Champions Oncology, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2019 (the company’s fiscal third quarter; the filing is dated March 18, 2019). Comparisons are to the periods ended January 31, 2018. Dollar amounts below are in millions unless noted.
Business context
Champions provides oncology research and development services using its TumorGraft Technology Platform. Its Translational Oncology Solutions (TOS) business serves pharmaceutical and biotechnology customers; Personalized Oncology Solutions (POS) provides services to physicians and patients. Management says future growth efforts will focus on TOS, not POS.
Key financial results
| Metric | Three months ended Jan. 31, 2019 | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2018 |
|---|---|---|---|---|
| Revenue | $6.43 | $5.08 | $19.35 | $15.32 |
| Gross margin | 46.7% | 51.3% | 48.5% | 49.5% |
| Operating income (loss) | $(0.37) | $(0.07) | $0.39 | $(0.76) |
| Net income (loss) | $(0.37) | $(0.08) | $0.38 | $(0.84) |
| Diluted earnings (loss) per share | $(0.03) | $(0.01) | $0.03 | $(0.08) |
Revenue increased 26.5% for the quarter and 26.3% year to date. Pharmacology services were the largest revenue source: $5.99 million for the quarter and $18.04 million year to date. Management attributed growth to more and larger studies, a broader customer base, and platform expansion. For the quarter, cost of services rose faster than revenue, compressing gross margin; management cited higher salary and mice costs as study volumes increased and noted expenses can precede related revenue.
For the nine months, operating cash flow was $1.61 million, versus cash used of $1.24 million in the prior-year period. Investing cash outflow was $0.69 million, mainly property and equipment purchases; financing cash inflow was $1.39 million, primarily from option and warrant exercises. Cash and restricted cash rose by $2.30 million to $3.31 million. The company reported no off-balance-sheet debt or similar obligations.
Financial position and liquidity
At January 31, 2019, cash was $3.31 million, current assets were $7.53 million, and current liabilities were $7.70 million, resulting in negative working capital of approximately $0.18 million. Total liabilities were $8.59 million and stockholders’ equity was $2.32 million. Current capital lease obligations were $0.22 million; the company paid the outstanding balance on the newer equipment lease on February 1, 2019. The $1.5 million revolving credit line matured October 29, 2018 and was not renewed.
Management believes cash on hand and continued improvement in operating cash flows will fund operations through at least March 2020. The filing warns that the company may need improved cash flows, reduced activity, or external capital to meet cash requirements beyond that point, and additional financing may not be available on acceptable terms.
Changes, outlook, and risks
- Year-to-date performance improved from a prior-year loss to net income, alongside higher revenue and positive operating cash flow. The quarter itself remained loss-making, with operating expenses up 32.1% year over year versus revenue growth of 26.5%.
- Research and development spending rose year over year, attributed to laboratory costs and salaries for new product development. Sales and marketing expense also increased, mainly due to commissions on bookings.
- Management plans to expand the TOS platform and says POS will not be a growth focus. The filing provides no quantified revenue or earnings guidance.
- The company adopted ASC 606 on May 1, 2018; management reported no material measurement impact. Adoption of the new lease standard is expected to materially affect the balance sheet through recognition of operating-lease assets and liabilities, but not materially affect operations or cash flows.
- The company had an accumulated deficit of $70.4 million and negative working capital. Its stated runway depends on continued improvement in operating cash flows. It also reported a $151,000 liability for uncertain tax positions related to a foreign operation.
- No legal proceedings were reported. Management stated that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether study growth and customer expansion continue, and whether increased study costs are converted into revenue without further gross-margin pressure.
- Whether operating cash flow remains positive and supports management’s estimated runway through March 2020, particularly given negative working capital and the lapsed credit line.
- The effect of the lease-standard adoption on reported assets and liabilities, and the company’s ongoing lease commitments (future minimum payments reported at $8.86 million).
- Potential dilution: 11,612,700 shares were outstanding at January 31, 2019; 4,161,608 options and warrants were outstanding, including 1,671,440 warrants expiring at various dates through March 2020.
- Whether the fiscal third-quarter loss and lower quarterly gross margin reflect timing and growth-related costs or a sustained change in economics.