Champions Oncology, Inc. — Form 10-Q Summary
Business context and reporting period. The company provides oncology research and development services using its TumorGraft platform, principally to pharmaceutical and biotechnology customers through Translational Oncology Solutions (TOS), and also offers Personalized Oncology Solutions (POS). This fiscal third-quarter report covers the three and nine months ended January 31, 2020; comparisons are with the periods ended January 31, 2019. Management said TOS will be the focus of growth efforts, while POS will not be a growth focus.
Financial performance
| Metric | Three months ended Jan. 31 | Nine months ended Jan. 31 |
|---|---|---|
| Revenue | $9.012 million vs. $6.430 million (+40.2%) | $23.375 million vs. $19.348 million (+20.8%) |
| Gross margin | 52.0% vs. 46.7% | 48.8% vs. 48.5% |
| Operating income (loss) | $433,000 vs. $(370,000) | $109,000 vs. $386,000 |
| Net income (loss) | $407,000 vs. $(369,000) | $72,000 vs. $381,000 |
| Net income per share, diluted | $0.03 vs. $(0.03) | $0.01 vs. $0.03 |
| Operating cash flow | Not provided for the quarter | $360,000 vs. $1.610 million |
Quarterly revenue growth reflected more studies and larger, more complex study designs, along with customer-base expansion. Nine-month revenue was primarily pharmacology services: $22.732 million, compared with $18.037 million a year earlier. Nine-month operating expenses rose 22.7% to $23.266 million, outpacing revenue growth; sales and marketing increased 47.6% and general and administrative expense increased 24.4%. Management attributed expense growth mainly to hiring, compensation, lab supplies, professional fees and depreciation. Quarterly G&A also included a non-recurring bad-debt write-off.
Financial position and liquidity
- At January 31, 2020, cash was $3.282 million; current assets were $8.130 million and current liabilities were $8.446 million, a working capital deficit of approximately $316,000.
- Total assets were $15.075 million and total liabilities were $11.898 million. The balance sheet showed finance lease liabilities of $177,000 current, plus operating lease liabilities of $490,000 current and $3.301 million non-current. The filing reports no off-balance-sheet debt or similar obligations.
- Cash increased by $45,000 over the nine-month period. Operating activities provided $360,000, investing activities used $693,000, and financing activities provided $378,000. Capital purchases were $693,000, primarily for lab equipment.
- Accounts receivable, net, was $4.493 million, including an allowance for doubtful accounts of $230,000; deferred revenue was $4.586 million.
- Stockholders’ equity was $3.177 million and accumulated deficit was $70.625 million. Common shares outstanding were 11,823,274 at January 31, 2020 and 11,887,649 at March 6, 2020.
Management said cash on hand and expected positive operating cash flows for fiscal 2020 should fund operations for at least 12 months from the filing date. If revenue expectations are not met, management believes it could implement cost reductions; any need to raise capital carries no assurance of success or acceptable terms.
Material changes, outlook and risks
- Revenue growth and improved quarterly gross margin contributed to quarterly operating profitability. For the nine-month period, however, operating income and net income declined year over year, and operating cash flow fell from $1.610 million to $360,000. Management cited first-quarter operating losses and working-capital timing, including a $334,000 increase in receivables and a $913,000 decrease in accounts payable.
- Research and development spending increased as the company invested in new PDX models, ex-vivo assays and expanded endpoint analysis. Sales and marketing spending rose as the sales force expanded.
- The company adopted lease accounting standard ASC 842 on May 1, 2019, recognizing operating lease assets and liabilities; comparative periods were not recast. Future minimum lease payments disclosed at January 31 totaled $10.486 million.
- Management was monitoring the emerging coronavirus outbreak and potential disruption to travel, partnerships, biologic-material shipments and suppliers. It did not expect a material adverse effect at that time, but said the impact could not be accurately predicted.
- The company reported no pending legal proceedings. It recorded $151,000 of liabilities for uncertain tax positions and maintained a valuation allowance against all net deferred tax assets. Management identified estimates involving receivable collectability, revenue recognition, deferred taxes, goodwill and share-based compensation as significant.
- Warrants to purchase 1,669,773 shares were outstanding at January 31, 2020 and were exercisable; they expired at various dates through March 2020. Options and warrants may create dilution. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and study volumes continue, and whether the larger, more complex contracts convert into cash on schedule.
- Whether operating cash flow improves and the working-capital deficit remains manageable, given receivables, deferred revenue and the decline in payables.
- Whether the stated 12-month liquidity outlook is supported by actual operating performance and whether cost reductions or external capital become necessary.
- The effect of lease commitments and laboratory investment on future cash needs, and the outcome of warrants expiring through March 2020 and other potential share dilution.
- Whether coronavirus-related supply-chain or operating disruptions, credit losses, tax matters or other risks disclosed in the filing change materially.