What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-03-15 compared with 2020-12-14 · 49 added, 42 removed, 84 unchanged (52% of the section changed)

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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.

We are engaged in the development and sale of advanced technology solutions and products to personalize the development and use of oncology drugs through our Translational Oncology Solutions ("TOS").

This technology ranges from computational-based discovery platforms, unique oncology software solutions, and innovative and proprietary experimental tools such as in vivo, ex vivo and biomarker platforms.

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.

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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

phase III clinical trials.

Simulating trials before executing them provides benefits to both pharmaceutical companies and patients.

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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.

As part of these efforts, we launched Lumin Bioinformatics ("Lumin"), a new oncology data-driven software program, during fiscal 2021, which enhances our TOS program.

Lumin provides users with a vast database of tumor characterization that can be used for computational research.

The software also offers analytic tools that are utilized to interrogate the data for associations between molecular and various phenotypic features, including thousands of drug responses, clinical annotations, prior treatment histories, and genetic dependencies.

Insights developed using Lumin can provide the basis for biomarker hypotheses, reveal potential mechanisms of therapeutic resistance, and guide the direction of additional preclinical evaluations.

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.

The global spread of COVID-19 from China to other countries 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, including the United States, subsequently imposed various degrees of restrictions and other measures, including but not limited to, mandatory temporary closures, quarantine and shelter in place guidelines, and restrictions on mass gatherings and on travel in an effort to slow and/or reduce the spread of the virus.

Employers were also required to increase, as much as possible, the capacity and arrangement for employees to work remotely.

While the COVID-19 pandemic has continued to evolve and remains highly unpredictable and dynamic in its duration and severity, many of these previously imposed restrictions and other measures have now been eased and/or lifted, while governments continue to monitor active cases and the health and safety of their citizens.

The spread of COVID-19 and the related actions implemented by the governments of the United States and elsewhere across the globe, may worsen again over time.

Thus, the COVID-19 pandemic may continue to have a negative impact on the US and Global economies for the foreseeable future.

Although, to date, these restrictions and the affect on the Global economy have not materially impacted our operations, the future effect on our business will largely depend on future developments which are highly uncertain and cannot be predicted at this time.

We continue to monitor our operations and applicable government recommendations and requirements.

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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;

Though we have not yet experienced such events related to COVID-19, 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 noted, 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.

As noted, 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 the COVID-19 virus, the actions to contain COVID-19, or treat its impact.

Liquidity and Capital Resources

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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.

For the nine months ended January 31, 2021, the Company had net income of approximately $816,000 and cash provided by operations of $299,000.

As of January 31, 2021, the Company had an accumulated deficit of approximately $71.9 million, working capital of $2.6 million, and cash of $7.4 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.

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The following table summarizes our operating results for the periods presented below (dollars in thousands):

For the Three Months Ended October 31,

For the Three Months Ended January 31,

Revenue 2020 % of

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Income from operations $ 763 7.1 % $ 433 4.8 % 76.2 %

For the Six months ended October 31,

For the Nine months ended January 31,

Revenue 2020 % of

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Total costs and operating expenses 29,681 97.4 23,266 99.5 27.6

Income (loss) from operations $ 31 0.2 $ (323) (2.2) % (109.6) %

Income from operations $ 795 2.6 $ 109 0.5 % 629.4 %

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.

Oncology services revenue was $10.8 million and $9.0 million for the three months ended January 31, 2021 and 2020, respectively, an increase of $1.8 million or 20.0%.

Oncology services revenue was $30.5 million and $23.4 million for the nine months ended January 31, 2021 and 2020, respectively, an increase of $7.1 million or 30.4%.

The increase in revenue for both the three and nine 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.

Cost of oncology services for the three months ended January 31, 2021 and 2020 were $4.8 million and $4.3 million, respectively, an increase of $517,000 or 12.0%.

For the three months ended January 31, 2021 and 2020, gross margins were 55.2% and 52.0%, respectively.

The increase in cost of oncology services for the three month period ending January 31, 2021 was mainly due to an increase in compensation and lab supply expenses.

The increase in cost was expected based on the increase in revenue.

Gross margin varies based on timing differences between expense and revenue recognition and was lifted by the revenue recognized from outsourced work, the costs of which we partially recognized in prior quarters.

Cost of oncology services for the nine months ended January 31, 2021 and 2020 were $15.8 million and $12.0 million, respectively, an increase of $3.9 million or 32.3%.

For the nine months ended January 31, 2021 and 2020, gross margins were 48.1% and 48.8%, respectively.

The increase in cost of oncology services for the nine month period 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.

Gross margin varies based on timing differences between expense and revenue recognition and was negatively impacted 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

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.

Research and development expenses for the three months ended January 31, 2021 and 2020 were $1.9 million and $1.4 million, respectively, an increase of approximately $488,000 or 35.1%.

Research and development expenses for the nine months ended January 31, 2021 and 2020 were $5.1 million and $4.0 million, respectively, an increase of approximately $1.1 million or 27.0%.

The increase for the three and nine 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.

Sales and marketing expenses for the three months ended January 31, 2021 and 2020 were $1.5 million and $1.3 million, respectively, an increase of $185,000, or 14.2%.

Sales and marketing expenses for the nine months ended January 31, 2021 and 2020 were $4.0 million and $3.2 million, respectively, an increase of $893,000, or 28.3%.

The increase for the three and nine 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.

General and administrative expenses for the three months ended January 31, 2021 and 2020 were $1.8 million and $1.6 million, an increase of $280,000, or 18.0%.

General and administrative expenses for the nine months ended January 31, 2021 and 2020 were $4.7 million and $4.1 million, respectively, an increase of $568,000, or 13.8%.

General and administrative expenses are primarily comprised of compensation, insurance, professional fees, IT, and depreciation and amortization expenses and have increased to support the overall infrastructure growth of the company.

Inflation does not have a meaningful impact on the results of our operations.

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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.

Net cash provided by operating activities was $299,000 and $360,000 for the nine months ended January 31, 2021 and 2020, respectively.

The decrease in cash from operating activities during the current period was primarily due to a reduction in our accounts payable along with changes in other working capital accounts in the ordinary course of business.

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.

Net cash used in investing activities was $2.3 million and $693,000 for the nine months ended January 31, 2021 and 2020, 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.

Net cash provided by financing activities was $1.1 million for the nine months ended January 31, 2021 compared to $378,000 for the nine months ended January 31, 2020, respectively.

Cash provided in financing activities resulted from an increase in option exercises during the current period.

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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

differ from those estimates.

Actual results could 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis