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. 20 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 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. 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 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. 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. 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. 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 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. As noted, the extent to which COVID-19 21 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 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 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. 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): For the Three Months Ended January 31, 2021 % of Revenue 2020 % of Revenue % Change Oncology services revenue $ 10,812 100.0 % $ 9,012 100.0 % 20.0 % Costs and operating expenses: Cost of oncology services 4,842 44.8 4,325 48.0 12.0 Research and development 1,879 17.4 1,391 15.4 35.1 Sales and marketing 1,492 13.8 1,307 14.5 14.2 General and administrative 1,836 17.0 1,556 17.3 18.0 Total costs and operating expenses 10,049 93.0 8,579 95.2 17.1 Income from operations $ 763 7.1 % $ 433 4.8 % 76.2 % For the Nine months ended January 31, 2021 % of Revenue 2020 % of Revenue % Change Oncology services revenue $ 30,476 100.0 % $ 23,375 100.0 % 30.4 % Costs and operating expenses: Cost of oncology services 15,822 51.9 11,958 51.2 32.3 Research and development 5,125 16.8 4,035 17.3 27.0 Sales and marketing 4,048 13.3 3,155 13.5 28.3 General and administrative 4,686 15.4 4,118 17.6 13.8 Total costs and operating expenses 29,681 97.4 23,266 99.5 27.6 Income from operations $ 795 2.6 $ 109 0.5 % 629.4 % 22 Oncology Services Revenue 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 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 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 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 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 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 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: 23 Cash Flows from Operating Activities 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 $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 $1.1 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. 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 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.