Anixa Biosciences Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Information included in this Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,” “anticipates,” “likely,” “will” and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 and the condensed consolidated financial statements included in this Report. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Report. GENERAL We discuss the description of our business in the Notes to our Condensed Consolidated Financial Statements. RESULTS OF OPERATIONS Three months ended April 30, 2023 compared with three months ended April 30, 2022 Revenue For the three months ended April 30, 2023, we recorded revenue of approximately $210,000 from one license agreement. 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 this license agreement were satisfied and 100% of the revenue was recognized upon execution of the license agreement. We had no revenue during the three months ended April 30, 2022. As discussed in Note 1 to our condensed consolidated financial statements, as part of our legacy operations, the Company remains engaged in limited patent licensing activities which we do not expect to be a significant part of our ongoing operations or revenue, 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 intend 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. 18 Inventor Royalties, Contingent Legal Fees, Litigation and Licensing Expenses Inventor royalties, contingent legal fees, litigation and licensing expenses for the three months ended April 30, 2023 were approximately $161,000. 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. We had no inventor royalties, contingent legal fees, litigation and licensing expenses during the three-month period ended April 30, 2022. Research and Development Expenses Research and development expenses incurred in the three months ended April 30, 2023 associated with each of our development programs consisted of approximately $512,000 for cancer vaccines, approximately $413,000 for CAR-T therapeutics and approximately $73,000 for anti-viral therapeutics. As of March 9, 2023, we paused further development of our COVID-19 anti-viral therapeutic program. While our compounds have shown promise in head-to-head in vitro analysis against Pfizer’s authorized oral treatment, results of additional animal studies indicate that there is not sufficient oral bioavailability, and it is unclear whether an orally delivered treatment may be developed. We do not currently believe that there is a viable market for an injectable treatment given the current oral treatments available. Furthermore, we believe the needed additional investment in research for alternative delivery methods would divert resources from more promising projects. We continue to prosecute our U.S. patent applications of this technology and may decide to restart development at some time in the future. Research and development expenses are related to the development of our cancer therapeutics and vaccine programs and our anti-viral drug program, and decreased by approximately $737,000 to approximately $998,000 in the three months ended April 30, 2023, from approximately $1,735,000 in the three months ended April 30, 2022. The decrease in research and development expenses was primarily due to a decrease in employee stock option compensation expense of approximately $413,000, a decrease in outside research and development expense related to our anti-viral drug program of approximately $84,000, a decrease of approximately $78,000 in outside research and development related to our CAR-T therapeutics program, a decrease in stock option compensation for consultants of approximately $62,000 and a decrease of approximately $50,000 in outside research and development related to our ovarian cancer vaccine program. General and Administrative Expenses General and administrative expenses decreased by approximately $243,000 to approximately $1,611,000 in the three months ended April 30, 2023, from approximately $1,854,000 in the three months ended April 30, 2022. The decrease in general and administrative expenses was primarily due to a decrease in employee compensation and related costs, other than stock option compensation expense, of approximately $151,000, a decrease in warrant expense of approximately $110,000, a decrease in patent related costs of approximately $73,00 and a decrease in investor and public relations expense, excluding warrant expense, of approximately $61,000, offset by an increase of approximately $146,000 in employee stock option compensation expense. Interest Income Interest income was approximately $253,000 and $1,000 in the three-month periods ended April 30, 2023 and 2022, respectively. The increase in interest income was due primarily to an increase in interest rates on our cash, cash equivalents and short-term investments. 19 Net Loss Attributable to Noncontrolling Interest The net loss attributable to noncontrolling interest, representing Wistar’s 5% ownership interest in Certainty’s net loss, was approximately $19,000 and $44,000, respectively, in the three months ended April 30, 2023 and 2022. Six months ended April 30, 2023 compared with six months ended April 30, 2022 Revenue For the six months ended April 30, 2023, we recorded revenue of approximately $210,000 from one license agreement. 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 this license agreement were satisfied and 100% of the revenue was recognized upon execution of the license agreement. We had no revenue during the six months ended April 30, 2022. As discussed in Note 1 to our condensed consolidated financial statements, as part of our legacy operations, the Company remains engaged in limited patent licensing activities which we do not expect to be a significant part of our ongoing operations or revenue, 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 intend 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 Inventor royalties, contingent legal fees, litigation and licensing expenses for the six months ended April 30, 2023 were approximately $161,000. 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. We had no inventor royalties, contingent legal fees, litigation and licensing expenses during the six-month period ended April 30, 2022. Research and Development Expenses Research and development expenses incurred in the six months ended April 30, 2023 associated with each of our development programs consisted of approximately $979,000 for cancer vaccines, approximately $849,000 for CAR-T therapeutics and approximately $238,000 for anti-viral therapeutics. As of March 9, 2023, we paused further development of our COVID-19 anti-viral therapeutic program. While our compounds have shown promise in head-to-head in vitro analysis against Pfizer’s authorized oral treatment, results of additional animal studies indicate that there is not sufficient oral bioavailability, and it is unclear whether an orally delivered treatment may be developed. We do not currently believe that there is a viable market for an injectable treatment given the current oral treatments available. Furthermore, we believe the needed additional investment in research for alternative delivery methods would divert resources from more promising projects. We continue to prosecute our U.S. patent applications of this technology and may decide to restart development at some time in the future. 20 Research and development expenses are related to the development of our cancer therapeutics and vaccine programs and our anti-viral drug program, and decreased by approximately $1,507,000 to approximately $2,066,000 in the six months ended April 30, 2023, from approximately $3,573,000 in the six months ended April 30, 2022. The decrease in research and development expenses was primarily due to a decrease in employee stock option compensation expense of approximately $1,156,000, a decrease in outside research and development expense related to our anti-viral drug program of approximately $148,000, a decrease in outside research and development expense related to ovarian cancer CAR-T program of approximately $98,000 and a decrease of approximately $89,000 of consultant stock option and warrant expense. General and Administrative Expenses General and administrative expenses decreased by approximately $797,000 to approximately $3,099,000 in the six months ended April 30, 2023, from approximately $3,896,000 in the six months ended April 30, 2022. The decrease in general and administrative expenses was primarily due to a decrease in employee stock option compensation expense of approximately $293,000, a decrease in warrant expense of approximately $220,000, a decrease in investor and public relations expense, excluding warrant expense of approximately $166,000 and a decrease in patent related costs of approximately $133,000. Interest Income Interest income was approximately $455,000 and $2,000 in the six-month periods ended April 30, 2023 and 2022, respectively. The increase in interest income was due primarily to an increase in interest rates on our cash, cash equivalents and short-term investments. Net Loss Attributable to Noncontrolling Interest The net loss attributable to noncontrolling interest, representing Wistar’s 5% ownership interest in Certainty’s net loss, was approximately $51,000 and $94,000, respectively, in the six months ended April 30, 2023 and 2022. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash, cash equivalents and short-term investments. Based on currently available information as of June 14, 2023, 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. Under our at-the-market equity program as of April 30, 2023, we may sell up to $100 million of common stock. We did not sell any shares under our at-the-market equity program during the three and six months ended April 30, 2023. We may seek to obtain working capital during our fiscal year 2023 or thereafter through sales of our equity securities 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. 21 During the six months ended April 30, 2023, cash used in operating activities was approximately $2,795,000. Cash used by investing activities was approximately $4,029,000, resulting from the purchase of short-term investments totaling approximately $17,406,000, which was offset by proceeds on the maturities of short-term investments of approximately $13,377,000. Cash provided by financing activities was approximately $84,000. As a result, our cash, cash equivalents, and short-term investments at April 30, 2023 decreased approximately $2,711,000 to approximately $26,976,000 from approximately $29,687,000 at the end of fiscal year 2022. CRITICAL ACCOUNTING POLICIES The Company’s condensed 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 condensed 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 in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, 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. 22 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 recognized as an expense on a straight-line basis over the requisite service period (the vesting period of the stock option) which is one to four years. 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 and directors 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 value 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 and the change in terms from historical options. For consultants we use the contract term for expected term. Under the Black-Scholes pricing model, we estimated 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 estimated 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 the Monte Carlo Simulation if additional information becomes available in the future that indicates another model 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. EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS We do not believe that any of the recently issued accounting pronouncements will have a material effect on the Company’s consolidated financial statements. See Note 7 of the accompanying condensed consolidated financial statements. 23