Champions Oncology, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended January 31, 2014. Financial statement amounts are in thousands of U.S. dollars, except per-share data. The company provides TumorGraft-based personalized oncology services (POS) to physicians and patients and translational oncology services (TOS) to pharmaceutical and biotechnology customers.
Financial performance
| Metric | Three months ended Jan. 31, 2014 | Prior-year quarter | Nine months ended Jan. 31, 2014 | Prior-year period |
|---|---|---|---|---|
| Revenue | $3,690 | $2,917 | $9,092 | $6,481 |
| Operating loss | $(1,408) | $(720) | $(3,882) | $(4,235) |
| Net loss | $(574) | $(990) | $(5,134) | $(4,284) |
| Net loss per share | $(0.01) | $(0.02) | $(0.08) | $(0.09) |
- Quarterly revenue rose 26.5%; nine-month revenue rose 40.3%. TOS supplied $3,100, or 84% of quarterly revenue, and $7,258, or 80% of nine-month revenue. POS revenue was $590 for the quarter and $1,834 year to date.
- For the quarter, POS gross margin was (4.1)% versus (42.9)% a year earlier; TOS gross margin was 67.5% versus 76.8%. For nine months, POS gross margin was (16.6)% versus (9.7)%, while TOS was 64.4% versus 62.4%. Management said quarterly TOS margin benefited from technology-licensing revenue.
- Quarterly operating loss widened as total costs and expenses rose 40.2%, including an 85.2% increase in general and administrative expense. Nine-month operating loss narrowed 8.3%, but net loss increased, mainly reflecting the change in fair value of warrant liabilities.
- Cash and cash equivalents were $5,812 at January 31, 2014, versus $9,561 at April 30, 2013. Working capital was $5.5 million. Accounts receivable increased to $3,123 from $500, and deferred revenue to $2,095 from $1,114.
- Nine-month operating cash use was $3,558, compared with $3,132 a year earlier; investing cash use was $164 versus $35. Financing cash flow was nil, compared with $9,195 provided in the prior-year period.
- The balance sheet reports no conventional borrowings; the company also stated it had no off-balance-sheet debt. Warrant liability was $2,248, up from $1,046, and stockholders’ equity was $4,486 versus a deficit of $9,206 at April 30, 2013.
Material changes and notable items
- TOS drove growth, while nine-month POS revenue was slightly lower year over year. Management attributed higher TOS costs to increased laboratory testing and revenue activity.
- On December 6, 2013, the company entered a $1,875 Pfizer licensing agreement for use of part of its TumorGraft platform, with potential further collaboration. Management cited the licensing revenue as a factor in quarterly TOS margin.
- A July 2013 Teva agreement replaced the earlier Cephalon collaboration. No revenue had been recognized under the new agreement as of January 31, 2014; potential milestone and royalty payments are contingent. The filing also describes potential development milestones of up to $27 million per compound under the earlier arrangement.
- January 2014 amendments changed the definition of a put-option trigger so it was within the company’s control. The related private-placement common shares were consequently reclassified from redeemable stock to permanent equity. Certain CEO and president arrangements address their participation in board votes involving a put trigger.
- The warrant fair-value change is noncash and is recorded in earnings: it generated $846 of other income in the quarter but $1,202 of expense for the nine-month period. The liability is valued using a Monte Carlo model and significant unobservable inputs.
- Stock-based compensation was $1,968 for nine months. The company granted 8.85 million options during that period; outstanding options totaled 22.63 million at January 31, 2014. Potential dilution also includes 3.28 million warrants. Common shares outstanding on February 28, 2014 were 66,867,100.
Outlook, risks and contingencies
- Management said cash on hand at January 31, 2014 was adequate to fund operations for at least the next 12 months, while noting that additional financing, if needed, might not be available on acceptable terms or at all.
- The company planned to continue expanding the TumorGraft platform and POS and TOS programs. It said it was evaluating ways to increase laboratory capacity. No specific financial guidance was provided.
- Management noted that its POS strategy included lower pricing to increase product volume and TumorBank growth. POS gross margins remain negative and can fluctuate with product mix, pricing and volume.
- Registration-rights provisions could require cash penalties of $50 to $130 per 30-day period during a registration default, subject to contractual caps. The company considered payment not probable and recorded no accrual.
- The company disclosed no current legal proceedings and no material changes to previously reported risk factors. It identified potential Irinophore C development milestone payments of up to $3 million if achieved, but did not expect milestones within the next 12 months.
Important facts for investors to verify
- Whether TOS growth and the Pfizer license are repeatable, and how much future revenue depends on a limited number of pharmaceutical customers.
- Cash burn, receivables collection and deferred-revenue conversion relative to management’s 12-month liquidity assessment.
- The effect of negative POS margins, laboratory capacity needs and rising operating expenses on the path to profitability.
- Potential dilution from outstanding options and warrants, and the sensitivity of the warrant liability to share price and valuation assumptions.
- The terms and remaining exposure under private-placement put rights, registration obligations and contingent licensing milestones.