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, 2023, 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, 2023, 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 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. 18 We offer Lumin Bioinformatics ("Lumin"), an oncology data-driven Software as a Service (SaaS) program. Our Lumin software contains comprehensive information derived from our research services and clinical studies. Lumin leverages our large Datacenter coupled with analytics and artificial intelligence to provide a robust tool for computational cancer research. 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 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 validate these targets for further drug development efforts. We have a 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. All 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. 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. Recently, we have met these cash requirements through cash, working capital management, and sales of products and services. In the past, we have also received proceeds from certain private placements and public offerings of our securities. For the three months ended July 31, 2023, the Company had a net loss of approximately $2.6 million and cash used in operations of approximately $4.0 million. As of July 31, 2023, the Company had an accumulated deficit of approximately $79.9 million and cash on hand of approximately $4.9 million. We believe that our cash on hand, together with expected cash flows from operations for the remainder of fiscal year 2024, 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 July 31, 2023 % of Revenue 2022 % of Revenue % Change Oncology services revenue $ 12,561 100.0 % $ 13,745 100.0 % (8.6) % Costs and operating expenses: Cost of oncology services 7,684 61.2 7,052 51.3 9.0 Research and development 2,793 22.2 2,887 21.0 (3.3) Sales and marketing 1,696 13.5 1,692 12.3 0.2 General and administrative 2,940 23.4 2,398 17.4 22.6 Total costs and operating expenses 15,113 120.3 14,029 102.0 7.7 Loss from operations $ (2,552) (20.3) % $ (284) (2.1) % 798.6 % 19 Oncology Services Revenue Oncology services revenue, which is primarily derived from pharmacology studies, was $12.6 million and $13.7 million for the three months ended July 31, 2023 and 2022, respectively, a decrease of $1.2 million or 8.6%. The decrease in revenue resulted from an increase in study cancellations during the prior year which resulted in lower revenue conversion in the first quarter of fiscal year 2024. Cost of Oncology Services Cost of oncology services for the three months ended July 31, 2023 and 2022 were $7.7 million and $7.1 million, respectively, an increase of $0.6 million or 9.0%. The increase in cost of oncology services was primarily from outsourced lab services. For the three months ended July 31, 2023 and 2022, margins were 38.8% and 48.7%, respectively. The lower margin for the current fiscal year resulted primarily from a higher expense base on lower revenue conversion. Research and Development Research and development expenses for the three months ended July 31, 2023 and 2022 were $2.8 million and $2.9 million, respectively, a slight decrease of approximately $0.1 million or 3.3%. Approximately $1.2 million of the Company’s R&D expense in the first quarter of 2024 was directed towards our target discovery program. Sales and Marketing Sales and marketing expenses for the three months ended July 31, 2023 and 2022 were $1.7 million. Sales and marketing expenses are primarily comprised of compensation and conference expenses to support sales efforts. General and Administrative General and administrative expenses for the three months ended July 31, 2023 and 2022 were $2.9 million and $2.4 million, an increase of $542,000, or 22.6%, respectively. General and administrative expenses are primarily comprised of compensation, insurance, professional fees, IT, and depreciation and amortization expenses. The increase was primarily due to an increase in bad debt expense and provision for credit losses of approximately $160,000 and non-cash stock-based compensation expense. Cash Flows The following discussion relates to the major components of our cash flows: Cash Flows from Operating Activities Net cash used in operating activities was $4.0 million for the three months ended July 31, 2023 compared to cash used in operations of $195,000 for the three-months ended July 31, 2022. The cash used in operating activities was due to the quarter’s operating loss, primarily due to the expected lower revenue conversion, an increase in accounts receivable due to timing differences in the ordinary course of business, and a decrease in deferred revenue as a result of study cancellations. Cash Flows from Investing Activities Net cash used in investing activities was $668,000 and $754,000 for the three months ended July 31, 2023 and 2022, respectively. The cash used in investing activities was for the investment in additional lab and computer equipment. Cash Flows from Financing Activities Net cash used in financing activities was $590,000 for the three months ended July 31, 2023 compared to cash provided by financing activities of $0 for the three months ended July 31, 2022. Cash was utilized for the Company's stock repurchase program which was slightly offset by an increase in stock option exercise activity. Critical Accounting Estimates and Policies The preparation of these condensed consolidated financial statements in conformity with GAAP in the United States requires management to apply methodologies and make estimates and assumptions that affect the reported amounts of assets 20 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 24, 2023. 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.