Champions Oncology, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2018. The filing is for the quarter ended January 31, 2018, notwithstanding the request metadata’s “2017 Q3” label. Financial statement amounts below are in millions of dollars unless otherwise noted.
Business context
Champions Oncology develops and sells oncology research and personalized-care solutions using its TumorGraft technology platform. Its two reportable businesses are Personalized Oncology Solutions (POS), serving physicians and patients, and Translational Oncology Solutions (TOS), serving pharmaceutical and biotechnology companies. Management said TOS will be the focus of growth efforts; POS is not expected to be a growth focus.
Financial performance
| Metric | Three months ended Jan. 31, 2018 | Prior-year quarter | Nine months ended Jan. 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Revenue | $5.082 | $3.565 | $15.319 | $11.691 |
| Operating loss | $(0.067) | $(1.401) | $(0.755) | $(4.420) |
| Net loss | $(0.076) | $(1.409) | $(0.844) | $(4.460) |
| Basic and diluted loss per share | $(0.01) | $(0.13) | $(0.08) | $(0.44) |
- Quarterly revenue rose 42.6%; nine-month revenue rose 31.0%. TOS revenue increased 49.9% in the quarter and 37.8% over nine months. POS revenue decreased 25.4% and 20.5%, respectively.
- Quarterly operating loss narrowed substantially as revenue growth outpaced expense growth. Nine-month total operating expenses were essentially flat year over year at $16.074 million versus $16.111 million.
- Reported segment gross margins improved: TOS was 53.3% for the quarter and 51.8% for nine months, versus 35.2% and 42.3%; POS was 15.1% and 19.1%, versus 7.8% and 13.8%. Management noted TOS margins can fluctuate with the timing of revenue and expense recognition.
- Quarterly R&D expense was $1.045 million, sales and marketing $0.627 million, and general and administrative expense $1.004 million. Nine-month stock-based compensation was $0.863 million, down from $1.901 million.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash use was $1.235 million, investing cash use was $1.017 million, and financing cash provided was $0.019 million. Cash and cash equivalents fell $2.233 million to $1.062 million.
- At January 31, 2018, current assets were $4.189 million and current liabilities were $6.177 million, representing negative working capital of approximately $2.0 million. Accounts receivable was $2.942 million and deferred revenue $3.851 million.
- Total liabilities were $6.623 million and stockholders’ equity was $0.472 million. The company reported no borrowings under its new $1.5 million secured line of credit; borrowings, if any, bear interest at prime plus 1.5% to 2.0%, are due on demand, and the facility matures October 29, 2018. A capital lease obligation had a $0.049 million present value.
- Capital spending included approximately $0.910 million for equipment for the new Rockville laboratory; the company also incurred approximately $0.100 million of non-capitalized, non-recurring lab setup costs.
Outlook, risks and unusual items
- Management stated that cash on hand and expected future revenue were adequate to fund operations through at least December 2018 in parts of MD&A, while other passages say through at least March 2019 and discuss needing to grow revenue and manage expenses to continue beyond March 2019. The filing does not provide a clear, consistent runway date.
- The company warned it may need external capital if revenue growth or expense management is insufficient. Financing may not be available on acceptable terms; equity financing could dilute shareholders, and debt could bring payment obligations and restrictive covenants. Failure to obtain financing could require reductions, delays, or cancellations of activities and could impair the company’s ability to continue operating.
- The line of credit was available but management said it did not plan to use it. No formal revenue or earnings guidance was provided.
- The company provisionally estimated that the Tax Cuts and Jobs Act reduced net federal and state deferred tax assets by $7 million, offset by a valuation allowance; analysis was ongoing. All net deferred tax assets were subject to a valuation allowance.
- The company reported no current legal proceedings, no accrued registration-rights penalties, and no off-balance-sheet debt or similar obligations. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Clarify management’s stated cash runway, given the filing’s differing references to December 2018 and March 2019.
- Monitor cash consumption, collections, deferred-revenue changes, and the timing and size of TOS studies; cash was $1.062 million against negative working capital of about $2.0 million.
- Assess whether TOS revenue and margins can be sustained while POS revenue declines and the company concentrates growth efforts on TOS.
- Review the company’s financing needs and the terms, availability, and potential use of its secured, demand line of credit.
- Track adoption of the new revenue-recognition standard planned for May 1, 2018; management did not anticipate a material financial-statement impact based on its preliminary review, but evaluation was incomplete.