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Item 7. Management’s Discussion and Analysis

2021-07-26 compared with 2020-07-28 · 76 added, 68 removed, 150 unchanged (49% 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.

Utilizing our TumorGraft Technology Platform, we provide select services to pharmaceutical and biotechnology companies seeking personalized approaches to drug development.

We are a technology-enabled research organization engaged in creating transformative technology solutions to be utilized in drug discovery and development.

Our research center consists of a comprehensive set of computational and experimental research platforms.

Our pharmacology, biomarker, and data platforms are designed to facilitate drug discovery and development at lower costs and increased speeds.

We perform studies which we believe may predict the efficacy of experimental oncology drugs or approved drugs as stand-alone therapies or in combination with other drugs and can stimulate the results of human clinical trials.

These studies include in vivo studies that rely on implanting multiple tumors from our TumorBank in mice and testing the therapy of interest on these tumors.

Studies may also include bioinformatics analysis that reveal the differences in the genetic signatures of the tumors that responded to a therapy as compared to the tumors that did not respond.

Additionally, we provide computational or experimental support to identify novel therapeutic targets, select appropriate patient populations for clinical evaluation, identify potential therapeutic combination strategies, and develop

biomarker hypothesis of sensitivity or resistance.

These studies include the use of our in vivo, ex vivo, analytical and computational platforms.

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 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 more than $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.

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 our growth strategy, we launched Lumin Bioinformatics ("Lumin"), a new oncology data-driven software program, during fiscal 2021.

Our Lumin software contains comprehensive information derived from our research services and clinical studies.

Lumin leverages Champions’ large Datacenter coupled with analytics and artificial intelligence to provide a robust tool for computational cancer research.

It is the combination of the Datacenter and the analytics that create a unique foundation for Lumin.

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.

Our drug discovery and development business leverages the computational and experimental capabilities within our platforms.

Our discovery strategy utilizes our rich and unique Datacenter, coupled with artificial intelligence and other advanced computational analytics, to identify novel therapeutic targets.

We then employ the use of our proprietary experimental platforms to rapidly validate these targets for further drug development efforts.

We have a rich pipeline of targets at various stages of discovery and validation, with a select group that has progressed to therapeutic development.

Our commercial strategy for the validated targets and therapeutics established from this business is wide-ranging and still being developed.

It will depend on many factors, and will be specific for each target or therapeutic area identified.

Results of Operations

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For the Years Ended April 30,

Revenue 2020 % of

Oncology services revenue $ 41,040 100.0 % $ 32,123 100.0 % 27.8 %

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Oncology Services Revenue

Oncology services revenue for the years ended April 30, 2020 and 2019 were $32.1 million and $27.1 million , respectively, an increase of $5.1 million , or 18.7% .

The increase in revenue is due to increased sales, both in number and size of studies, an increase in demand for our services, the growth of the platform, and expansion of our product line.

Oncology services revenue, which is primarily derived from research services, was $41.0 million and $32.1 million, for the years ended April 30, 2021 and 2020 respectively, an increase of $8.9 million, or 27.8%.

The increase in revenue 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.

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For the years ended April 30, 2021 and 2020 , gross margins were 47.7% and 47.1%, respectively.

The increase in cost of oncology services was mainly due to an increase in compensation, 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 impacted by the increase in costs ahead of revenue related to the increase in number of studies performed.

Additionally, the cost of outsourced lab services magnifies this effect.

The expense increase was mostly a function of an increase in variable costs in conjunction with the growth in revenue, study volume, and expansion into new services.

The increase was primarily from the following expense categories, compensation, lab supply, and outsourced lab service expenses.

Gross margin varies based on timing differences between expense and revenue recognition and was pressured by outsourced lab services, in addition to the increase in costs on growing study volume ahead of revenue recognition.

Research and Development

Research and development expense was $7.2 million and $5.9 million for the years ended April 30, 2021 and 2020, respectively, an increase of $1.3 million or 22.9%.

The increase is due to increased compensation and mice and lab supply expenses as we replenished the models in our Bank and continued to develop new service capabilities and endpoint analysis testing.

The increase is mainly due to the investment in new service capabilities and our discovery programs with the increase coming primarily from compensation and lab supply expenses.

Additionally, we incurred costs stemming from our investment in adding valuable data to our platform.

Sales and Marketing

Sales and marketing expense was $5.5 million and $4.2 million for the years ended April 30, 2021 and 2020, respectively, an increase of $1.3 million or 30.1%.

The increase is mainly due to compensation expense driven by the continued expansion of our sales force and commissions earned on increased sales.

The increase is mainly due to compensation expense driven by the continued expansion of our research services business development team and the addition of a SaaS business development team.

General and Administrative

General and administrative expense was $6.6 million and $4.7 million for the years ended April 30, 2020 and 2019 , respectively, an increase of $1.9 million , or 41.4% .

The increase was mainly due to an increase in compensation expense which included a bonus awarded to the CEO.

General and administrative expense was $6.5 million and $6.6 million for the years ended April 30, 2021 and 2020, respectively, a decrease of $102,000, or (1.5)%.

General and administrative expenses were primarily comprised of compensation, insurance, professional fees, IT, and depreciation and amortization expenses.

In 2020, the CEO received a one time remuneration for salary not taken in prior years, resulting in the general and administrative expenses decrease in 2021.

Excluding the one-time payment, general and administrative expenses increased $650,000 which was used to support the overall infrastructure growth of the company.

Goodwill Impairment

We recognized an impairment on goodwill of approximately $335,000 for the year ended April 30, 2020.

This charge was attributable to the Company's POS business operations.

As disclosed in prior fiscal years, the POS business ceased to be the focus of our growth strategy moving forward.

As a result of our annual evaluation of goodwill impairment, the Company determined that the recording of the impairment charge was warranted.

Other Expense

Other Expense was $42,000 and $39,000 for the years ended April 30, 2020 and 2019 , respectively.

The current year expense is mainly due to foreign currency transaction losses and foreign fees offset by a gain on disposal of equipment.

We recognized an impairment on goodwill of zero and $335,000 for the years ended April 30, 2021 and 2020, respectively.

As a result of our annual evaluation of goodwill impairment for the year ended April 30, 2020, the Company determined that the recording of the impairment charge was warranted.

This charge was attributable to the expected decline in the Company's POS business operations.

Other Income (Expense)

Other income was $71,000 and other expense was $42,000 for the years ended April 30, 2021 and 2020, respectively.

Other income for the year ended April 30, 2021 was primarily attributable to a $72,000 gain on operating lease termination.

Other expense in the prior year resulted from foreign currency transaction losses and fees offset by a gain on disposal of equipment.

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

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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 our cash on hand, working capital management, proceeds from certain private placements and public offerings of our securities and sales of products and services.

For the years ended April 30, 2020 and 2019 , the Company had a net loss of approximately $2.0 million and net income of $128,000 , respectively.

In the past, we have met these cash requirements through our cash on hand, working capital management, proceeds from certain private placements and public offerings of our securities

and sales of products and services.

For the years ended April 30, 2021 and 2020, the Company had net income of approximately $362,000 and a net loss of $2.1 million, respectively.

As of April 30, 2021, the Company had an accumulated deficit of approximately $72.5 million, working capital of $1.4 million and cash of $4.7 million.

We believe that our cash on hand, together with continued improved cash flows from operations, are adequate to fund operations through at least August 2021.

We believe that our cash on hand, together with future improved cash flows from operations, are adequate to fund operations through at least August 2022.

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.

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Cash Flows from Operating Activities

Net cash provided by operating activities was $2.9 million and $1.9 million for the years ended April 30, 2020 and 2019 , respectively.

The increase in cash provided of $1.0 million relates to our revenue growth and increase in bookings, along with the timing of ordinary business operating activities.

Net cash (used in) provided by operating activities was ($1.7) million and $2.9 million for the years ended April 30, 2021 and 2020, respectively.

The decrease in cash provided of ($4.6) million relates primarily to an increase in our accounts receivable and prepaid expenses and a decrease in our accounts payable despite the increase in total expenses.

The changes in these working capital accounts were in the course of ordinary business operating activities.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.2 million and $834,000 for the years ended April 30, 2020 and 2019 , respectively.

These cash flows were used for the purchase and finance leasing of lab equipment.

Net cash used in investing activities was $3.2 million and $2.2 million for the years ended April 30, 2021 and 2020, respectively.

The increase in cash used was for the investment in additional lab equipment and software development.

Cash Flows from Financing Activities

Net cash provided by financing activities was $1.2 million and $4.4 million for the years ended April 30, 2021 and 2020, respectively.

The increase in cash flows provided in fiscal year 2020 was due to exercises of stock options and warrants.

Cash flows provided by financing activities was due to exercises of stock options and decreased from the prior year due to lower volume of exercises of options and warrants.

Critical Accounting Policies

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Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-19, Revenue from Contracts with Customers (Topic 606) which was added to the FASB's Accounting Standards Codification (ASC) as ASC 606.

The Company adopted ASC 606 on May 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.

The reported results for the twelve months ended April 30, 2020 and April 30, 2019 reflect the application of ASC 606.

In accordance with ASC 606, revenue is now recognized when, or as, a customer obtains control of promised services.

The Company accounts for revenue under the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers In accordance with ASC 606, revenue is now recognized when, or as, a customer obtains control of promised services.

The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.

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We have one reportable segment.

The Company evaluated its TOS and POS business operations (or business units) and determined that the POS operations no longer qualified as a separate reportable segment primarily due to its revenue representing approximately 2.5% of total revenue.

The Company assesses goodwill by business unit, which are also reporting units.

Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the acquired businesses.

The Company assesses goodwill impairment by business unit.

Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the businesses.

Future events, including but not limited to continued declines in economic activity, loss of contracts or a significant number of customers, or a rapid increase in costs or capital expenditures, could cause us to conclude that impairment indicators exist and that goodwill is impaired.

As a result of its annual assessment, which included an estimation of the future cash flows of the POS operations as described above, the Company determined that, under a discounted cash flow model, the fair value of the POS business/reporting unit was below its carrying amount as of April 30, 2020.

The Company recognized goodwill impairment for the quarter and year ended April 30, 2020 of $335,000 .

As of April 30, 2020 and 2019, goodwill was $335,000 and $670,000, respectively.

For the year ended April 30, 2021, the Company's annual assessment did not result in any impairment indicators.

The Company recognized goodwill impairment for the years ended April 30, 2021 and 2020 of $0 and $335,000, respectively.

As of April 30, 2021 and 2020, goodwill was $335,000.

Accounting for Income Taxes

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These differences result in deferred tax assets, which include tax loss carry-forwards, and liabilities, which are included within the consolidated balance sheet.

We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a

valuation allowance is established.

We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established.

To the extent a valuation allowance is established or increased in a period, we include an expense within the tax provision of the consolidated statements of operations.

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The Company has accrued $3,000 for penalties and interest during the year ended April 30, 2021.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740) — Simplifying the Accounting for Income Taxes.

ASU 2019-12 which modifies ASC 740 to simplify the accounting for income taxes.

The ASU removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods.

The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.

ASU 2019-12 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2020.

We are currently assessing the potential impact of this ASU on our consolidated financial statements and do not expect a material impact on our consolidated financial statements.

Accounting Pronouncements Being Evaluated

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Early adoption is permitted.

We are currently assessing the impact of this update on our consolidated financial statements and do not expect a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, which amends ASC 350-40, Intangibles—Goodwill and Other—Internal-Use Software, to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement ("CCA") that is a service contract.

This update aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software.

The update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption of the amendments in this update is permitted, including adoption in any interim period.

We are currently assessing the impact of this update on our consolidated financial statements and do not expect a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820) — Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.

ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures.

ASU 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019.

Early adoption is permitted.

We are currently assessing the potential impact of the amendments in this ASU on our consolidated financial statements and do not expect a material impact on our consolidated financial statements.

We are currently assessing the impact of this update on our consolidated financial statements and have not yet determined the impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740) — Simplifying the Accounting for Income Taxes.

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Leases" for additional information.

In August 2016, the FASB issued ASU No.

2016-15, “Statement of Cash Flows:

Classification of Certain Cash Receipts and Cash Payments”.

The new standard attempts to reduce diversity in practice in how cash receipts and cash payments are presented and classified in the statement of cash flows.

2016-15 provides guidance on eight specific cash flow issues.

The new guidance was effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.

The Company adopted ASU 2016-15 on May 1, 2018 and it did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No.

2016-18, "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2016-18"), which addresses classification and presentation of changes in restricted cash on the statement of cash flows.

ASU 2016-18 requires an entity's reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents.

ASU 2016-18 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017.

The Company adopted ASU 2016-18 on May 1, 2018 and did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No.

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The adoption did not have a material impact on the Company's consolidated financial statements.

The update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

The Company adopted this guidance on May 1, 2020 and it's impact was captured within its current year consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820) — Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.

ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures.

ASU 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019.

The Company adopted this guidance on May 1, 2020 and it did not have an impact on its consolidated financial statements.

Off-Balance Sheet Financing

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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-K

Item 7. Management’s Discussion and Analysis