Champions Oncology, Inc. — Q1 FY2020 Form 10-Q
Period: Three months ended July 31, 2019; unaudited. Champions 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 | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $6.737 million | $6.225 million |
| Gross margin | 44.3% | 50.5% |
| Operating income (loss) | ($614,000) | $481,000 |
| Net income (loss) | ($641,000) | $482,000 |
| Net income (loss) per diluted share | ($0.06) | $0.04 |
| Cash from (used in) operations | ($279,000) | $336,000 |
| Capital expenditures | $749,000 | $211,000 |
Revenue increased 8.2%, driven by more and larger studies, customer-base expansion, and platform growth. Pharmacology services generated $6.530 million of revenue; personalized oncology services generated $180,000. Costs and operating expenses rose 28.0% to $7.351 million, outpacing revenue growth. Cost of services increased 21.7%; R&D rose 19.8%, sales and marketing 68.0%, and general and administrative expense 35.2%. Management attributed lower gross margin to higher salaries, mice and laboratory supply costs as study volume increased, including costs incurred ahead of related revenue.
Liquidity, balance sheet and cash flows
Cash was $2.202 million at July 31, down $1.035 million from April 30. Working capital was in deficit by $1.6 million, and accumulated deficit was $71.3 million. Current assets were $6.349 million versus current liabilities of $7.930 million. Property and equipment, net, was $3.113 million. The company reported no off-balance-sheet debt or similar obligations. Finance lease liabilities were $9,000 current; operating lease liabilities totaled approximately $4.010 million ($457,000 current and $3.553 million non-current), following adoption of ASC 842.
Investing cash use increased principally because of laboratory equipment purchases for new product and service offerings. Financing cash use was $7,000, primarily finance-lease payments. The filing reports no material legal proceedings.
Outlook, risks and notable items
Management believes cash on hand and expected positive operating cash flows in fiscal 2020 will fund operations through at least November 2020. This outlook depends on the expected cash flows; the company cautions that additional capital, if needed, may not be available on acceptable terms or at all. The quarter’s operating loss and working-capital deficit make liquidity and execution important to monitor.
The company adopted lease-accounting standard ASC 842 on May 1, 2019, recognizing operating lease assets and liabilities; prior-year figures were not recast. It invested substantially more in equipment during the quarter. Management identified estimates involving receivable collection, revenue recognition, deferred-tax-asset valuation, goodwill, and stock compensation and warrant valuations as significant. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether study-volume growth converts into revenue and improved gross margins, given the quarter’s higher service costs.
- Whether expected positive fiscal 2020 operating cash flow supports management’s stated runway through November 2020.
- How the $749,000 of equipment investment supports new offerings and future revenue.
- The company’s liquidity needs and ability to raise capital if cash flow falls short of expectations.
- Potential dilution: 2,374,875 options and 1,669,773 warrants were outstanding at July 31, 2019; warrants expire at various dates through March 2020.