Anixa Biosciences Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. General In reviewing Management’s Discussion and Analysis of Financial Condition and Results of Operations, you should refer to our Consolidated Financial Statements and the notes related thereto. Results of Operations Fiscal Year ended October 31, 2021 compared with Fiscal Year ended October 31, 2020 Revenue In fiscal year 2021, we recorded revenue of approximately $513,000 from one license agreement related to our encrypted audio/video conference calling technology. The license agreement provided for a one-time, non-recurring, lump sum payment in exchange for a non-exclusive retroactive and future license, and covenant not to sue. Pursuant to the terms of the agreement, we have no further obligations with respect to the granted intellectual property rights, including no obligation to maintain or upgrade the technology, or provide future support or services. Accordingly, the performance obligations from the license were satisfied and 100% of the revenue was recognized upon execution of the license agreement. We did not have any revenue in fiscal year 2020. Over the past several years, our revenue, if any, was derived from technology licensing and the sale of patented technologies, including revenue from the settlement of litigation. As part of our legacy operations, the Company remains engaged in limited patent licensing activities regarding the Cchek™ liquid biopsy platform, as well as in the area of encrypted audio/video conference calling. We do not expect these activities to be a significant part of the Company’s ongoing operations, nor do we expect these activities to require material financial resources or attention of senior management. We have not generated any revenue to date from our therapeutics or vaccine programs. In addition, while we pursue our therapeutics and vaccine programs, we may also make investments in and form new companies to develop additional emerging technologies. We do not expect to begin generating revenue with respect to any of our current therapy or vaccine programs in the near term. We hope to achieve a profitable outcome by eventually licensing our technologies to large pharmaceutical companies that have the resources and infrastructure in place to manufacture, market and sell our technologies as therapeutics or vaccines. The eventual licensing of any of our technologies may take several years, if it is to occur at all, and may depend on positive results from human clinical trials. Inventor Royalties, Contingent Legal Fees, Litigation and Licensing Expenses Related to Patent Assertion In fiscal year 2021 inventor royalties, contingent legal fees, litigation and licensing expenses related to patent assertion activities were approximately $385,000. Inventor royalties and contingent legal fees are expensed in the period that the related revenues are recognized. Litigation and licensing expenses related to patent assertion, other than contingent legal fees, are expensed in the period incurred. 36 We did not have any inventor royalties, contingent legal fees, litigation and licensing expenses related to patent assertion activities in fiscal year 2020. Research and Development Expenses Research and development expenses incurred in fiscal year 2021 associated with each of our development programs consisted of approximately $2,634,000 for CAR-T therapeutics, approximately $2,231,000 for cancer vaccines, approximately $1,323,000 for anti-viral therapeutics and approximately $2,000 for cancer diagnostics. Research and development expenses are related to the development of our cancer therapeutics, vaccine and diagnostics programs and our anti-viral drug program, and increased by approximately $1,809,000 to approximately $6,190,000 in fiscal year 2021, from approximately $4,381,000 in fiscal year 2020. The increase in research and development expenses was primarily due to an increase in employee stock option expense of approximately $2,440,000, an increase in outside research and development related to our development programs, other than our cancer diagnostics program, of approximately $772,000, an increase in consultant stock option expense of approximately $241,000 and an increase in legal fees primarily related to collaborative and license agreements of approximately $30,000, offset by a decrease in outside research and development expense related to our cancer diagnostics program of approximately $1,112,000, a decrease in employee compensation and related costs, other than stock option compensation expense, of approximately $515,000 and a decrease in depreciation expense of approximately $35,000, all such decreases primarily due to suspension of development of our cancer diagnostics program in July 2020. General and Administrative Expenses General and administrative expenses increased by approximately $1,476,000 to approximately $7,073,000 in fiscal year 2021, from approximately $5,597,000 in fiscal year 2020. The increase in general and administrative expenses was principally due to an increase in employee stock option expense of approximately $1,108,000, non-recurring income in the prior year period resulting from the discharge in January 2020 of a disputed liability of approximately $337,000 upon the expiration of the vendor’s statutory right to pursue collection of the disputed liability, an increase in patent expense of approximately $336,000, an increase in directors compensation of approximately $209,000, an increase in warrant expense of approximately $96,000, an increase in corporate insurance expense of approximately $59,000 primarily due to an increase in our directors and officers insurance premium and an increase in investor and public relations expense of approximately $52,000, offset by a decrease in employee compensation and related costs, other than stock option expense, of approximately $584,000 and a decrease in consulting expense, other than warrant expense, of approximately $133,000. Gain (Loss) on Disposal of Property and Equipment Gain (loss) on disposal of property and equipment was a gain of approximately $5,000 in fiscal year 2021 compared to a loss of approximately $148,000 in fiscal year 2020. The disposal of property and equipment was in connection with the suspension of development of our cancer diagnostics program. Interest Income Interest income decreased to approximately $2,000 in fiscal year 2021 compared to approximately $34,000 in fiscal year 2020, due to a decrease in interest rates. 37 Net Loss Attributable to Noncontrolling Interest The net loss attributable to noncontrolling interest, representing Wistar’s 5% ownership interest in Certainty’s net loss, increased by approximately $100,000 to approximately $174,000 in fiscal year 2021, from approximately $74,000 in fiscal year 2020, as Certainty’s net loss increased. The increase in Certainty’s net loss was primarily due to an increase in employee stock option expense of approximately $1,422,000, an increase in outside research and development of approximately $407,000 and an increase in patent expense of approximately $178,000. Liquidity and Capital Resources Our primary sources of liquidity are cash, cash equivalents and short-term investments. Based on currently available information as of January 4, 2022, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows will be sufficient to fund our activities for at least the next twelve months. We have implemented a business model that conserves funds by collaborating with third parties to develop our technologies. However, our projections of future cash needs and cash flows may differ from actual results. If current cash on hand, cash equivalents, short-term investments and cash that may be generated from our business operations are insufficient to continue to operate our business, or if we elect to invest in or acquire a company or companies or new technology or technologies that are synergistic with or complementary to our technologies, we may be required to obtain more working capital. During fiscal year 2021, we raised approximately $20,292,000, net of expenses, through a public offering in which we sold an aggregate of 4,285,715 shares of common stock and approximately $10,834,000, net of expenses, through an at-the-market equity program in which we sold an aggregate of 2,806,410 shares of common stock. Our at-the-market equity program was terminated on June 16, 2021. We may seek to obtain working capital during our fiscal year 2022 or thereafter through sales of our equity securities or through bank credit facilities or public or private debt from various financial institutions where possible. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we do identify sources for additional funding, the sale of additional equity securities or convertible debt will result in dilution to our stockholders. We can give no assurance that we will generate sufficient cash flows in the future to satisfy our liquidity requirements or sustain future operations, or that other sources of funding, such as sales of equity or debt, would be available or would be approved by our security holders, if needed, on favorable terms or at all. If we fail to obtain additional working capital as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition. Furthermore, such lack of funds may inhibit our ability to respond to competitive pressures or unanticipated capital needs, or may force us to reduce operating expenses, which would significantly harm the business and development of operations. During the year ended October 31, 2021, cash used in operating activities was approximately $4,937,000. Cash used in investing activities was approximately $3,918,000, resulting from the purchase of short-term investments of approximately $16,499,000, which was offset by the proceeds on maturities of short-term investments of approximately $12,539,000, the proceeds from the sale of equipment of approximately $35,000 and proceeds received on sale of common stock by ZQX Advisors, LLC of approximately $6,000. Cash provided by financing activities was approximately $31,566,000, resulting from net proceeds of approximately $20,292,000 from a public offering of 4,285,715 shares of common stock, the sale of 2,806,410 shares of common stock in an at-the-market equity offering of approximately $10,834,000, proceeds from exercise of stock options of approximately $434,000 and proceeds from the sale of common stock pursuant to employee stock purchase plan of approximately $6,000. As a result, our cash, cash equivalents, and short-term investments at October 31, 2021 increased approximately $26,671,000 to approximately $35,728,000 from approximately $9,057,000 at the end of fiscal year 2020. We have a future cash obligation related to the lease of our offices through 2026, estimated at approximately $331,000. 38 Off-Balance Sheet Arrangements We have no variable interest entities or other significant off-balance sheet obligation arrangements. Critical Accounting Policies The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that, of the significant accounting policies discussed in Note 2 to our Consolidated Financial Statements, the following accounting policies require our most difficult, subjective, or complex judgments: ● Revenue Recognition; and ● Stock-Based Compensation. Revenue Recognition Our revenue has been derived solely from technology licensing and the sale of patented technologies. Revenue is recognized upon transfer of control of intellectual property rights and satisfaction of other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive. Our revenue recognition policy requires us to make certain judgments and estimates in connection with the accounting for revenue. Such areas may include determining the existence of a contract and identifying each party’s rights and obligations to transfer goods and services, identifying the performance obligations in the contract, determining the transaction price and allocating the transaction price to separate performance obligations, estimating the timing of satisfaction of performance obligations, determining whether a promise to grant a license is distinct from other promised goods or services and evaluating whether a license transfers to a customer at a point in time or over time. Our revenue arrangements provide for the payment, within 30 days of execution of the agreement, of contractually determined, one-time, paid-up license fees in settlement of litigation and in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by the Company. These arrangements typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by the Company, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. In such instances, the intellectual property rights granted have been perpetual in nature, extending until the expiration of the related patents. Pursuant to the terms of these agreements, we have no further obligations with respect to the granted intellectual property rights, including no obligation to maintain or upgrade the technology, or provide future support or services. Licensees obtained control of the intellectual property rights they have acquired upon execution of the agreement. Accordingly, the performance obligations from these agreements were satisfied and 100% of the revenue was recognized upon the execution of the agreements. 39 Stock-Based Compensation The compensation cost for service-based stock options granted to employees, directors and consultants is measured at the grant date, based on the fair value of the award using the Black-Scholes pricing model, and is expensed on a straight-line basis over the requisite service period (the vesting period of the stock option). For employee options vesting if the trading price of the Company’s common stock exceeds certain price targets, we use a Monte Carlo Simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period. For stock awards granted to employees, directors and consultants that vest at date of grant we recognize expense based on the grant date market price of the underlying common stock. For restricted stock awards vesting upon achievement of a price target of our common stock we use a Monte Carlo Simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period (median time to vest). The Black-Scholes pricing model and the Monte Carlo Simulation we use to estimate fair values requires valuation assumptions of expected term, expected volatility, risk-free interest rates and expected dividend yield. The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. For employees we use the simplified method, which is a weighted average of the vesting term and contractual term, to determine expected term. The simplified method was adopted since we do not believe that historical experience is representative of future performance because of the impact of the changes in our operations. For consultants we use the contract term for expected term. We estimate the expected volatility of our shares of common stock based upon the historical volatility of our share price over a period of time equal to the expected term of the grants. We estimate the risk-free interest rate based on the implied yield available on the applicable grant date of a U.S. Treasury note with a term equal to the expected term of the underlying grants. We made the dividend yield assumption based on our history of not paying dividends and our expectation not to pay dividends in the future. We will reconsider use of the Black-Scholes pricing model and Monte Carlo Simulation if additional information becomes available in the future that indicates other models would be more appropriate. If factors change and we employ different assumptions in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. See Note 2 to the Consolidated Financial Statements for additional information. Effect of Recent Accounting Pronouncements We discuss the effect of recently issued pronouncements in Note 2 to the Consolidated Financial Statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not required for a smaller reporting company. Item 8. Financial Statements and Supplementary Data. See accompanying “Index to Consolidated Financial Statements.” 40 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.