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CSBR > SEC Filings for CSBR > Form 10-Q on 14-Mar-2014All Recent SEC Filings

Show all filings for CHAMPIONS ONCOLOGY, INC.

Form 10-Q for CHAMPIONS ONCOLOGY, INC.


14-Mar-2014

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 tests, previously known as 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., a wholly-owned subsidiary of Teva Pharmaceutical Industries Ltd., 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 the agreement, Cephalon agreed to, 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. Potential milestone payments that could be received under the agreement totaled $27 million per compound. In addition, Cephalon agreed to pay the Company royalties on any commercialized products developed under the agreement. 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 January 31, 2014, the remaining compound is no longer being evaluated.

During fiscal 2013, the agreement with Cephalon was amended to perform additional work for an increased fee of $277,000. As models, along with required reports, are delivered, revenue is recognized on a proportionate basis in accordance with the Company's revenue recognition policies. Revenues of $133,000 and $317,000 were recognized during the nine months ended January 31, 2014 and 2013, respectively, which are independent of the $880,000 noted above.

On December 6, 2013, the Company entered into a licensing agreement with Pfizer, Inc. in the amount of $1,875,000, pursuant to which Pfizer agreed to license and utilize a portion of the Company's TumorGraft technology platform for its studies. In addition, the Company and Pfizer will seek opportunities for further platform development and research collaboration.

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 Pharmaceutical Industries Ltd. 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, Cephalon agreed to pay the Company royalties on any commercialized products developed under the agreement. This agreement terminated 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 January 31,
                                           % of                        % of            %
                              2014        Revenue         2013        Revenue       Change
Operating revenue:
Personalized oncology
solutions                  $       590        16.0 %   $       473        16.2 %        24.7 %
Translational oncology
solutions                        3,100        84.0           2,444        83.8          26.8

Total operating revenue          3,690       100.0           2,917       100.0          26.5

Costs and operating
expenses:
Cost of personalized
oncology solutions                 614        16.6             676        23.2         (9.2)
Cost of translational
oncology solutions               1,008        27.3             566        19.4          78.1
Research and development           535        14.5             592        20.3         (9.6)
Sales and marketing                821        22.2             658        22.6          24.8
General and
administrative                   2,120        57.5           1,145        39.3          85.2

Total costs and
operating expenses               5,098       138.2           3,637       124.7          40.2

Operating loss             $   (1,408)      (38.2) %   $     (720)      (24.7) %        95.6



                                        For the Nine Months Ended January 31,
                                          % of                        % of            %
                              2014       Revenue          2013       Revenue       Change
Operating revenue:
Personalized oncology
solutions                 $     1,834        20.2 %   $     1,850        28.5 %       (0.9) %
Translational oncology
solutions                       7,258        79.8           4,631        71.5          56.7

Total operating revenue         9,092       100.0           6,481       100.0          40.3

Costs and operating
expenses:
Cost of personalized
oncology solutions              2,139        23.5           2,030        31.3           5.4
Cost of translational
oncology solutions              2,585        28.4           1,740        26.8          48.6
Research and
development                     1,614        17.8           1,415        21.8          14.1
Sales and marketing             2,160        23.8           2,047        31.6           5.5
General and
administrative                  4,476        49.2           3,484        53.8          28.5

Total costs and
operating expenses             12,974       142.7          10,716       165.3          21.1

Operating loss            $   (3,882)      (42.7) %       (4,235)      (65.3) %       (8.3)

Operating Revenues

Operating revenues were $3.7 million and $2.9 million for the three months ended January 31, 2014 and 2013, respectively, an increase of $0.8 million or 26.5%. Operating revenues were $9.1 million and $6.5 million for the nine months ended January 31, 2014 and 2013, respectively, an increase of $2.6 million or 40.3%.

POS revenues were $0.6 million and $0.5 million for the three months ended January 31, 2014 and 2013, respectively, an increase of $0.1 million, or 24.7%. POS revenues were $1.8 million and $1.9 million for the nine months ended January 31, 2014 and 2013, respectively, a decrease of $0.1 million, or (0.9)%.

TOS revenues were $3.1 million and $2.4 million for the three months ended January 31, 2014 and 2013, respectively, an increase of $0.7 million, or 26.8%. TOS revenues were $7.3 and $4.6 million for the nine month ended January 31, 2014 and 2013, respectively, an increase of $2.7 million, or 56.7%.

Cost of Personalized Oncology Solutions

Cost of POS for the three months ended January 31, 2014 and 2013 was $0.6 million and $0.7 million, respectively, a decrease of $0.1 million, or (9.2)%. POS cost of sales for the nine months ended January 31, 2014 and 2013 was $2.1 million and $2.0 million, respectively, and increase of $0.1 million, or 5.4%. For the three months ended January 31, 2014 and 2013, gross margins for POS were
(4.1)% and (42.9)%, respectively. For the nine months ended January 31, 2014 and 2013, gross margins for POS were (16.6)% and (9.7)%, respectively. The gross margin in this business segment fluctuates based on a number of factors including business mix, pricing and volumes.

Cost of Translational Oncology Solutions

Cost of TOS for the three months ended January 31, 2014 and 2013 was $1.0 million and $0.6 million, respectively, an increase of $0.4 million, or 78.1%. TOS cost of sales for the nine months ended January 31, 2014 and 2013 was $2.6 million and $1.7 million, respectively, an increase of $0.9 million, or 48.6%. The increase in cost of sales is due to higher lab costs associated with increased TOS revenues and laboratory testing. For the three months ended January 31, 2014 and 2013, gross margins for TOS were 67.5% and 76.8%, respectively. Gross margins for the quarter ended January 31, 2014 was higher than usual due to the higher gross margins associated with the technology licensing revenue. Gross margins for the quarter ended January 31, 2013 was higher than usual because the one-time payment from Teva did not have any cost of sales associated with it in the quarter. For the nine months ended January 31, 2014 and 2013, gross margins for TOS were 64.4% and 62.4%, respectively.

Research and Development

Research and development expenses for the three months ended January 31, 2014 and 2013 were $0.5 million and $0.6 million, respectively, a decrease of $0.1 million, or (9.6)%. Research and development expense for the nine months ended January 31, 2014 and 2013 was $1.6 million and $1.4 million, respectively, an increase of $0.2 million, or 14.1%.

Sales and Marketing

Sales and marketing expenses the three months ended January 31, 2014 and 2013 was $0.8 million and $0.7 million respectively, an increase of $0.2, or 24.8%. Sales and marketing expense for the nine months ended January 31, 2014 and 2013 were $2.1 million and $2.0 million, respectively, an increase of $0.1 million, or 5.5%. The increase is due to performance based payments to sales representatives for achieving certain revenue targets.

General and Administrative

General and administrative expenses for the three months ended January 31, 2014 and 2013 was $2.1 million and $1.1 million, respectively, an increase of $1 million, or 85.2%. General and administrative expense for the nine months ended January 31, 2014 and 2013 was $4.5 million and $3.5 million, an increase of $1 million, or 28.5%. The increase was due to an increase in stock based compensation expense, the addition of 3 senior executives to the company and the accrual of bonus payments for fiscal 2014.

Other Income (Expense)

Other income (expense) for the three months ended January 31, 2014 and 2013 was 0.8 million and ($0.3) million, an increase of $1.1 million. During the three months ended January 31, 2014 and 2013, the Company recognized income of $0.8 million and (expense) of ($0.3) 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 nine months ended January 31, 2014 and 2013, other income (expense) was ($1.2) million and ($43,000), 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 January 31, 2014, we had working capital of $5.5 million and cash and cash equivalents of $5.8 million. We believe that our cash and cash equivalents on hand at January 31, 2014 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.

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, for aggregate proceeds of $9.3 million, $0.5 million of which was sold to officers and directors of the Company. As part of this transaction, the Company also issued warrants to purchase an aggregate 1,860,000 shares of Common Stock at an exercise price of $0.66 per share. These warrants expire five years after the closing date. The Company also entered into an Amended and Restated Registration Rights Agreement on January 28, 2013 which provided certain registration rights with respect to the shares of Common Stock issued and the shares of Common Stock issuable upon exercise of the warrants, as well as shares of Common Stock issued and shares of Common Stock issuable upon exercise of warrants issued in a private placement in April 2011. Furthermore, certain investors will have the right to require the Company to redeem the purchased common shares held by all of the investors for cash of $0.50 per share upon a change of control or sale or exclusive license of substantially all of the Company's assets. The put option will terminate upon the achievement of certain financial milestones by the Company, the sale of 25% of the common shares purchased by an investor, with respect only to the shares owned by such investor, or in certain other circumstances as outlined in the Securities Purchase Agreement. The investors also have certain participation rights with respect to future financings of the Company.

Due to the put option described above, the Company has accounted for Common Stock issued in the January 2013 private placement as temporary equity, which is reflected under the caption "redeemable common stock" on the consolidated balance sheets included in Item 1 of this report. The total amount allocated to these common shares was $8.8 million, which is equal to the total proceeds of $9.3 million less the amount allocated to the fair value of the warrants of $0.4 million and is also net of the direct and incremental costs associated with the private placement of $0.1 million.

On January 29, 2014, the Company executed amendments to the 2011 Securities Purchase Agreement and to the 2013 Securities Purchase Agreement with certain of the parties thereto, in each case revising the definition of "Change of Control" as it appears on the Securities Purchase Agreements.

On January 29, 2014, the Company also entered into an agreement with Joel Ackerman, its Chief Executive Officer and a Director, and Ronnie Morris, its President and a Director, both of whom bought securities from the Company pursuant to the Securities Purchase Agreements, that, if the Company's Board of Directors votes on a transaction, event or approval that would constitute a Put Option Trigger Event (as defined in each of the Securities Purchase Agreements), each of Ackerman and Morris shall either (a) recuse themselves from voting as a member of the Board of Directors on such transaction, event or approval or (b) be entitled to vote but forego exercising or receiving the benefit of their Put Right (as defined in each of the Securities Purchase Agreements).

Prior to the January 29, 2014 amendments the Put Option Trigger Event (as defined in each of the Securities Purchase Agreements) was outside of the Company's control. Subsequent to the January 29, 2014 amendments the Put Option Trigger Event is within the Company's control. This change resulted in the common stock related to the April 2011 Private Placement and the 2013 Private Placement to be reclassified from outside of permanent equity (reflected under the caption "redeemable common stock") to inside permanent equity (reflected in the captions "common stock" and "additional paid-in capital").

The warrants issued in connection with the private placement contain certain exercise price reset provisions. Under these provisions, the exercise price of the warrants may be adjusted downward should the Company have future sales of its common stock for no consideration or for a consideration per share less than the Per Share Price (as such term is defined in the Securities Purchase Agreement).

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 $3.6 million and $3.1 million for the nine months ended January 31, 2014 and 2013, respectively, an increase of $0.5 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $164,000 and $35,000 for the nine months ended January 31, 2014 and 2013, 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 nil and $9.2 million for the nine months ended January 31, 2014 and 2013, respectively.

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, revenue recognition, 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.

During the quarter the Company entered into certain contracts that may require future performance in the event that a portion of the contract has not been satisfied. Due to such requirements the Company has estimated an amount of revenue related to future performance and has deferred this revenue until all provisions of the agreement have been met.

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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