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. 18 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 simulate 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. 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 19 private placements and public offerings of our securities. For the six months ended October 31, 2023, the Company had a net loss of approximately $4.6 million and cash used in operations of approximately $3.4 million. As of October 31, 2023, the Company had an accumulated deficit of approximately $82.0 million and cash on hand of approximately $5.5 million. We believe that our cash on hand, together with expected cash flows from operations to be provided for the remainder of fiscal year 2024, are adequate to fund operations through at least 12 months from the filing of this Report. 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 October 31, 2023 % of Revenue 2022 % of Revenue % Change Oncology services revenue $ 11,573 100.0 % $ 14,281 100.0 % (19.0) % Costs and operating expenses: Cost of oncology services 6,618 57.2 7,443 52.2 (11.1) Research and development 2,515 21.7 2,604 18.2 (3.4) Sales and marketing 1,795 15.5 1,700 11.9 5.6 General and administrative 2,600 22.5 2,527 17.7 2.9 Total costs and operating expenses 13,528 116.9 14,274 100.0 (5.2) Loss from operations $ (1,955) (16.9) % $ 7 — % (28,028.6) % For the Six months ended October 31, 2023 % of Revenue 2022 % of Revenue % Change Oncology services revenue $ 24,134 100.0 % $ 28,026 100.0 % (13.9) % Costs and operating expenses: Cost of oncology services 14,302 59.3 14,495 51.7 (1.3) Research and development 5,308 22.0 5,491 19.6 (3.3) Sales and marketing 3,491 14.5 3,392 12.1 2.9 General and administrative 5,540 23.0 4,925 17.6 12.5 Total costs and operating expenses 28,641 118.7 28,303 101.0 1.2 (Loss) Income from operations $ (4,507) (18.7) $ (277) (1.0) % 1,527.1 % Oncology Services Revenue Oncology services revenue, which is primarily derived from pharmacology studies, was $11.6 million and $14.3 million for the three months ended October 31, 2023 and 2022, respectively, a decrease of $2.7 million or 19.0%. Oncology services revenue was $24.1 million and $28.0 million for the six months ended October 31, 2023 and 2022, respectively, a decrease of $3.9 million or 13.9%. The decrease in revenue resulted from an increase in study cancellations during fiscal year 2023, thereby reducing our net bookings and available convertible revenue in the current year. 20 Cost of Oncology Services Cost of oncology services for the three months ended October 31, 2023 and 2022 were $6.6 million and $7.4 million, respectively, a decrease of $825,000 or 11.1%. Cost of oncology services for the six months ended October 31, 2023 and 2022 were $14.3 million and $14.5 million, respectively, a decrease of $193,000 or 1.3%. The decrease in cost of oncology services for the three months ended October 31, 2023 was primarily from a decrease in compensation and supply expenses and outsourced lab services. For the six months ended October 31, 2023, the decrease was primarily from a reduction in compensation expense. For the three months ended October 31, 2023 and 2022, margins were 42.8% and 47.9%, respectively. For the six months ended October 2023 and 2022, margins were 40.7% and 48.3%, respectively. The lower margin for both the three months and six months ended October 31, 2023 resulted primarily from a decline in top line revenue against a generally unchanged cost base. Research and Development Research and development expenses for the three months ended October 31, 2023 and 2022 were $2.5 million and $2.6 million, respectively, a slight decrease of approximately $89,000 or 3.4%. Research and development expenses for the six months ended October 2023 and 2022 were $5.3 million and $5.5 million, respectively, a decrease of approximately $183,000 or 3.3%. Approximately $2.5 million of the Company’s research and development expenses in the first half of 2024 was directed towards our target discovery program. Sales and Marketing Sales and marketing expenses for the three months ended October 31, 2023 and 2022 were $1.8 million and $1.7 million, respectively, a slight increase of $95,000 or 5.6%. Sales and marketing expenses for the six months ended October 2023 and 2022 were $3.5 million and $3.4 million, respectively, a slight increase of $99,000 or 2.9%. Sales and marketing expenses are primarily comprised of compensation expenses to support business development. General and Administrative General and administrative expenses for the three months ended October 31, 2023 and 2022 were $2.6 million and $2.5 million, respectively, an increase of $73,000, or 2.9%. General and administrative expenses for the the six months ended October 2023 and 2022 were $5.5 million and $4.9 million, respectively, an increase of $615,000, or 12.5%. General and administrative expenses are primarily comprised of compensation, insurance, professional fees, IT and depreciation and amortization expenses. The increase for both the three months and six months ended October 31, 2023 was primarily from compensation and recruiting expenses. Cash Flows The following discussion relates to the major components of our cash flows: Cash Flows from Operating Activities Net cash provided by operating activities was $600,000 for the three months ended October 31, 2023, primarily due from increases in accounts receivable collections and deferred revenue. For the six months ended October 31, 2023, net cash used in operating activities was $3.4 million. The cash used in operating activities was primarily due to the loss for the period resulting from lower revenue. Cash Flows from Investing Activities Net cash used in investing activities was $821,000 and $1.4 million for the six months ended October 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 $382,000 for the six months ended October 31, 2023. The cash used was for the the Company's stock repurchase program, offset by cash received from stock option exercises. Critical Accounting Estimates and Policies 21 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 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-based 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 We are a smaller reporting companies company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item.