CHAMPIONS ONCOLOGY, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that are based on our current expectations, estimates, and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under Item 1A – “Risk Factors” and elsewhere in this Annual Report. Overview and Recent Developments 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. 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. 16 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. Any expenses associated with this part of our business are research and development and are expensed as incurred. We regularly evaluate strategic options to create additional value from our drug discovery business, which may include, but are not limited to, potential spin-out transactions or capital raises. Results of Operations The following table summarizes our operating results for the periods presented below (dollars in thousands): For the Years Ended April 30, 2022 % of Revenue 2021 % of Revenue % Change Oncology services revenue $ 49,109 100.0 % $ 41,040 100.0 % 19.7 % Costs and operating expenses: Cost of oncology services 23,632 48.1 21,446 52.3 10.2 Research and development 9,374 19.1 7,196 17.5 30.3 Sales and marketing 6,379 13.0 5,520 13.5 15.6 General and administrative 9,117 18.6 6,512 15.9 40.0 Total costs and operating expenses 48,502 98.8 40,674 99.2 19.2 Income from operations $ 607 1.2 % $ 366 0.8 % 65.8 % Oncology Services Revenue Oncology services revenue, which is primarily derived from research services, was $49.1 million and $41.0 million, for the years ended April 30, 2022 and 2021, respectively, an increase of $8.1 million, or 19.7%. The increase in revenue was primarily due to the expansion of both our platform and product lines creating additional demand for our services, leading to larger pharmacology study sizes in both our in-vivo and ex-vivo platforms. Cost of Oncology Services Cost of oncology services were $23.6 million and $21.4 million for the years ended April 30, 2022 and 2021, respectively, an increase of $2.2 million or 10.2%. The increase in cost of oncology services was primarily from an increase in compensation and supply expenses resulting from the larger study sizes, and compensation expense for our SaaS platform. These increases were offset by a decrease in outsourced lab services. Gross margin was 52% for the twelve months ended April 30, 2022 compared to 48% for the twelve months ended April 30, 2021. The improvement in gross margin was the direct result of decreasing the Company’s reliance on outsourcing and leveraging revenue growth over the fixed cost component of cost of sales. Research and Development Research and development expense was $9.4 million and $7.2 million for the years ended April 30, 2022 and 2021, respectively, an increase of $2.2 million or 30.3%. The increase was primarily due to the investments in new service capabilities and our drug discovery and development programs with the increase coming primarily from compensation and lab supply expenses. 17 Sales and Marketing Sales and marketing expense was $6.4 million and $5.5 million for the years ended April 30, 2022 and 2021, respectively, an increase of $0.9 million or 15.6%. The increase was mainly due to compensation expense. Additionally, travel expense increased for our business development team as Covid-19 travel related restrictions eased. General and Administrative General and administrative expense was $9.1 million and $6.5 million for the years ended April 30, 2022 and 2021, respectively, a decrease of $2.6 million, or 40.0%. General and administrative expenses were primarily comprised of compensation, insurance, professional fees, IT, and depreciation and amortization expenses. The general and administrative expenses increase was primarily due to increases in non-cash expenses, compensation and IT expenses for data storage and to support the overall infrastructure growth of the company. Other Income (Expense) Other expense was $24,000 and other income was $71,000 for the years ended April 30, 2022 and 2021, respectively. Other expense for the year ended April 30, 2022 resulted primarily from foreign currency transaction losses. Other income for the year ended April 30, 2021 was primarily attributable to a $75,000 gain on operating lease termination offset by foreign currency transaction losses. 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 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, 2022 and 2021, the Company had net income of approximately $548,000 and $362,000, respectively. As of April 30, 2022, the Company had an accumulated deficit of approximately $72.0 million, working capital of $2.2 million and cash of $9.0 million. We believe that our cash on hand, together with expected cash flows from operations, are adequate to fund operations through at least August 2023. 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. Cash Flows The following discussion relates to the major components of our cash flows: Cash Flows from Operating Activities Net cash provided by (used in) operating activities was $6.5 million and ($1.7) million for the years ended April 30, 2022 and 2021, respectively. The increase in cash provided was primarily due to improving cash based operational results and an increase in deferred revenue. The increase in deferred revenue was primarily driven by cash received upon signing new studies, an indicator of the strength of the Company’s sales pipeline. Changes in our working capital accounts were in the ordinary course of business operating activities. Cash Flows from Investing Activities Net cash used in investing activities was $2.4 million and $3.2 million for the years ended April 30, 2022 and 2021, respectively. The cash used was for the investment in lab and computer equipment and software development. Cash Flows from Financing Activities Net cash provided by financing activities was $0.2 million and $1.2 million for the years ended April 30, 2022 and 2021, respectively. 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 18 The following discussion of critical accounting policies identifies the accounting policies that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 2 of the notes to the consolidated financial statements included in this document. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which the selection of an available alternative policy would not produce a materially different result. General Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States or GAAP. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. Significant estimates of the Company include, among other things, accounts receivable realization, revenue recognition (replacement of licensed tumors), valuation allowance for deferred tax assets, recoverability of capitalized software development costs, and stock-based compensation and warrant assumptions. We base our estimates on historical experience, our observance of trends in particular areas and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. Revenue Recognition 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. A performance obligation is a promise (or a combination of promises) in a contract to transfer distinct goods or services to a customer and is the unit of accounting under ASC 606 for the purposes of revenue recognition. A contract's transaction price is allocated to each separate performance obligation based upon the standalone selling price and is recognized as revenue, when, or as, the performance obligation is satisfied. The majority of the Company's contracts have a single performance obligation because the promise to transfer individual services is not separately identifiable from other promises in the contracts, and therefore, is not distinct. The majority of the Company's revenue arrangements are service contracts that are completed within a year or less. There are a few contracts that range in duration between 1 and 3 years. Substantially all of the Company's performance obligations, and associated revenue, are transferred to the customer over time. Most of the Company's contracts can be terminated by the customer without cause. In the event of termination, the Company's contracts provide that the customer pay the Company for services rendered through the termination date. The Company generally receives compensation based on a predetermined invoicing schedule relating to specific milestones for that contract. In addition, in certain instances a customer contract may include forms of variable consideration such as performance incentives or other provisions that can increase or decrease the transaction price. This variable consideration is generally awarded upon achievement of certain performance metrics. For the purposes of revenue recognition, variable consideration is assessed on a contract-by-contract basis and the amount to be recorded is estimated based on the assessment of the Company's anticipated performance and consideration of all information that is reasonably available. Variable consideration is recognized as revenue if and when it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved in the future. Amendments to contracts are common. The Company evaluates each amendment which meets the criteria of a contract modification under ASC 606. Each modification is further evaluated to determine whether the contract modification should be accounted for as a separate contract or as a continuation of the original agreement. The Company accounts for amendments as a separate contract when they meet the criteria under ASC 606-10-25-12. Stock-Based Payments 19 We typically recognize expense for stock-based payments based on the fair value of awards on the date of grant. We use the Black-Scholes option pricing model to estimate fair value. The option pricing model requires us to estimate certain key assumptions such as expected life, volatility, risk free interest rates, and dividend yield to determine the fair value of stock-based awards. These assumptions are based on historical information and management judgment. We expense stock-based payments over the period that the awards are expected to vest. In the event of forfeitures, compensation expense is adjusted. We report cash flows resulting from tax deductions in excess of the compensation cost recognized from those options (excess tax benefits) as financing cash flows when the cash tax benefit is received. Recoverability of Capitalized Software Development Costs The Company accounts for the cost of computer software obtained or developed for internal use as well as the software development and implementation costs associated with a hosting arrangement ("internal-use software") that is a service contract in accordance and with ASC 350, Intangibles - Goodwill and Other ("ASC-350"). We capitalize certain costs in the development of our internal-use software when the preliminary project stage is completed and the software has reached the point of technological feasibility. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose and available for sale. Capitalized costs are then amortized using the straight-line method over an estimated useful economic life of three years. Capitalized software development costs are stated at gross cost less accumulated amortization. Recoverability of these capitalized costs is determined at each balance sheet date by comparing the forecasted future revenues from the related product, based on management’s best estimates using appropriate assumptions and projections at the time, to the carrying amount of the capitalized software development costs. If the carrying value is determined not to be recoverable from future revenues, an impairment loss is recognized equal to the amount by which the carrying amount exceeds the future revenues. Accounting for Income Taxes We use the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation on property, plant and equipment, goodwill and losses for tax and accounting purposes. 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. 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. As of April 30, 2022 and 2021, we have established a full valuation allowance for all deferred tax assets. As of April 30, 2022 and 2021, we recognized a liability for uncertain tax positions on the balance sheet relative to foreign operations in the amount of $181,000. We do not anticipate any significant unrecognized tax benefits will be recorded during the next 12 months. Any interest or penalties related to unrecognized tax benefits is recognized in income tax expense. The Company has not accrued penalties or interest during the year ended April 30, 2022. Accounting Pronouncements Being Evaluated In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses". This update requires immediate recognition of management’s estimates of current expected credit losses ("CECL"). Under the prior model, losses were recognized only as they were incurred. The new model is applicable to all financial instruments that are not accounted for at fair value through net income. The standard is effective for fiscal years beginning after December 15, 2022 for public entities qualifying as smaller reporting companies. Early adoption is permitted. 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. Recently Adopted Accounting Pronouncements 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 20 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. The Company adopted this guidance on May 1, 2021 and it did not have an impact on its consolidated financial statements. 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 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The consolidated financial statements required pursuant to this item are included in Item 15 of this annual report and are presented beginning on page F-1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.