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Item 7. Management’s Discussion and Analysis

2024-07-19 compared with 2023-07-24 · 59 added, 42 removed, 128 unchanged (44% of the section changed)

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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.

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 also sell Lumin Bioinformatics ("Lumin"), an oncology data-driven software program which 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.

It is the combination of the Datacenter and the analytics that create a 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.

During fiscal 2023, we recorded an asset impairment related to Lumin software development costs of $807,000.

There were no impairment charges recorded for fiscal 2024.

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

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General and administrative 11,067 22.1 10,240 19.0 8.1

Loss on disposal of equipment 435 0.9 — — 100.0

Asset Impairment — — 807 1.5 (100.0)

Total costs and operating expenses 57,511 114.7 59,126 109.7 (2.7)

(Loss) income from operations $ (5,256) (9.7) % $ 607 1.2 % (965.9) %

Loss from operations (7,356) (14.7) (5,256) (9.8) 40.0

Oncology Services Revenue

Oncology services revenue, which is primarily derived from research services, was $53.9 million and $49.1 million, for the years ended April 30, 2023 and 2022, respectively, an increase of $4.8 million, or 9.7%.

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.

Oncology services revenue, which is primarily derived from research services, was $50.2 million and $53.9 million, for the years ended April 30, 2024 and 2023, respectively, a decrease of $3.7 million, or 6.9%.

The decrease in revenue was primarily due to a combination of factors including an increase in study cancellations during fiscal year 2023 and a slowdown of bookings expansion.

These two factors reduced our net bookings and available convertible revenue in the current year.

Cost of Oncology Services

Cost of oncology services were $29.5 million and $23.6 million for the years ended April 30, 2023 and 2022, respectively, an increase of $5.9 million or 25.0%.

The increase in cost of oncology services was primarily from an increase in compensation

and supply expenses.

Cost of oncology services were $29.4 million and $29.5 million for the years ended April 30, 2024 and 2023, respectively, a slight decrease of $0.1 million or 0.4%.

Gross margin was 41% for the twelve months ended April 30, 2024 compared to 45% for the twelve months ended April 30, 2023.

The decrease in gross margin was the result of increasing costs in compensation and supplies to support revenue growth that didn't materialize as expected.

The decrease in gross margin was the result of relatively unchanged variable costs on a revenue decline.

Variable costs were a higher percentage of revenue due to increases in mice and supply expenses.

These increases were caused by operational inefficiencies creating the need for additional mice and lab supplies.

Research and Development

Research and development expense was $11.5 million and $9.4 million for the years ended April 30, 2023 and 2022, respectively, an increase of $2.2 million or 23.2%.

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, lab supply, and outsourced discovery expenses.

Research and development expense was $9.5 million and $11.5 million for the years ended April 30, 2024 and 2023, respectively, a decrease of $2.0 million or (17.3)%.

The decrease was primarily due to cost cutting measures along with a reduction in research and development work required as our newer platforms mature.

These factors led to a decline in compensation and lab supply expenses.

The decrease was also due to a reduction in spend for our drug discovery and development programs.

Sales and Marketing

Sales and marketing expense was $7.0 million and $6.4 million for the years ended April 30, 2023 and 2022, respectively, an increase of $0.6 million or 9.8%.

The increase was mainly due to compensation expense, driven by the continued expansion of our business development teams, and marketing initiatives, including increased conference attendance due to the easing of Covid restrictions.

Sales and marketing expense was $7.1 million and $7.0 million for the years ended April 30, 2024 and 2023, respectively, remaining relatively flat with a slight increase of $0.1 million or 0.9%.

The increase was mainly due to increased conference attendance.

General and Administrative

General and administrative expense was $11.1 million and $10.2 million for the years ended April 30, 2024 and 2023, respectively, an increase of $0.8 million, or 8.1%.

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 depreciation and amortization expenses.

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

The general and administrative expense increase was primarily due to compensation and recruiting expenses due to the addition to the executive team.

Additionally, non-cash stock compensation and allowances for estimated credit losses and bad debt reserves increased.

These increases were partially offset by a decrease in IT and professional fees.

Asset Impairment

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There were no impairment charges for the year ending April 30, 2024.

Other Expense

Other expense, net was $11,000 and $24,000 for the years ended April 30, 2023 and 2022, respectively and resulted primarily from foreign currency transaction net losses offset by interest income.

Loss on Disposal of Equipment

Loss on disposal of equipment was $435,000 and zero for the years ended April 30, 2024 and 2023, respectively.

For the year ended April 30, 2024, the loss resulted from the disposal of equipment which could no longer be utilized and had a net book value, or carrying value on the balance sheet, as of the disposal date.

Other Income (Expense)

Other income, net, was $48,000 for the year ended April 30, 2024.

Other expense, net, was $11,000 for the year ended April 30, 2023.

For the year ended April 30, 2024, other income resulted primarily from interest income of $92,000 partially offset by foreign currency transaction net losses of approximately $16,000 and interest expense of $28,000.

For the year ended April 30, 2023, other expense, net resulted primarily from foreign currency transaction net losses.

Liquidity and Capital Resources

Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued.

The following conditions raised substantial doubt about our ability to continue as a going concern:

a history of net losses, working capital deficits, accumulated deficit and declining cash position.

Going concern matters are more fully discussed in Notes to the Consolidated Financial Statements, Note 2, Summary of Significant Accounting Policies.

No adjustments have been made to the financials statements as a result this uncertainty.

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, 2023 and 2022, the Company had a net loss of approximately $5.3 million and net income of approximately $548,000, respectively.

As of April 30, 2023, the Company had an accumulated deficit of approximately $77.3 million, negative working capital of $2.3 million and cash of $10.1 million.

For the twelve months ended April 30, 2023, the Company realized cash flow from operations of approximately $4.0 million.

Despite our negative working capital at this date, we believe that our cash on hand, together with expected cash flows from operations, are adequate to fund operations through at least August 2024.

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.

Most recently, we have met these cash requirements through cash on hand, 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 years ended April 30, 2024 and 2023, the Company had a net loss of approximately $7.3 million and a net loss of approximately $5.3 million, respectively.

While we believe we have strategies to increase our revenues and reduce our costs which can be implemented without disrupting the business or completely restructuring the Company, there can be no assurances.

In order to continue to fund our operations we may need to raise additional equity or debt capital in the near term and cannot provide any assurance that we will be successful in doing so, and if we can, on whether the terms will be acceptable to us.

If we are unable to obtain additional financing in the near future, we may be required to pursue a reorganization proceeding, including under applicable bankruptcy or insolvency laws.

The following discussion relates to the major components of our cash flows:

Cash Flows from Operating Activities

Net cash provided by operating activities was $4.0 million and $6.5 million for the years ended April 30, 2023 and 2022, respectively.

The decrease in cash provided by operations resulted primarily from the net loss realized in fiscal 2023.

Cash generated from operations in 2023 was primarily due to changes in our working capital accounts in the ordinary course of business and an increase in deferred revenue.

Net cash used in operating activities was $6.1 million for the year ended April 30, 2024.

Net cash provided by operating activities was $4.0 million for the year ended April 30, 2023.

The decrease in cash from operations was primarily due to the net loss realized in fiscal 2024.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.9 million and $2.4 million for the years ended April 30, 2023 and 2022, respectively.

Net cash used in investing activities was $836,000 and $2.9 million for the years ended April 30, 2024 and 2023, respectively.

The cash used was for the investment in lab and computer equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $11,000 and $207,000 for the years ended April 30, 2023 and 2022, 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.

During fiscal 2023, cash provided by financing was offset by cash used to repurchase common stock per our stock buyback program.

Net cash used in financing activities was $527,000 for the year ended April 30, 2024.

Net cash provided by financing activities was $11,000 for the year ended April 30, 2023.

Cash flows used in financing activities was for the repurchase of common stock per our stock buyback program and financing lease payments and was offset by stock options exercise proceeds.

Critical Accounting Policies

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.

It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 2 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.

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.

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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.

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.

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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.

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.

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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").

in accordance and with ASC 350, Intangibles - Goodwill and Other.

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.

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During fiscal 2023, we recorded an asset impairment charge related to software development costs of $807,000.

There were no impairment charges related to software development costs recorded during fiscal 2024.

Accounting for Income Taxes

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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, 2023 as we believe the liability for uncertain tax positions accurately reflects penalties and/or interest as of this date.

Accounting Pronouncements Being Evaluated

The Company has not accrued any additional penalties or interest during the year ended April 30, 2024 as we believe the liability for uncertain tax positions accurately reflects penalties and/or interest as of this date.

Accounting Pronouncements Adopted

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").

This update requires immediate recognition of management’s estimates of current expected credit losses.

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 May 1, 2023 for the Company.

We are currently assessing the impact of this update on our consolidated financial statements but we do not expect the adoption of the pronouncement to have a material impact on our balance sheet or results of operations.

The Company adopted this ASU on May 1, 2023 and the adoption did not have a material effect on its condensed consolidated financial statements and related disclosures.

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