Champions Oncology, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended July 31, 2018; comparisons are to the three months ended July 31, 2017. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
Champions provides oncology research and development services using its TumorGraft Technology Platform. Its Translational Oncology Solutions (TOS) serve pharmaceutical and biotechnology companies; Personalized Oncology Solutions (POS) support physicians and cancer patients. Management said it plans to focus growth on TOS, with POS not a growth focus.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $6.225 million | $5.033 million |
| Gross profit / margin | $3.142 million / 50.5% | $2.391 million / 47.5% |
| Operating income (loss) | $481,000 | $(619,000) |
| Net income (loss) | $482,000 | $(674,000) |
| Basic and diluted EPS | $0.04 | $(0.06) |
| Operating cash flow | $336,000 | $(1.948) million |
| Investing cash flow | $(211,000) | $(910,000) |
Revenue grew 23.7%, primarily from more and larger TOS studies and platform growth. Cost of oncology solutions increased 16.7%, slower than revenue growth; management attributed improved gross margin to leveraging fixed costs. R&D decreased 2.7%, sales and marketing decreased 24.2% (mainly lower payroll), and general and administrative expenses decreased 12.7% (primarily lower stock compensation).
At July 31, cash and cash equivalents were $1.016 million, plus $150,000 restricted cash. Working capital was negative $1.9 million and accumulated deficit was $70.3 million. Total liabilities were $7.789 million and stockholders’ equity was $602,000. The company reported no outstanding borrowings on its secured, demand line of credit of up to $1.5 million, which matures October 29, 2018. Capital lease liabilities are reported on the balance sheet; the company entered a new laboratory-equipment lease in July 2018. The cash flow statement also reports $249,000 of equipment acquired under capital lease.
Deferred revenue was $4.263 million, down from $4.704 million at April 30, 2018. Property and equipment purchases used $211,000 of cash; cash increased $160,000 including restricted cash during the quarter.
Outlook, risks, and notable items
- Management believes available cash and continued improvement in operating cash flows will fund operations through at least September 2019. It cautioned that further funding may be needed beyond then if cash flows do not continue to improve, activities are not reduced, or external capital is unavailable on acceptable terms.
- The company reported a $70.3 million accumulated deficit and negative working capital, making the stated runway dependent on improved operating cash flow.
- ASC 606 revenue recognition was adopted May 1, 2018 using the modified retrospective method; management said adoption did not materially affect the financial statements. The 2018 quarter uses ASC 606 while the comparative 2017 quarter uses ASC 605.
- The $150,000 restricted certificate of deposit was expected to mature in October 2018; the company said it would not renew it and would then cease classifying it as restricted cash.
- After quarter-end, 123,177 warrants were exercised in August 2018 at $5.76 per warrant. The filing reports no legal proceedings and no material off-balance-sheet debt or similar obligations.
- Management reported disclosure controls and procedures were effective as of July 31, 2018 and no material changes in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether positive operating cash flow and the revenue growth trend continue, given the stated runway depends on continued cash-flow improvement.
- The renewal, repayment, or replacement of the $1.5 million demand credit line ahead of its October 29, 2018 maturity.
- Whether TOS study volume and margins can sustain growth, and the effects of management’s reduced growth emphasis on POS.
- The balance-sheet presentation of capital leases: the balance sheet lists $137,000 current and $148,000 non-current, while the lease note’s schedule gives a $266,000 present value, including $129,000 non-current.
- The cash and share-count effects of the post-quarter warrant exercises and the timing of release of restricted cash.