommended Phase II dose. With no severe adverse events reported to date, and with the early signs of efficacy, we believe these results are encouraging for the clinical development of IMX-110. We anticipate a steady flow of data readouts throughout H223 and FY24.

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