CSBR 10-Q Quarterly Report July 31, 2017 | Alphaminr
CHAMPIONS ONCOLOGY, INC.
ALPHAMINR

CSBR 10-Q Quarter ended July 31, 2017

Balance Sheet
Cash Flow
Income Statement
CHAMPIONS ONCOLOGY, INC.
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10-Q 1 csbr10-q7312017.htm 10-Q Document


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2017
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-11504
CHAMPIONS ONCOLOGY, INC.
(Exact name of registrant as defined in its charter)
Delaware
52-1401755
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One University Plaza, Suite 307
07601
Hackensack, New Jersey
(Zip Code)
(Address of principal executive offices)
(201) 808-8400
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company þ
Non-accelerated filer o
(Do not check if a smaller reporting company)
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of Common Shares of the Registrant outstanding as of September 9, 2017 was 10,985,966.




DOCUMENTS INCORPORATED BY REFERENCE - None




INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2017

Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CHAMPIONS ONCOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for shares)
July 31,
2017
April 30,
2017
(unaudited)
ASSETS


Current assets:


Cash and cash equivalents
$
430

$
3,295

Accounts receivable, net
2,667

2,274

Prepaid expenses and other current assets
360

300

Total current assets
3,457

5,869

Restricted cash
150

150

Property and equipment, net
2,084

1,216

Other Long Term Assets
107

107

Goodwill
669

669

Total assets
$
6,467

$
8,011

LIABILITIES AND STOCKHOLDERS’ EQUITY


Current liabilities:


Accounts payable
$
1,732

$
1,852

Accrued liabilities
551

685

Deferred revenue
3,737

4,910

Total current liabilities
6,020

7,447

Other non-current liabilities
157

164

Total liabilities
6,177

7,611

Stockholders’ equity:


Common stock, $.001 par value; 200,000,000 shares authorized; 11,251,844 and 11,251,844 shares issued and 10,982,159 and 10,982,159 shares outstanding as of July 31, 2017 and April 30, 2017, respectively
11

11

Treasury stock, at cost, 269,685 common shares as of  July 31, 2017 and April 30, 2017
(1,252
)
(1,252
)
Additional paid-in capital
71,555

70,991

Accumulated deficit
(70,024
)
(69,350
)
Total stockholders’ equity
290

400

Total liabilities and stockholders’ equity
$
6,467

$
8,011

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4


CHAMPIONS ONCOLOGY, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended
July 31,
2017
2016
Operating revenue:


Personalized oncology solutions
$
439

$
511

Translational oncology solutions
4,594

3,159

Total operating revenue
5,033

3,670

Costs and operating expenses:


Cost of personalized oncology solutions
387

474

Cost of translational oncology solutions
2,255

2,049

Research and development
1,118

1,211

Sales and marketing
683

925

General and administrative
1,209

1,534

Total costs and operating expenses
5,652

6,193

Loss from operations
(619
)
(2,523
)
Other (expense):


Other (expense)
(51
)
(9
)
Total other (expense)
(51
)
(9
)
Loss before provision for income taxes
(670
)
(2,532
)
Provision for income taxes
4

14

Net loss
$
(674
)
$
(2,546
)
Net loss per common share outstanding


basic and diluted
$
(0.06
)
$
(0.26
)
Weighted average common shares outstanding


basic and diluted
10,982,159

9,835,279

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5


CHAMPIONS ONCOLOGY, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended
July 31,
2017
2016
Operating activities:


Net loss
$
(674
)
$
(2,546
)
Adjustments to reconcile net loss to net cash used in operating activities:


Stock-based compensation expense
564

1,129

Depreciation expense
42

45

Provision for bad debts
14

(2
)
Issuance of common stock for services
—

15

Changes in operating assets and liabilities:


Accounts receivable
(407
)
(314
)
Prepaid expenses and other current assets
(60
)
94

Accounts payable
(120
)
(387
)
Accrued liabilities
(134
)
(51
)
Other non-current liability
—

20

Deferred revenue
(1,173
)
(442
)
Net cash used in operating activities
(1,948
)
(2,439
)
Investing activities:


Purchase of property and equipment
(910
)
(17
)
Net cash used in investing activities
(910
)
(17
)
Financing activities:


Proceeds from June 2016 Public Offering, net of financing costs of $742
—

4,340

Capital lease payments
(7
)
(6
)
Net cash (used in)/provided by financing activities
(7
)
4,334

(Decrease)/Increase in cash and cash equivalents.
(2,865
)
1,878

Cash and cash equivalents, beginning of period
3,295

2,585

Cash and cash equivalents, end of period
$
430

$
4,463

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


6


CHAMPIONS ONCOLOGY, INC.
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.

7



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

8


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

9


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:

10


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.

11



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):

12


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.

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, 2017 , 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.

13


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, 2017 , 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
We are engaged in the development and sale of advanced technology solutions and products utilized in the development and use of oncology drugs.  Utilizing our TumorGraft Technology Platform, 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.

Our platform provides a novel approach to simulating the results of human clinical trials used in developing oncology drugs. According to a 2013 study conducted by Cutting Edge Information, it can cost up to $100,000 per patient in oncology clinical trials and the typical cost for each phase of development per year increases from approximately $3 million in the pre-clinical setting to approximately $150 million in phase III. Simulating trials before executing them provides benefits to both pharmaceutical companies and patients. Pharmaceutical companies can lower the risk of spending resources on drugs that do not show significant anti-cancer activities and increase the chance that the clinical development path they pursue will be focused on an appropriate patient population and a successful combination with other drugs.

We plan to continue our efforts to expand our TumorGraft Technology Platform in order to expand our TOS program. Our POS program will not be the focus of our growth moving forward.

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 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 over $100,000 in non-capitalized, non-recurring costs related to new lab set-up. 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.
Operating Results
The following table summarizes our operating results for the periods presented below (dollars in thousands):

14


For the Three Months Ended July 31,
2017
% of
Revenue
2016
% of
Revenue
%
Change
Operating revenue:





Personalized oncology solutions
$
439

8.7
%
$
511

13.9
%
(14.1
)%
Translational oncology solutions
4,594

91.3

3,159

86.1

45.4

Total operating revenue
5,033

100.0

3,670

100.0

37.1

Costs and operating expenses:





Cost of personalized oncology solutions
387

7.7

474

12.9

(18.4
)
Cost of translational oncology solutions
2,255

44.8

2,049

55.8

10.1

Research and development
1,118

22.2

1,211

33.0

(7.7
)
Sales and marketing
683

13.6

925

25.2

(26.2
)
General and administrative
1,209

24.0

1,534

41.8

(21.2
)
Total costs and operating expenses
5,652

112.3

6,193

168.7

(8.7
)
Loss from operations
$
(619
)
(12.3
)%
$
(2,523
)
(68.7
)%
(75.5
)%
Operating Revenues
Operating revenues were $5.0 million and $3.7 million for the three months ended July 31, 2017 and 2016 , respectively, an increase of $1.3 million or 37.1%.
POS revenues were $439,000 and $511,000 for the three months ended July 31, 2017 and 2016 , respectively, a decrease of $72,000, or (14.1%). The decrease is due mainly to a decrease in implant and drug panel revenue of $48,000 and $17,000, respectively.
TOS revenues were $4.6 million and $3.2 million for the three months ended July 31, 2017 and 2016 , respectively, an increase of $1.4 million, or 45.4%. The increase is due to sustained bookings growth in prior quarters, both in number and size of the studies.
Cost of Personalized Oncology Solutions
Cost of POS for the three months ended July 31, 2017 and 2016 were $387,000 and $474,000, respectively, a decrease of $87,000, or (18.4%). For the three months ended July 31, 2017 and 2016 , gross margins for POS were 11.8% and 7.2%, respectively. The improvement in gross margin is attributed to higher margin, sequencing revenue contributing a higher percentage to total POS revenue and aggressively managing our lab costs.

Cost of Translational Oncology Solutions
Cost of TOS for the three months ended July 31, 2017 and 2016 were $2.3 million and $2.0 million, respectively, an increase of $300,000, or 10.1%. The increase in cost was due to an increase in the number and size of TOS studies. For the three months ended July 31, 2017 and 2016 , gross margins for TOS were 50.9% and 35.1%, respectively. Gross margins vary quarterly based on timing differences between expense and revenue recognition. The improvement in gross margin was due to higher TOS revenue leveraged off the fixed cost component of the lab and effective management of the variable lab costs.
Research and Development
Research and development expenses for both the three months ended July 31, 2017 and 2016 were $1.1 million and $1.2 million, respectively, a decrease of $100,000, or (7.7%). Research and development is focused on the development and expansion of our TumorGraft Technology Platform. We build our platform primarily through research collaborations and relationships with medical centers and academic institutions.

15


Sales and Marketing
Sales and marketing expenses for the three months ended July 31, 2017 and 2016 were $683,000 and $925,000, respectively, a decrease of $242,000, or (26.2%). The decrease is mainly due to a decrease in stock compensation expense.


General and Administrative
General and administrative expenses for the three months ended July 31, 2017 and 2016 were $1.2 million and $1.5 million, respectively, a decrease of $300,000, or (21.2%). The decrease in the three months ended January 31, 2017 is primarily due to a decrease in stock compensation expense.

Inflation
Inflation does not have a meaningful impact on the results of our operations.
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 $2.4 million for the three months ended July 31, 2017 and 2016 , respectively. The reduction in cash burn is the result of revenue growth and aggressive expense management.
Cash Flows from Investing Activities
Net cash used in investing activities was $910,000 and $17,000 for the three months ended July 31, 2017 and 2016 , respectively.  These cash outflows primarily relate to the purchase of property and equipment. The Company opened a new lab facility in Rockville, Maryland which required a capital investment.
Cash Flows from Financing Activities
Net cash (used in)/provided by financing activities was ($7,000) and $4.3 million for the three months ended July 31, 2017 and 2016 , respectively. The net cash used in financing activities relates to our capital lease. The $4.3 million of net cash provided by financing activities relates to the public offering we completed in June 2016.
Critical Accounting Estimates and Policies
The preparation of these condensed consolidated 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 (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 the SEC on July 28, 2017.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

16


It is management’s responsibility to establish and maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Our management, with the participation of our Chief Executive Officer and our Vice President, Finance, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our Chief Executive Officer and our Vice President, Finance, have concluded that our disclosure controls and procedures were effective as of July 31, 2017 at the reasonable assurance level in ensuring that information required to be disclosed in the reports that we file or submit under the Securities Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and our Vice President, Finance, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
We may not be able to meet our cash requirements beyond September 2018 without reducing the scope of our activities or obtaining additional capital from external sources, and if we are unable to do so, we may not be able to continue as a going concern.

17


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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.


18


Item 6. Exhibits
__
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
* filed herewith
** furnished herewith

19


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHAMPIONS ONCOLOGY, INC.
(Registrant)
Date: September 14, 2017
By:
/s/ Ronnie Morris
Ronnie Morris
Chief Executive Officer
(principal executive officer)
Date: September 14, 2017
By:
/s/ David Miller
David Miller
Chief Financial Officer
(principal financial and accounting officer)


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