Champions Oncology, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2018; unaudited. Comparative periods ended October 31, 2017. The company provides oncology research and development services using its TumorGraft platform. Management plans to focus growth on Translational Oncology Solutions (TOS); Personalized Oncology Solutions (POS) is not expected to be a growth focus.
Financial performance
| Metric | Three months ended Oct. 31, 2018 | Prior year | Six months ended Oct. 31, 2018 | Prior year |
|---|---|---|---|---|
| Revenue | $6.693 million | $5.203 million | $12.919 million | $10.237 million |
| Gross margin | 48.4% | 49.0% | 49.4% | 48.3% |
| Operating income (loss) | $275,000 | ($70,000) | $757,000 | ($689,000) |
| Net income (loss) | $267,000 | ($94,000) | $750,000 | ($768,000) |
| Diluted EPS | $0.02 | ($0.01) | $0.06 | ($0.07) |
Six-month operating cash flow was $400,000, versus $1.680 million used in the prior-year period. Investing activities used $486,000, principally for property and equipment; financing provided $1.036 million, primarily from option exercises. Cash and restricted cash increased by $950,000 to $1.956 million. The company reported no conventional borrowings; capital-lease obligations totaled $237,000, including $142,000 current. Total assets were $10.239 million and total liabilities $8.247 million at October 31.
Current assets were $6.921 million and current liabilities $7.332 million, representing negative working capital of approximately $411,000. Deferred revenue was $4.828 million. Accumulated deficit was $70.1 million. No off-balance-sheet debt or similar obligations were reported.
Changes and management commentary
- Revenue grew 28.6% year over year in the quarter and 26.2% for six months. Management attributed the increase primarily to more and larger TOS studies, customer-base expansion, and platform growth. Pharmacology services generated $12.013 million of six-month revenue; personalized oncology services generated $609,000.
- Six-month operating costs and expenses rose 11.3%, slower than revenue growth. Cost of oncology solutions increased with study volume. Research and development rose 2.2%; sales and marketing rose 1.9%; general and administrative expense fell 3.5%, mainly due to lower stock-based compensation.
- Quarterly gross margin declined to 48.4% from 49.0%; six-month gross margin improved to 49.4% from 48.3%. Management said margin can vary with timing differences in expense and revenue recognition.
- The company adopted ASC 606 effective May 1, 2018 using the modified retrospective method; it reported no material measurement impact. Most service revenue is recognized over time as performance obligations are completed.
Liquidity, outlook, and risks
Management said cash on hand, together with continued improvement in operating cash flows, should fund operations through at least December 2019. The company cautioned that it may not meet cash requirements beyond that point without continued cash-flow improvement, reduced activity, or additional capital; external financing may not be available on acceptable terms, or at all. Its $1.5 million revolving credit line matured October 29, 2018 and was not renewed; management said it was not currently needed for working capital.
The company entered a new laboratory and office lease on November 1, 2018, with operations expected to commence January 15, 2019. Disclosed future minimum operating-lease payments totaled $8.344 million. It also expects to transition from a Gaithersburg location and terminate that lease shortly after the new location begins. Management reported no known current legal proceedings. Deferred tax assets remained fully valuation-allowed; a Section 382 study was in progress, and the company believed available net operating losses could offset fiscal 2019 taxable income.
Important facts for investors to verify
- Whether operating cash flow continues to improve sufficiently to support the stated funding outlook through December 2019, given negative working capital and $1.956 million in cash.
- Whether revenue growth and gross margins are sustained as TOS study volume expands, and how revenue-recognition timing affects reported results and deferred revenue.
- The financial impact of the new facility, existing lease commitments, and laboratory capital leases.
- Potential dilution: 4,345,096 options and warrants were outstanding at October 31, 2018; 446,815 shares were issued through option and warrant exercises during the quarter, and six-month financing cash inflow included $1.076 million of option-exercise proceeds.
- Whether the Section 382 review affects the company’s ability to use tax-loss carryforwards; management stated that deferred tax assets were fully reserved.