CHAMPIONS ONCOLOGY, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the condensed consolidated financial statements and related notes that appear elsewhere in this report and our most recent annual report for the year ended April 30, 2020, as filed on Form 10-K. Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations that regulatory developments or other matters will not have a material adverse effect on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Forward-looking statements speak only as of the date the statements are made. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2020, as updated in our subsequent reports filed with the SEC, including any updates found in Part II, Item 1A of this or other reports on Form 10-Q, if any. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Overview and Recent Developments We are engaged in the development and sale of advanced technology solutions and products to personalize the development and use of oncology drugs. Utilizing our TumorGraft Technology Platform (the "Platform"), a comprehensive Bank of unique, well characterized PDX models, we provide select services to pharmaceutical and biotechnology companies seeking personalized approaches to drug development. By performing studies to predict the efficacy of oncology drugs, our Platform facilitates drug discovery with lower costs and increased speed of drug development as well as increased adoption of existing drugs. Our Platform provides a novel approach to simulating the results of human clinical trials used in developing oncology drugs. We believe it costs up to $100,000 per patient in oncology clinical trials and the typical cost for each phase of development per year increases from approximately $3 million in the pre-clinical setting to approximately $150 million in 20 phase III clinical trials. Simulating trials before executing them provides benefits to both pharmaceutical companies and patients. Pharmaceutical companies can lower the risk of spending resources on drugs that do not show significant anti-cancer activities and increase the chance that the clinical development path they pursue will be focused on an appropriate patient population and a successful combination with other drugs. We plan to continue our efforts to expand our TumorGraft Technology Platform in order to expand our TOS program. We have previously disclosed that our POS program would not be the focus of our growth moving forward and this plan remains unchanged. In December 2019, a novel strain of coronavirus, COVID-19, was first identified in Wuhan, China. This virus continues to spread globally and, as of December 2020, has spread to over 200 countries, including the United States. The spread of COVID-19 from China to other countries has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Many countries around the world imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. Employers are also required to increase, as much as possible, the capacity and arrangement for employees to work remotely. In addition, on March 11, 2020, the President of the United States issued a proclamation to restrict travel to the United States from foreign nationals who have recently been in certain European and Latin American countries. Although, to date, these restrictions have not impacted our operations, the effect on our business, from the spread of COVID-19 and the actions implemented by the governments of the United States and elsewhere across the globe, may worsen over time. We continue to monitor our operations and applicable government recommendations and requirements. Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel, pursue partnerships and other business transactions, receive shipments of biologic materials, as well as be impacted by the temporary closure of the facilities of suppliers. The spread of an infectious disease, including COVID-19, may also result in the inability of our suppliers to deliver supplies to us on a timely basis. In addition, health professionals may reduce staffing and reduce or postpone meetings with clients in response to the spread of an infectious disease. Though we have not yet experienced such events, if they would occur, they could result in a period of business disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. However, as of the date of this Form 10-Q, we have not experienced a material adverse effect on our business nor the need for reduction in our work force; and, currently, and we do not expect any material impact on our long-term activity. The extent to which COVID-19 impacts our business will depend on future developments which are highly uncertain and cannot be predicted, including, but not limited to, new information which may emerge concerning the increased severity of COVID-19, the actions to contain COVID-19, or treat its impact. Liquidity and Capital Resources Our liquidity needs have typically arisen from the funding of our research and development programs and the launch of new products, working capital requirements, and other strategic initiatives. In the past, we have met these cash requirements through cash, working capital management, proceeds from certain private placements and public offerings of our securities, and sales of products and services. For the six months ended October 31, 2020, the Company had net income of approximately $76,000 and cash provided by operations of $164,000. As of October 31, 2020, the Company had an accumulated deficit of approximately $72.6 million, working capital of $2.2 million, and cash of $8.6 million. We believe that our cash on hand, together with expected positive cash flows from operations for fiscal year 2021, are adequate to fund operations through at least 12 months from the filing of this 10-Q. However, should our revenue expectations not materialize, we believe we have cost reduction strategies that could be implemented without disrupting the business or restructuring the Company. Should the Company be required to raise additional capital, there can be no assurance that management would be successful in raising such capital on terms acceptable to us, if at all. Operating Results The following table summarizes our operating results for the periods presented below (dollars in thousands): 21 For the Three Months Ended October 31, 2020 % of Revenue 2019 % of Revenue % Change Oncology services revenue $ 10,117 100.0 % $ 7,625 100.0 % 32.7 % Costs and operating expenses: Cost of oncology services 5,644 55.8 3,881 50.9 45.4 Research and development 1,650 16.3 1,341 17.6 23.0 Sales and marketing 1,348 13.3 977 12.8 38.0 General and administrative 1,468 14.5 1,135 14.9 29.3 Total costs and operating expenses 10,110 99.9 7,334 96.2 37.9 Income from operations $ 7 0.1 % $ 291 3.8 % 97.6 % For the Six months ended October 31, 2020 % of Revenue 2019 % of Revenue % Change Oncology services revenue $ 19,664 100.0 % $ 14,362 100.0 % 36.9 % Costs and operating expenses: Cost of oncology services 10,980 55.8 7,633 53.1 43.8 Research and development 3,247 16.5 2,644 18.4 22.8 Sales and marketing 2,556 13.0 1,847 12.9 38.4 General and administrative 2,850 14.5 2,561 17.8 11.3 Total costs and operating expenses 19,633 99.8 14,685 102.2 33.7 Income (loss) from operations $ 31 0.2 $ (323) (2.2) % (109.6) % Oncology Services Revenue Oncology services revenue was $10.1 million and $7.6 million for the three months ended October 31, 2020 and 2019, respectively, an increase of $2.5 million or 32.7%. Oncology services revenue was $19.7 million and $14.4 million for the six months ended October 31, 2020 and 2019, respectively, an increase of $5.3 million or 36.9%. The increase in revenue for both the three and six month periods is due to increased sales, both in number and size of studies, and the expansion of both our platform and product lines. Additionally, customers are seeking more complex study designs and end point analysis testing, leading to larger contracts, which contributed to revenue growth. Cost of Oncology Services Cost of oncology services for the three months ended October 31, 2020 and 2019 were $5.6 million and $3.9 million, respectively, an increase of $1.8 million or 45.4%. For the three months ended October 31, 2020 and 2019, gross margins were 44.2% and 49.1%, respectively. Cost of oncology services for the six months ended October 31, 2020 and 2019 were $11.0 million and $7.6 million, respectively, an increase of $3.3 million or 43.8%. For the six months ended October 31, 2020 and 2019, gross margins were 44.2% and 46.9%, respectively. The increase in cost of oncology services for the three and six month periods was mainly due to an increase in compensation, lab supply, and outsourced lab service expenses. With the exception of outsourced lab services, the overall expense increase is generally in line with the expected contribution based on the growth in revenue, study volume, and expansion into new services. Gross margin varies based on timing differences between expense and revenue recognition and was driven lower by the increase in costs on growing study volume in advance of revenue recognition. The cost of outsourced lab services amplified this impact. Research and Development 22 Research and development expenses for the three months ended October 31, 2020 and 2019 were $1.7 million and $1.3 million, respectively, an increase of approximately $308,000 or 23.0%. Research and development expenses for the six months ended October 31, 2020 and 2019 were $3.2 million and $2.6 million, respectively, an increase of approximately $603,000 or 22.8%. The increase for the three and six month periods is mainly due to increased compensation and lab supply expense as we continued to develop new service capabilities and endpoint testing analysis. Additionally, we incurred sequencing costs as our investment in characterizing our TumorBank continues, adding valuable data to our platform. Sales and Marketing Sales and marketing expenses for the three months ended October 31, 2020 and 2019 were $1.3 million and $977,000, respectively, an increase of $371,000, or 38.0%. Sales and marketing expenses for the six months ended October 31, 2020 and 2019 were $2.6 million and $1.8 million, respectively, an increase of $709,000, or 38.4%. The increase for the three and six month periods is mainly due to compensation expense driven by the continued investment in expanding our business development team. General and Administrative General and administrative expenses for the three months ended October 31, 2020 and 2019 were $1.5 million and $1.1 million, an increase of $333,000, or 29.3%. General and administrative expenses for the six months ended October 31, 2020 and 2019 were $2.9 million and $2.6 million, respectively, an increase of $289,000, or 11.3%. General and administrative expenses are primarily comprised of compensation, insurance, accounting fees, and depreciation expenses and have increased to support the overall infrastructure growth of the company. Inflation Inflation does not have a meaningful impact on the results of our operations. Cash Flows The following discussion relates to the major components of our cash flows: Cash Flows from Operating Activities Net cash provided by operating activities was $164,000 and $81,000 for the six months ended October 31, 2020 and 2019. The increase in cash from operating activities during the current period was primarily due to changes in current balance sheet accounts in the ordinary course of business, including an increase in net accounts receivable offset by an increase in accounts payable and accrued liabilities. Cash Flows from Investing Activities Net cash used in investing activities was $1.1 million and $522,000 for the six months ended October 31, 2020 and 2019, respectively. Cash used in investing activities was primarily related to the purchase of lab equipment and the development of software required for the Company's new products and services. Cash Flows from Financing Activities Net cash provided by financing activities was $1.2 million for the six months ended October 31, 2020 compared to the net cash used in financing activities of $12,000 for the six months ended October 31, 2019, respectively. Cash provided in financing activities resulted from an increase in option exercises during the current period. Critical Accounting Estimates and Policies The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to apply methodologies and make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, revenue recognition (replacement of licensed tumors), valuation allowance for deferred tax assets, valuation of goodwill, and stock compensation and warrant assumptions. Actual results could 23 differ from those estimates. The Company’s critical accounting policies are summarized in the Company’s Annual Report on Form 10-K, filed with the SEC on July 28, 2020. Recent Accounting Pronouncements For detailed information regarding recently issued accounting pronouncements and the expected impact on our condensed consolidated financial statements, see Note 2, "Significant Accounting Policies" in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of this Report on Form 10-Q. Off-Balance Sheet Financing We have no off-balance sheet debt or similar obligations. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable to smaller reporting companies.