Item 7. Management’s Discussion and Analysis
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.
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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.
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 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. 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 pipeline of targets at various stages of discovery and validation, with a select group that has progressed to early stage 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):
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For the Years Ended April 30,
2024 % of
Revenue 2023 % of
Revenue %
Change
Oncology services revenue $ 50,155 100.0 % $ 53,870 100.0 % (6.9) %
Costs and operating expenses:
Cost of oncology services 29,401 58.6 29,532 54.8 (0.4)
Research and development 9,544 19.0 11,545 21.4 (17.3)
Sales and marketing 7,064 14.1 7,002 13.0 0.9
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 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 $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 $29.4 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 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 $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 $7.1 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 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.
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Asset Impairment
During the fourth quarter of fiscal 2023, we assessed the recoverability of the Lumin capitalized software development costs by comparing the forecasted future revenues from Lumin sales, based on management’s best estimates and using appropriate assumptions and projections, to the carrying amount of the capitalized asset. Several factors were considered in this analysis, including, the decrease in Lumin revenue growth from the prior year, the deceleration of new Lumin bookings in the current year, and the strategic consideration for additional capital investment into the platform, sales team, and marketing campaigns to bolster awareness and growth. As the carrying value was determined not to be recoverable from future revenues, an impairment loss was recognized for the year ending April 30, 2023 equal to the amount by which the carrying amount exceeded the future revenues, or, its net book value at that date of $807,000. There were no impairment charges for the year ending April 30, 2024.
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. 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.
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 $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
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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 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 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 ("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, 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
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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
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. 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 recorded as an asset and 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. 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
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, 2024 and 2023, we have established a full valuation allowance for all deferred tax assets.
As of April 30, 2024 and 2023, 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 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
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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. 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 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
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.