Champions Oncology, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended April 30, 2019, compared with the year ended April 30, 2018. The filing is an annual report, not a calendar-year 2018 Q4 report. Champions provides oncology research and drug-development services using its TumorGraft/PDX platform. Its primary growth focus is Translational Oncology Solutions (TOS); Personalized Oncology Solutions (POS) is not a growth priority.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $27.07 million | $20.24 million |
| Gross margin | 47.3% | 47.9% |
| Operating income (loss) | $0.27 million | ($1.35 million) |
| Net income (loss) | $0.13 million | ($1.48 million) |
| Diluted earnings (loss) per share | $0.01 | ($0.13) |
| Cash from operating activities | $1.86 million | ($1.23 million) |
| Cash used in investing activities | $0.83 million | $1.23 million |
| Cash from financing activities | $1.20 million | $0.01 million |
- Revenue grew 33.7%. Pharmacology services revenue was $25.48 million, POS revenue was $1.28 million, and other TOS revenue was $0.31 million. The company separately reported TOS product revenue of approximately $25.8 million, up 37.3%; POS revenue declined 12.2%.
- Cost of services increased 35.2% to $14.27 million, including higher personnel and mouse costs and $0.9 million for repeat studies. Gross margin fell 0.6 percentage points.
- Research and development was $4.80 million, sales and marketing $3.06 million, and general and administrative expense $4.68 million. Operating results moved from loss to modest income as revenue growth outpaced total expense growth.
- At April 30, 2019, cash and cash equivalents were $3.24 million, current assets $7.92 million, current liabilities $8.03 million, and working capital was negative $0.10 million. Accumulated deficit was $70.7 million.
- The company stated that cash on hand and expected improved operating cash flows were adequate to fund operations through at least August 2020, while cautioning that additional capital might be needed and could be unavailable on acceptable terms.
- The $1.5 million revolving credit line matured in October 2018 and was not renewed. Capital lease obligations were $16,000 current, with no long-term capital lease balance at year-end. The filing reports no off-balance-sheet debt.
Material changes, outlook and risks
- Operating cash flow improved by $3.1 million year over year, attributed to revenue growth, increased bookings, and timing of ordinary operating activity. Financing cash inflow mainly reflected stock-option and warrant exercises.
- Management’s strategy is to expand the TumorBank, develop new PDX technologies including humanized-immune-system ImmunoGrafts, and increase study size and scale. No specific revenue, earnings, or cash-flow guidance was provided.
- Management cited platform results with approximately 87% positive and 94% negative predictive value, but described POS patient-response data as limited and indicated a possible correlation rather than established clinical validation.
- Key risks include the possibility of continued losses or future capital raises; cancellation or modification of customer studies; competition and the platform’s lack of patent protection; potential changes to FDA oversight of laboratory-developed tests; lack of third-party reimbursement for patient services; and reliance on laboratory facilities, live mice, and specialized personnel.
- One customer represented 10.7% of FY2019 revenue, compared with two customers representing 20.6% and 12.8% in FY2018. No customer exceeded 10% of year-end receivables in FY2019.
- Operating lease expense was $0.82 million, and disclosed future minimum lease payments totaled $11.53 million. Management expected adoption of the new lease standard in May 2019 to add approximately $4.1 million of lease liabilities and $3.2 million of right-of-use assets, with no material operating-results or cash-flow impact expected.
- The company adopted ASC 606 in FY2019; management reported no material measurement impact, though FY2019 and FY2018 revenue were prepared under different recognition standards. The company recorded a $0.10 million income-tax provision despite modest pretax income and maintained a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether TOS bookings, study size, customer retention, and revenue growth continued after year-end, and whether repeat-study costs pressure gross margins.
- Cash runway assumptions underlying management’s estimate through August 2020, including working-capital needs, capital spending, and potential financing requirements.
- Evidence supporting PDX predictive performance and the commercial and clinical validation of ImmunoGrafts and other planned products.
- Exposure to customer study cancellations, customer concentration, regulatory changes affecting POS services, and the company’s ability to protect unpatented know-how.
- Potential dilution from outstanding options and warrants: 4.10 million instruments were outstanding at April 30, 2019; the filing reports 11.62 million common shares outstanding at that date.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of April 30, 2019.