CHAMPIONS ONCOLOGY, INC. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the condensed consolidated financial statements and related notes that appear elsewhere in this report and our most recent annual report for the year endedApril 30, 2022 , as filed on Form 10-K. Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain "forward-looking statements," which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations that regulatory developments or other matters will not have a material adverse effect on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Forward-looking statements speak only as of the date the statements are made. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedApril 30, 2022 , as updated in our subsequent reports filed with theSEC , including any updates found in Part II, Item 1A of this or other reports on Form 10-Q, if any. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Overview and Recent Developments We are a technology-enabled research organization engaged in creating transformative technology solutions to be utilized in drug discovery and development. Our research center consists of a comprehensive set of computational and experimental research platforms. Our pharmacology, biomarker, and data platforms are designed to facilitate drug discovery and development at lower costs and increased speeds. We perform studies which we believe may predict the efficacy of experimental oncology drugs or approved drugs as stand-alone therapies or in combination with other drugs and can stimulate the results of human clinical trials. These studies include in vivo studies that rely on implanting multiple tumors from our TumorBank in mice and testing the therapy of interest on these tumors. Studies may also include bioinformatics analysis that reveal the differences in the genetic signatures of the tumors that responded to a therapy as compared to the tumors that did not respond. Additionally, we provide computational or experimental support to identify novel therapeutic targets, select appropriate patient populations for clinical evaluation, identify potential therapeutic combination strategies, and develop biomarker hypothesis of sensitivity or resistance. These studies include the use of our in vivo, ex vivo, analytical and computational platforms. We are engaged in the development and sale of advanced technology solutions and products to personalize the development and use of oncology drugs through our Translational Oncology Solutions ("TOS"). This technology ranges from computational-based discovery platforms, unique oncology software solutions, and innovative and proprietary experimental tools such as in vivo, ex vivo and biomarker platforms. Utilizing our TumorGraft Technology Platform ("The Platform"), a comprehensive 18 -------------------------------------------------------------------------------- Bank of unique, well characterized models, we provide select services to pharmaceutical and biotechnology companies seeking personalized approaches to drug development. By performing studies to predict the efficacy of oncology drugs, our Platform facilitates drug discovery with lower costs and increased speed of drug development as well as increased adoption of existing drugs. As part of our growth strategy, we launched Lumin Bioinformatics ("Lumin"), an oncology data-driven software program. Our Lumin software contains comprehensive information derived from our research services and clinical studies. Lumin leverages our large Datacenter coupled with analytics and artificial intelligence to provide a robust tool for computational cancer research. It is the combination of the Datacenter and the analytics that create a unique foundation for Lumin. Insights developed using Lumin can provide the basis for biomarker hypotheses, reveal potential mechanisms of therapeutic resistance, and guide the direction of additional preclinical evaluations. Our drug discovery and development business leverages the computational and experimental capabilities within our platforms. Our discovery strategy utilizes our rich and unique Datacenter, coupled with artificial intelligence and other advanced computational analytics, to identify novel therapeutic targets. We then employ the use of our proprietary experimental platforms to rapidly validate these targets for further drug development efforts. We have a rich pipeline of targets at various stages of discovery and validation, with a select group that has progressed to therapeutic development. Our commercial strategy for the validated targets and therapeutics established from this business is wide-ranging and still being developed. It will depend on many factors, and will be specific for each target or therapeutic area identified. Any expenses associated with this part of our business are research and development and are expensed as incurred.
We regularly evaluate strategic options to create additional value from our drug discovery business, which may include, but are not limited to, potential spin-out transactions or capital raises.
Liquidity and Capital Resources
Our liquidity needs have typically arisen from the funding of our research and development programs and the launch of new products, working capital requirements, and other strategic initiatives. Recently, we have met these cash requirements through cash, working capital management, and sales of products and services. In the past, we have also received proceeds from certain private placements and public offerings of our securities. For the six months endedOctober 31, 2022 , the Company had a net loss of approximately$335,000 and cash provided by operations of$3.1 million . As ofOctober 31, 2022 , the Company had an accumulated deficit of approximately$72.3 million , working capital of$1.9 million , and cash of$10.8 million . We believe that our cash on hand, together with expected positive cash flows from operations for fiscal year 2023, are adequate to fund operations through at least 12 months from the filing of this 10-Q. However, should our revenue expectations not materialize, we believe we have cost reduction strategies that could be implemented without disrupting the business or restructuring the Company. Should the Company be required to raise additional capital, there can be no assurance that management would be successful in raising such capital on terms acceptable to us, if at all.
Operating Results
The following table summarizes our operating results for the periods presented below (dollars in thousands):
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For the Three Months Ended
% of % of %
2022 Revenue 2021 Revenue Change
Oncology services revenue $ 14,281 100.0 % $ 11,786 100.0 % 21.2 %
Costs and operating expenses:
Cost of oncology services 7,443 52.2 5,609 47.6 32.7
Research and development 2,604 18.2 2,299 19.5 13.3
Sales and marketing 1,700 11.9 1,640 13.9 3.7
General and administrative 2,527 17.7 1,975 16.8 27.9
Total costs and operating expenses 14,274 100.0 11,523 97.8 23.9
Income from operations $ 7 - % $ 263 2.2 % (97.3) %
For the Six months ended October 31,
% of % of %
2022 Revenue 2021 Revenue Change
Oncology services revenue $ 28,026 100.0 % $ 23,039 100.0 % 21.6 %
Costs and operating expenses:
Cost of oncology services 14,495 51.7 11,005 47.8 31.7
Research and development 5,491 19.6 4,603 20.0 19.3
Sales and marketing 3,392 12.1 3,214 14.0 5.5
General and administrative 4,925 17.6 4,129 17.9 19.3
Total costs and operating expenses 28,303 101.0 22,951 99.6 23.3
Income (loss) from operations $ (277) (1.0) $ 88 0.4 % (414.8) %
Oncology Services Revenue
Oncology services revenue, which is primarily derived from pharmacology studies,
was $14.3 million and $11.8 million for the three months ended October 31, 2022
and 2021, respectively, an increase of $2.5 million or 21.2%. Oncology services
revenue was $28.0 million and $23.0 million for the six months ended October 31,
2022 and 2021, respectively, an increase of $5.0 million or 21.6%. The increase
in revenue was primarily due to continued demand for our services and platform
expansion leading to larger in-vivo and ex-vivo pharmacology studies.
Cost of Oncology Services
Cost of oncology services for the three months endedOctober 31, 2022 and 2021 were$7.4 million and$5.6 million , respectively, an increase of$1.8 million or 32.7%. Cost of oncology services for the six months endedOctober 31, 2022 and 2021 were$14.5 million and$11.0 million , respectively, an increase of$3.5 million or 31.7%. The increase in cost of oncology services was primarily from compensation, mice and supply expenses for pharmacology studies and compensation expense for our SaaS platform. For the three months endedOctober 31, 2022 and 2021, total gross margins were 47.9% and 52.4%, respectively. For the six months endedOctober 31, 2022 and 2021, total gross margins were 48.3% and 52.2%, respectively. For the three months endedOctober 31, 2022 and 2021, gross margins for pharmacology services were 50.5% and 53.1%, respectively. For the six months endedOctober 31, 2022 and 2021, gross margins for pharmacology services were 51.1% and 52.8%, respectively. The lower pharmacology margins resulted from an increase in up-front study related expenses in advance of the revenue recognition. Additionally, Lumin related depreciation and amortization expense during the three and six months endedOctober 31, 2022 was higher compared to the three and six months endedOctober 31, 2021 , contributing to the total margin decline. 20 --------------------------------------------------------------------------------
Research and Development
Research and development expenses for the three months endedOctober 31, 2022 and 2021 were$2.6 million and$2.3 million , respectively, an increase of approximately$305,000 or 13.3%. Research and development expenses for the six months endedOctober 31, 2022 and 2021 were$5.5 million and$4.6 million , respectively, an increase of approximately$888,000 or 19.3%. The increase for the three and six-month periods was mainly due to compensation and lab supply expense related to the investment in our therapeutic drug discovery platform.
Sales and Marketing
Sales and marketing expenses for the three months endedOctober 31, 2022 and 2021 were$1.7 million and$1.6 million , respectively, an increase of$60,000 , or 3.7%. Sales and marketing expenses for the six months endedOctober 31, 2022 and 2021 were$3.4 million and$3.2 million , respectively, an increase of 178,000, or 5.5%. The increase for both periods was mainly due to compensation expense. General and Administrative General and administrative expenses for the three months endedOctober 31, 2022 and 2021 were$2.5 million and$2.0 million , an increase of$552,000 , or 27.9%. General and administrative expenses for the six months endedOctober 31, 2022 and 2021 were$4.9 million and$4.1 million , an increase of$800,000 , or 19.3%. General and administrative expenses are primarily comprised of compensation, insurance, professional fees, IT, and depreciation and amortization expenses. The increase for the three and six-month period was mainly due to an increase in compensation and IT related expenses to support the overall infrastructure growth of the Company. Additionally, bad debt expense increased during the three and six-month periods endedOctober 31, 2022 , compared to the three and six-month periods endedOctober 31, 2021 .
Cash Flows
The following discussion relates to the major components of our cash flows:
Cash Flows from Operating Activities
Net cash provided by operating activities was$3.1 million compared to net cash provided by operations of$1.4 million for the six months endedOctober 31, 2022 and 2021, respectively. The cash provided by operating activities during the current period was primarily due to positive operating results excluding non-cash expenses combined with increases in accounts receivable collections and accounts payable balances in the ordinary course of business.
Cash Flows from Investing Activities
Net cash used in investing activities was
Cash Flows from Financing Activities
Net cash provided by financing activities was$86,000 for the six months endedOctober 31, 2022 compared to cash provided by financing activities of$123,000 for the six months endedOctober 31, 2021 . The decrease in cash provided by financing is related to decrease in stock option exercise activity.
Critical Accounting Estimates and Policies
The preparation of these condensed consolidated financial statements in conformity with GAAP inthe United States requires management to apply methodologies and make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, revenue recognition (replacement of licensed tumors), valuation allowance for deferred tax assets, valuation of goodwill, and stock compensation and warrant assumptions. Actual results could differ from those estimates. The Company's critical accounting policies are summarized in the Company's Annual Report on Form 10-K, filed with theSEC onJuly 22, 2022 . 21 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our condensed consolidated financial statements, see Note 2, "Significant Accounting Policies" in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of this Report on Form 10-Q.
Off-Balance Sheet Financing
We have no off-balance sheet debt or similar obligations. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.
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