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CSBR > SEC Filings for CSBR > Form 10-Q on 13-Dec-2013All Recent SEC Filings

Show all filings for CHAMPIONS ONCOLOGY, INC.

Form 10-Q for CHAMPIONS ONCOLOGY, INC.


13-Dec-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 ended April 30, 2013, as filed on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 ended April 30, 2013, as updated in our subsequent reports filed with the SEC, including any updates found in Part II, Item 1A of this or other reports on Form 10-Q. 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

Champions Oncology, Inc. is engaged in the development and sale of advanced technology solutions to personalize the development and use of oncology drugs. The Company's TumorGraft Technology Platform is a novel approach to personalizing cancer care, based upon the implantation of human tumors in immune-deficient mice. The Company uses this technology, in conjunction with related products, to offer solutions for two customer groups:

Our Personalized Oncology Solutions, or POS, business, which provides services to physicians and patients looking for information to help guide the development of personalized treatment plans.

Our Translational Oncology Solutions, or TOS, business, which provides services to pharmaceutical and biotechnology companies seeking personalized approaches to drug development that will lower costs and increase the speed of developing new drugs, as well as increase the adoption of existing drugs.

We plan to continue our efforts to expand our TumorGraft Technology Platform in order to expand our POS and TOS programs. In fiscal 2012, we modified our POS business strategy to focus on growing our core technology products, which includes TumorGraft implants and drug studies. As part of this strategy, which we continued to execute during fiscal 2013 and into fiscal 2014, we lowered our prices for these products to increase the number of patients to whom we sell these products and increase the number of tumors in our TumorBank. We will continue to offer related personalized oncology products, such as the personalized tumor panels and gene sequencing, to our customers; however, we expect future POS revenues to be driven by our core products.

During the second half of fiscal 2012, we transitioned the laboratory activities that support the POS and TOS businesses from a clinical research organization to a facility in Baltimore, Maryland that we rent, and at which our personnel conduct the POS and TOS operations. We believe that having our own personnel perform these activities reduces the cost of providing our products and allows us to maintain a more competitive pricing strategy. To facilitate this strategy and support the increase in POS implants and drug study volume that resulted from our POS pricing restructuring strategy, we invested in our information technology and other infrastructure and increased our laboratory staff. We are evaluating options to increase our laboratory capacity to meet our expected increases demand in the future.

On March 16, 2011, the Company entered into an agreement with Cephalon, Inc., or Cephalon, a wholly-owned subsidiary of Teva Pharmaceutical Industries Ltd., or Teva, pursuant to which the Company agreed to conduct TumorGraft studies on two proprietary chemical compounds provided by Cephalon to determine the activity or response of these compounds in potential clinical indications. Under certain conditions, Cephalon reserved the right to exercise and pay a one-time fee of in lieu of the milestone or royalty payments, which are $460,000 for one compound and $880,000 for the second compound.

On November 30, 2012, Cephalon exercised the option to pay this one-time fee of $880,000 to the Company, in lieu of any future milestone or royalty payments, for one compound tested under the agreement described above. Written notice was provided to the Company on December 3, 2012 and payment was received on December 19, 2012. This fee has been recognized as revenue during the third quarter of fiscal 2013. As of October 31, 2013, the remaining compound is no longer being evaluated.

On January 28, 2013, the Company entered into a Securities Purchase Agreement with several accredited investors for the sale of an aggregate 18,600,000 shares of the Company's Common Stock at a purchase price of $0.50 per share, as well as issued warrants to purchase 1,860,000 additional shares of Common Stock, for aggregate proceeds of $9.3 million. This private placement transaction is discussed in further detail below in the "liquidity and capital resources" section.

On July 30, 2013, the Company entered into an agreement with Teva pursuant to which the Company agreed to conduct TumorGraft studies on multiple proprietary chemical compounds provided by Teva to determine the activity or response of these compounds in potential clinical indications. Under the agreement, Teva agreed to, pay an upfront payment and, under certain conditions, pay the Company various amounts upon achieving certain milestones, based on the performance of the compounds in preclinical testing and dependent upon testing the compound in clinical settings and obtaining FDA approval. In addition, Teva agrees to pay the Company royalties on any commercialized products developed under the agreement. This agreement terminates the collaborative agreement noted above between Cephalon and the Company.

Operating Results

The following table summarizes our operating results for the periods presented
below:

                                              For the Three Months Ended October 31,
                                                 % of                      % of            %
                                     2013       Revenue        2012       Revenue       Change
Operating revenue:
Personalized oncology solutions    $     623        26.1 %   $     459        31.5 %        35.7 %
Translational oncology solutions       1,760        73.9           999        68.5          76.2

Total operating revenue.               2,383       100.0         1,458       100.0          63.4

Costs and operating expenses:
Cost of personalized oncology
solutions                                732        30.7           582        39.9          25.8
Cost of translational oncology
solutions                                698        29.3           475        32.6          46.9
Research and development                 677        28.4           436        29.9          55.3
Sales and marketing                      698        29.3           680        46.6           2.6
General and administrative             1,279        53.7         1,201        82.4           6.5

Total costs and operating
expenses                               4,084       171.4         3,374       231.4          21.0

Operating loss                     $ (1,701)      (71.4) %   $ (1,916)     (131.4) %      (11.2)



                                               For the Six Months Ended October 31,
                                                 % of                      % of            %
                                     2013       Revenue        2012       Revenue       Change
Operating revenue:
Personalized oncology solutions    $   1,245        23.0 %   $   1,377        38.6 %       (9.6) %
Translational oncology solutions       4,158        77.0         2,187        61.4          90.1

Total operating revenue.               5,403       100.0         3,564       100.0          51.6

Costs and operating expenses:
Cost of personalized oncology
solutions                              1,525        28.2         1,354        38.0          12.6
Cost of translational oncology
solutions                              1,576        29.2         1,174        32.9          34.2
Research and development               1,079        20.0           823        23.1          31.1
Sales and marketing                    1,340        24.8         1,389        39.0         (3.5)
General and administrative             2,355        43.6         2,340        65.8           0.6

Total costs and operating
expenses                               7,875       145.8         7,080       198.7          11.2

Operating loss                     $ (2,472)      (45.8) %     (3,516)      (98.7) %      (29.7)

Operating Revenues

Operating revenues were $2.4 million and $1.5 million for the three months ended October 31, 2013 and 2012, respectively, an increase of $0.9 million or 63.4%. Operating revenues were $5.4 million and $3.6 million for the six months ended October 31, 2013 and 2012, respectively, an increase of $1.8 million or 51.6%.

POS revenues were $0.62 million and $0.45 million for the three months ended October 31, 2013 and 2012, respectively, an increase of $0.17 million, or 35.7%. This increase over the three month period comes from an increase in sales in our core products TumorGrafts (implants) and drug studies. POS revenues were $1.2 million and $1.4 million for the six months ended October 31, 2013 and 2012, respectively, a decrease of $0.2 million, or (9.6)%. The decrease over the six month period is due to the decrease in our non-core products and services of personalized tumor panels and gene sequencing offset by an increase in our core products and services. This is in line with the company strategy to focus on our core products and services.

TOS revenues were $1.8 million and $1.0 million for the three months ended October 31, 2013 and 2012, respectively, an increase of $0.8 million, or 76.2%. TOS revenues were $4.2 and $2.2 million for the six month ended October 31, 2013 and 2012, respectively, an increase of $2.0 million. These increases are due to the increase in sales to our historical customer base and the increase in new customers.

Cost of Personalized Oncology Solutions

Cost of POS for the three months ended October 31, 2013 and 2012 was $0.7 million and $0.6 million, respectively, an increase of $0.1 million, or 25.8%. POS cost of sales for the six months ended October 31, 2013 and 2012 was $1.5 million and $1.4 million, respectively, and in increase of $0.1 million, or 12.6%. For the three months ended October 31, 2013 and 2012, gross margins for POS were (17.5)% and (26.8)%, respectively. For the six months ended October 31, 2013 and 2012, gross margins for POS were (22.5)% and 1.7%, respectively. The gross margin in this business segment fluctuates based on a number of factors including business mix, pricing and volumes. The increase in cost is directly related to the increase in revenue in our core products and services as these items carry a higher percentage of internal costs in relation to non-core products and services. The increase in gross margin is due to continued gain of efficiencies utilizing internal lab facilities.

Cost of Translational Oncology Solutions

Cost of TOS for the three months ended October 31, 2013 and 2012 was $0.7 million and $0.5 million, respectively, an increase of $0.2 million, or 46.9%. TOS cost of sales for the six months ended October 31, 2013 and 2012 was $1.6 million and $1.2 million, respectively, an increase of $0.4 million, or 34.2%. For the three months ended October 31, 2013 and 2012, gross margins for TOS were 60% and 53%, respectively. For the six months ended October 31, 2013 and 2012, gross margins for TOS were 62% and 46%, respectively. The increase in gross margin is due to the leveraging of the fixed component of cost of sales over a higher revenue amount and the absorption of certain costs associated with this quarter's revenue in previous quarters.

Research and Development

Research and development expenses for the three months ended October 31, 2013 and 2012 were $0.7 million and $0.4 million, respectively, an increase of $0.3 million, or 55.3%. Research and development expense for the six months ended October 31, 2013 and 2012 was $1.1 million and $0.8 million, respectively, an increase of $0.3 million, or 31.1%. This increase is due to the growth of our Tumorbank.

Sales and Marketing

Sales and marketing expenses for both the three months ended October 31, 2013 and 2012 were $0.7 million. Sales and marketing expense for the six months ended October 31, 2013 and 2012 were $1.3 million and $1.4 million, respectively, a decrease of $0.1 million, or (3.5)%. There were no significant changes to our sales and marketing activities between these periods.

General and Administrative

General and administrative expenses for the three months ended October 31, 2013 and 2012 was $1.3 million and $1.2 million, respectively, an increase of $0.1 million, or 6.5%. General and administrative expense for both the six months ended October 31, 2013 and 2012 was $2.3 million. There were no significant changes to our general and administrative activities between these periods.

Other Income (Expense)

Other (expense) for the three months ended October 31, 2013 and 2012 was ($0.6) million and ($0.1) million, an increase of $0.5 million. During the three months ended October 31, 2013 and 2012, the Company recognized (expense) of ($0.58) million and ($0.1) million for the change in fair value of warrants that are accounted for as liabilities and are described further below and in Note 9 to our unaudited condensed consolidated financial statements. For the six months ended October 31, 2013 and 2012, other (expense)/income was ($2.1) million and $0.2 million, respectively. The Company will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants, or expiration of the warrants. This change in fair value of warrant liability was a result of revaluing the warrant liability based on the Monte Carlo simulation valuation model, impacted primarily by the quoted price of the Company's common stock. The revaluation of the warrant liability has no impact on our cash balances.

Inflation

Inflation does not have a meaningful impact on the results of our operations.

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. In the past, we have met these cash requirements through our cash and cash equivalents, working capital management, and proceeds from certain private placements of our securities. As of October 31, 2013, we had working capital of $6.0 million and cash and cash equivalents of $7.6 million. We believe that our cash and cash equivalents on hand at October 31, 2013 are adequate to fund operations for at least the next twelve months. 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.

Cash Flows

The following discussion relates to the major components of our cash flows:

Cash Flows from Operating Activities

Net cash used in operating activities was $1.9 million and $2.6 million for the six months ended October 31, 2013 and 2012, respectively, a decrease of $0.7 million. The decrease is mainly due to the increase in warrant liability and deferred revenue offset by an increase in accounts receivable.

Cash Flows from Investing Activities

Net cash used in investing activities was $76,000 and $28,000 for the six months ended October 31, 2013 and 2012, respectively. These cash flows primarily relate to the purchase of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $9,000 and nil for the six months ended October 31, 2013 and 2012, respectively, all of which was due to the exercise of stock options.

Critical Accounting Estimates and Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the 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, valuation allowances for deferred tax assets, valuation of goodwill, and stock compensation 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 the SEC on July 26, 2013.

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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