NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization, Use of Estimates and Basis of Presentation
Champions Oncology, Inc. (the “Company”) is engaged in the development and sale of advanced technology solutions and products 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 services, to offer solutions for two consumer groups: Personalized Oncology Solutions (“POS”) and Translational Oncology Solutions (“TOS”). POS assists physicians in developing personalized treatment options for their cancer patients through tumor specific data obtained from drug panels and related personalized oncology services. The Company’s TOS business offers a technology platform to pharmaceutical and biotechnology companies using proprietary TumorGraft studies, which the Company believes may be predictive of how drugs may perform in clinical settings.
The Company has
two
operating subsidiaries: Champions Oncology (Israel), Limited and Champions Biotechnology U.K., Limited. For the
three months ended July 31, 2017
and
2016
, there were no material revenues earned by these subsidiaries.
The Company’s foreign subsidiaries functional currency is the U.S. dollar. Transaction gains and losses are recognized in earnings. The Company is subject to foreign exchange rate fluctuations in connection with the Company’s international operations.
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. All significant intercompany transactions and accounts have been eliminated. Certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in the Company’s annual consolidated financial statements for the year ended
April 30, 2017
, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
April 30, 2017
.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.
Liquidity
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 sales of products and services, working capital management, and proceeds from certain private and public offerings of our securities. For the
three
months ended
July 31, 2017
, we had a net loss of
$674,000
and net operating cash outflows of
$1.9 million
. In addition, as of
July 31, 2017
, we had negative working capital of
$2.6
million and cash and cash equivalents on hand of
$430,000
. The reduction of cash from year-end was mainly due to the timing of accounts receivable collections and payment of normal business expenses. Additionally, we invested
$910,000
in equipment for our new lab along with approximately
$100,000
in non-capitalized, non-recurring costs related to new lab set-up. These expenses are not expected to recur. Lastly, we have grown our revenues while undertaking significant cost reductions beginning in the fourth quarter of fiscal year 2016, which have helped reduce our net loss and use of cash year over year by
$3.6
million each for fiscal year 2017 in conjunction with
38%
revenue growth.
W
e believe that our cash and cash equivalents on hand at
July 31, 2017
are adequate to fund our operations through at least September 2018.
However, in order for us to continue our operations beyond September 2018, we need to continue to increase revenues while maintaining minor increases in expense levels. In addition, we may need to obtain capital from external sources. If we are unable to maintain our operating levels and cannot obtain additional financing, we may be required to reduce the scope of, or delay or eliminate, some of our research and development and other activities, which could harm our financial condition and operating results. Financing may not be available on acceptable terms or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that could restrict our ability to operate our business.
Earnings Per Share
Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period. Such dilutive shares consist of incremental shares that would be issued upon exercise of the Company’s common stock purchase warrants and stock options. For the
three months ended July 31, 2017
and
2016
, basic and dilutive loss per share were the same, as the potentially dilutive securities did not have a dilutive effect.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31,
|
|
2017
|
|
2016
|
Basic and diluted net loss per share computation:
|
|
|
|
|
|
Net loss attributable to common stockholders
|
$
|
(674,157
|
)
|
|
$
|
(2,546,449
|
)
|
Weighted Average common shares – basic
|
10,982,159
|
|
|
9,835,279
|
|
Basic and diluted net loss per share
|
$
|
(0.06
|
)
|
|
$
|
(0.26
|
)
|
The following table reflects the total potential share-based instruments outstanding at
July 31, 2017
and
2016
that could have an effect on the future computation of dilution per common share:
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
Stock options
|
2,501,806
|
|
|
2,154,948
|
|
Warrants
|
2,004,284
|
|
|
2,109,840
|
|
|
|
|
|
Total common stock equivalents
|
4,506,090
|
|
|
4,264,788
|
|
Income Taxes
Deferred income taxes have been provided to show the effect of temporary differences between the recognition of expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities, and their reported amounts in the consolidated financial statements. In assessing the realizability of deferred tax assets, the Company assesses the likelihood that deferred tax assets will be recovered through tax planning strategies or from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. The Company adjusts the valuation allowance in the period management determines it is more likely than not that net deferred tax assets will or will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. As of
July 31, 2017
and
April 30, 2017
, the Company provided a valuation allowance for all net deferred tax assets, as recovery is not more likely than not based on an insufficient history of earnings.
Tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the consolidated financial statements. Tax positions include, but are not limited to, the following:
|
|
•
|
An allocation or shift of income between taxing jurisdictions;
|
|
|
•
|
The characterization of income or a decision to exclude reportable taxable income in a tax return; or
|
|
|
•
|
A decision to classify a transaction, entity or other position in a tax return as tax exempt.
|
The Company reflects tax benefits only if it is more likely than not that we will be able to sustain the tax position, based on its technical merits. If a tax benefit meets this criterion, it is measured and recognized based on the largest amount of benefit that is cumulatively greater than 50% likely to be realized. The Company has recorded
$121,000
of liabilities related to uncertain tax positions relative to one of its foreign operations as of
July 31, 2017
and
April 30, 2017
.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s balance sheets at
July 31, 2017
and
April 30, 2017
, and has
not recognized interest and/or penalties in the statement of operations for either period. We do not anticipate any significant unrecognized tax benefits will be recorded during the next 12 months.
The income tax provision for the
three months ended July 31, 2017
and
2016
was
$4,000
and
$14,000
, respectively.
Note 2. Property and Equipment
Property and equipment is recorded at cost and primarily consists of laboratory equipment, leasehold improvements, furniture and fixtures, and computer equipment and software. Depreciation and amortization is calculated on a straight-line basis over the estimated useful lives of the various assets ranging from three to seven years. Property and equipment consisted of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
April 30,
2017
|
|
(unaudited)
|
|
|
Furniture and fixtures
|
$
|
76
|
|
|
$
|
74
|
|
Computer equipment and software
|
917
|
|
|
872
|
|
Laboratory equipment
|
2,112
|
|
|
918
|
|
Assets in progress
|
141
|
|
|
472
|
|
Leasehold improvements
|
2
|
|
|
2
|
|
|
|
|
|
Total property and equipment
|
3,248
|
|
|
2,338
|
|
Less: Accumulated depreciation
|
(1,164
|
)
|
|
(1,122
|
)
|
|
|
|
|
Property and equipment, net
|
$
|
2,084
|
|
|
$
|
1,216
|
|
Depreciation and amortization expense, excluding expense recorded under capital lease, was
$36,000
and
$39,000
for the
three months ended July 31, 2017
and
2016
, respectively. As of
July 31, 2017
and
April 30, 2017
, property, plant and equipment included assets held under capital lease of
$124,000
. Related depreciation expense was
$6,000
and
$6,000
, respectively, for the
three months ended July 31, 2017
and
2016
.
Capital Lease
In November 2014, the Company entered into a capital lease for laboratory equipment. The lease has costs of approximately
$149,000
and matures on November 2019. The current monthly capital lease payment is approximately
$3,000
.
The following is a schedule by years of future minimum lease payments under this capital lease together with the present value of the net minimum lease payments as of
July 31, 2017
(table in thousands):
|
|
|
|
|
For the Years Ended April 30,
|
Total
|
2018 (remaining)
|
$
|
19
|
|
2019
|
27
|
|
2020
|
16
|
|
|
|
|
Total minimum payments
|
62
|
|
Less: amount representing interest
|
(4
|
)
|
Present value of minimum payments
|
58
|
|
Less: current portion
|
(25
|
)
|
|
$
|
33
|
|
The present value of minimum future obligations shown above is calculated based on an interest rate of
5%
. The short-term and long-term components of the capital lease obligation are included in accrued liabilities and other non-current liabilities, respectively at
July 31, 2017
and
April 30, 2017
.
Note 3. Share-Based Payments
The Company has in place a 2010 Equity Incentive Plan and a 2008 Equity Incentive Plan. In general, these plans provide for stock-based compensation in the form of (i) Non-statutory Stock Options; (ii) Restricted Stock Awards; and (iii) Stock Appreciation Rights to the Company’s employees, directors and non-employees. The plans also provide for limits on the aggregate number of shares that may be granted, the term of grants and the strike price of option awards.
On June 30, 2017, the Board of Directors extended the expiration terms of the previous Chief Commercial Officer's vested grants to December 30, 2019. As a result of this modification, the Company had an additional stock option expense of
$56,529
which was expensed under the "General and Administrative" line item on the consolidated statement of operations.
Stock-based compensation in the amount of
$564,000
and
$1.1 million
was recognized for the
three months ended July 31, 2017
and
2016
, respectively. Included in 2017 stock-based compensation expense under general and administrative line item is an option modification charge of
$56,529
. Stock-based compensation expense was recognized as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31,
|
|
2017
|
|
2016
|
General and administrative
|
$
|
423
|
|
|
$
|
830
|
|
Sales and marketing
|
34
|
|
|
168
|
|
Research and development
|
80
|
|
|
85
|
|
TOS cost of sales
|
26
|
|
|
44
|
|
POS cost of sales
|
1
|
|
|
2
|
|
Total stock-based compensation expense
|
$
|
564
|
|
|
$
|
1,129
|
|
On July 31, 2017, there was
$300,371
in unrecognized stock based compensation which will be recognized as expense over
three
years.
Stock Option Grants
Black-Scholes assumptions used to calculate the fair value of options granted during the
three months ended July 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
Three Months Ended
July 31,
|
|
2017
|
|
2016
|
Expected term in years
|
6
|
|
2.6 - 6
|
Risk-free interest rates
|
1.98%
|
|
0.75% - 1.25%
|
Volatility
|
87.1%
|
|
73.2% - 95.6%
|
Dividend yield
|
—%
|
|
—%
|
The weighted average fair value of stock options granted during the
three months ended July 31, 2017
and
2016
was
$1.84
and
$1.79
, respectively. The Company’s stock options activity for the
three months ended July 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
Employees
|
|
Directors
and
Employees
|
|
Total
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding, May 1, 2017
|
50,000
|
|
|
2,258,704
|
|
|
2,308,704
|
|
|
$
|
2.86
|
|
|
6.1
|
|
$
|
1,282,000
|
|
Granted
|
—
|
|
|
194,977
|
|
|
194,977
|
|
|
2.51
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
(1,875
|
)
|
|
(1,875
|
)
|
|
7.76
|
|
|
|
|
|
|
Canceled
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, July 31, 2017
|
50,000
|
|
|
2,451,806
|
|
|
2,501,806
|
|
|
2.83
|
|
|
6.1
|
|
$
|
1,720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of July 31, 2017
|
50,000
|
|
|
2,451,806
|
|
|
2,501,806
|
|
|
2.83
|
|
|
6.1
|
|
$
|
1,720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of July 31, 2017
|
33,336
|
|
|
2,287,095
|
|
|
2,320,431
|
|
|
2.85
|
|
|
6.0
|
|
$
|
1,608,000
|
|
Stock Purchase Warrants
As of
July 31, 2017
and
April 30, 2017
, the Company had warrants outstanding for the purchase of
2,004,284
shares of its common stock, all of which were exercisable. Activity related to these warrants, which expire at various dates through March 2020, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding, May 1, 2017
|
2,004,284
|
|
|
$
|
5.57
|
|
|
2.8
|
|
|
$
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding, July 31, 2017
|
2,004,284
|
|
|
$
|
5.57
|
|
|
2.5
|
|
|
$
|
—
|
|
Note 4. Related Party Transactions
Related party transactions include transactions between the Company and its shareholders, management, or affiliates. The following transactions were in the normal course of operations and were measured and recorded at the exchange amount, which is the amount of consideration established and agreed to by the parties.
Consulting Services
During the
three months ended July 31, 2017
and
2016
, the Company paid a member of its Board of Directors
$18,000
and
$18,000
, respectively, for consulting services unrelated to his duties as a board member. During the
three months ended July 31, 2017
and
2016
, the Company paid an affiliate of a board member $
25,529
and
$0
, respectively, for consulting services unrelated to their duties as board members. As of
July 31, 2017
, no amounts were due to these related parties.
Note 5. Commitments and Contingencies
Operating Leases
The Company currently leases its office facilities. Rent expenses totaled
$102,000
and
$99,000
for the
three months ended July 31, 2017
and
2016
, respectively. The Company considers its facilities adequate for our current operational needs.
The Company leases the following facilities under non-cancelable operating lease agreements:
|
|
•
|
One University Plaza, Suite 307, Hackensack, New Jersey 07601, which, since November 2011, serves as the Company’s corporate headquarters. The lease expires in
November 2021
. The Company recognized
$23,000
of rental costs relative to this lease for each of the
three months ended July 31, 2017
and
2016
, respectively.
|
|
|
•
|
855 North Wolfe Street, Suite 619, Baltimore, Maryland 21205, which consists of laboratories and office space where the Company conducts operations related to its primary service offerings. This lease expires
December 2017
. The Company recognized
$27,000
and
$26,000
of rental costs relative to this lease for the
three months ended July 31, 2017
and
2016
, respectively.
|
|
|
•
|
450 East 29t
h
Street, New York, New York, 10016, which is a laboratory at which we implant tumors. The Company recognized
$52,000
and
$52,000
of rental expense for the
three months ended July 31, 2017
and
2016
, respectively. The lease expired in
May 2017
and will not be renewed.
|
|
|
•
|
1330 Piccard Drive, Suite 025, Rockville, MD 20850, which consists of laboratory and office space where the Company will conduct operations related to its primary service offerings. The Company executed this lease on January 11, 2017. The operating commencement date was August 11, 2017. This lease expires in August 31, 2028. The Company did not recognize any rental costs associated with this lease for the three months ended July 31, 2017.
|
Legal Matters
The Company is not currently party to any legal matters to its knowledge. The Company is not aware of any other matters that would have a material impact on the Company’s financial position or results of operations.
Registration Payment Arrangements
The Company has entered into an Amended and Restated Registration Rights Agreement in connection with the March 2015 Private Placement and is discussed more fully in Note 7 in the Company’s Form 10-K for the fiscal year ended
April 30, 2017
. This Amended and Restated Registration Rights Agreement contains provisions that may call for the Company to pay penalties in certain circumstances. This registration payment arrangement primarily relates to the Company’s ability to file a registration statement within a particular time period, have a registration statement declared effective within a particular time period and to maintain the effectiveness of the registration statement for a particular time period. The Company has not accrued any liquidated damages associated with the Amended and Restated Registration Right Agreement as the Company has filed the required registration statement and anticipates continued compliance with the agreement.
Note 6. Segment Information
The Company operates in two reportable segments, POS and TOS. The accounting policies of the Company’s segments are the same as those described in Note 2 of the Company’s annual financial statements for the year ended
April 30, 2017
, as filed on Form 10-K. The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, and income taxes (“segment profit”). Management uses segment profit information for internal reporting and control purposes and considers it in making decisions regarding the allocation of capital and other resources, risk assessment, and employee compensation, among other matters. The following tables summarize, for the periods indicated, operating results by reportable segment (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31, 2017
|
|
Personalized
Oncology
Solutions
(POS)
|
|
Translational
Oncology
Solutions
(TOS)
|
|
Unallocated
Corporate
Overhead
|
|
Consolidated
|
Net revenue
|
|
$
|
439
|
|
|
$
|
4,594
|
|
|
$
|
—
|
|
|
$
|
5,033
|
|
Direct cost of services
|
|
(386
|
)
|
|
(2,229
|
)
|
|
—
|
|
|
(2,615
|
)
|
Sales and marketing costs
|
|
(86
|
)
|
|
(563
|
)
|
|
—
|
|
|
(649
|
)
|
Other operating expenses
|
|
—
|
|
|
(1,038
|
)
|
|
(786
|
)
|
|
(1,824
|
)
|
Stock- based compensation expense (1)
|
|
—
|
|
|
—
|
|
|
(564
|
)
|
|
(564
|
)
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
(33
|
)
|
|
$
|
764
|
|
|
$
|
(1,350
|
)
|
|
$
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31, 2016
|
|
Personalized
Oncology
Solutions
(POS)
|
|
Translational
Oncology
Solutions
(TOS)
|
|
Unallocated
Corporate
Overhead
|
|
Consolidated
|
Net revenue
|
|
$
|
511
|
|
|
$
|
3,159
|
|
|
$
|
—
|
|
|
$
|
3,670
|
|
Direct cost of services
|
|
(472
|
)
|
|
(2,005
|
)
|
|
—
|
|
|
(2,477
|
)
|
Sales and marketing costs
|
|
(141
|
)
|
|
(616
|
)
|
|
—
|
|
|
(757
|
)
|
Other operating expenses
|
|
—
|
|
|
(1,126
|
)
|
|
(704
|
)
|
|
(1,830
|
)
|
Stock- based compensation expense (1)
|
|
—
|
|
|
—
|
|
|
(1,129
|
)
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
(102
|
)
|
|
$
|
(588
|
)
|
|
$
|
(1,833
|
)
|
|
$
|
(2,523
|
)
|
(1) Stock compensation expense is shown separately and is excluded from direct costs of services, sales and marketing costs, and other operating expenses, as it is managed on a consolidated basis and is not used by management to evaluate the performance of its segments. See Note 3 for the allocation of stock compensation expense relative to the individual line items as it is reported on the Company's Consolidated Statements of Operations.
All of the Company’s revenue is recorded in the United States and substantially all of its long-lived assets are in the United States.