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, 2019 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 Six months ended April 30, 2020 compared with six months ended April 30, 2019 Revenue We did not record any revenue for the six months ended April 20, 2020. For the six months ended April 30, 2019, we recorded revenue of $250,000 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 earnings process from the license was complete and 100% of the revenue was recognized upon execution of the license agreement. 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. 27 Table of Contents Inventor Royalties, Contingent Legal Fees, Litigation and Licensing Expenses Related to Patent Assertion Inventor royalties, contingent legal fees, litigation and licensing expenses related to patent assertion activities decreased from approximately $166,000 in the six months ended April 30, 2019 to $ -0- in the six months ended April 20, 2020. The decrease was primarily due to the decrease in related revenues. 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. Amortization of Patents Amortization of patents was $-0- in the six months ended April 30, 2020 compared to approximately $377,000 in the comparable prior year. We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. The decrease in amortization of patents was due to the patent asset being fully amortized in fiscal year 2019. Research and Development Expenses Research and development expenses are related to the development of our cancer diagnostics and therapeutics programs and our anti-viral drug program, and de creased by approximately $798,000 to approximately $2,719,000 in the six months ended April 30, 2020, from approximately $3,517,000 in the six months ended April 30, 2019 . The decrease in research and development expenses was primarily due to a decrease in employee stock award compensation expense of approximately $1,251,000, a decrease in employee stock option compensation expense of approximately $129,000, offset by an increase in outside research and development expense, excluding license expense, of approximately $414,000 primarily related to the development of Cchek™, our non-invasive blood tests for early detection of cancer, and an increase in license expense related to our collaborative agreement with OntoChem concerning discovery and development of anti-viral drugs for COVID-19 of approximately $111,000. Research and development expenses incurred in the six months ended April 30, 2020 associated with each of our development programs consisted of approximately $1,827,000 for cancer diagnostics, approximately $565,000 for CAR-T therapeutics, approximately $171,000 for cancer vaccines, and approximately $156,000 for anti-viral therapeutics. General and Administrative Expenses General and administrative expenses decreased by approximately $767,000 to approximately $2,581,000 in the six months ended April 30, 2020, from approximately $3,348,000 in the six months ended April 30, 2019. The decrease in general and administrative expenses in fiscal year 2020 was principally due to a decrease in employee stock award compensation expense of approximately $704,000, a decrease in legal and accounting fees of approximately $440,000 in fiscal year 2020 primarily related to fees incurred in fiscal year 2019 in connection with a putative shareholder derivative complaint which was settled in August 2019, a decrease in expense 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 which reduced expenses in fiscal year 2020, offset by an increase in employee compensation and related costs, other than stock option compensation expense and stock award compensation expense, of approximately $327,000, an increase in consulting expense of approximately $114,000 in fiscal year 2020 primarily related to the commercialization of Cchek™, our non-invasive blood test for early detection of cancer, an increase in corporate insurance expense of approximately $156,000 primarily due to an increase in directors and officers insurance premium and increase in employee stock option compensation expense of approximately $124,000. 28 Table of Contents Impairment in Carrying Amount of Patent Assets The impairment in carrying amount of patent assets related to our legacy patent licensing activities of approximately $419,000 in the six months ended April 30, 2019 resulted from the write down of the value of our patent assets to the estimated undiscounted future cash flows we anticipated receiving from the patent assets as of January 31, 2019. Our estimates of future cash flows were based on our most recent assessment of the market for potential licensees, as well as the status of ongoing negotiations with potential licensees. Interest Income Interest income decreased by approximately $10,000 to approximately $25,000 in the six months ended April 30, 2020, from approximately $35,000 in the comparable prior year period as a result of a decrease in interest rates. Net Loss Attributable to Noncontrolling Interest The net loss attributable to noncontrolling interest, representing Wistar’s 5% ownership interest in Certainty’s net loss, decreased by approximately $80,000 to approximately $42,000 in the six months ended April 30, 2020, from approximately $122,000 in the six months ended April 30, 2019, as Certainty’s net loss decreased. The decrease in Certainty’s net loss was primarily due to decreases in employee stock option compensation expense and employee stock award compensation expense. Three months ended April 30, 2020 compared with three months ended April 30, 2019 Revenue We did not record any revenue for the three months ended April 20, 2020. For the three months ended April 30, 2019, we recorded revenue of $250,000 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 earnings process from the license was complete and 100% of the revenue was recognized upon execution of the license agreement. 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. 29 Table of Contents Inventor Royalties, Contingent Legal Fees, Litigation and Licensing Expenses Related to Patent Assertion Inventor royalties, contingent legal fees, litigation and licensing expenses related to patent assertion activities decreased from approximately $166,000 in the three months ended April 30, 2019 to $ -0- in the six months ended April 20, 2020. The decrease was primarily due to the decrease in related revenues. 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. Amortization of Patents Amortization of patents was $-0- in the three months ended April 30, 2020 compared to approximately $126,000 in the comparable prior year. We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. The decrease in amortization of patents was due to the patent asset being fully amortized in fiscal year 2019. Research and Development Expenses Research and development expenses are related to the development of our cancer diagnostics and therapeutics programs and our anti-viral drug program, and de creased by approximately $40,000 to approximately $1,229,000 in the three months ended April 30, 2020, from approximately $1,269,000 in the three months ended April 30, 2019. The decrease in research and development expenses was primarily due to a decrease in employee stock award compensation expense of approximately $301,000, offset by an increase in license expense related to our collaborative agreement with OntoChem concerning discovery and development of anti-viral drugs for COVID-19 of approximately $111,000, an increase in employee stock option compensation expense of approximately $102,000 and an increase in outside research and development expense, excluding license expense, of approximately $51,000 primarily related to the development of Cchek™, our non-invasive blood test for early detection of cancer . Research and development expenses incurred in the three months ended April 30, 2020 associated with each of our development programs consisted of approximately $761,000 for cancer diagnostics, approximately $235,000 for CAR-T therapeutics, approximately $156,000 for anti-viral therapeutics, and approximately $77,000 for cancer vaccines. 30 Table of Contents General and Administrative Expenses General and administrative expenses increased by approximately $159,000 to approximately $1,441,000 in the three months ended April 30, 2020, from approximately $1,282,000 in the three months ended April 30, 2019. The increase in general and administrative expenses in fiscal year 2020 was principally due to an increase in employee compensation and related costs, other than stock option compensation expense and stock award compensation expense, of approximately $158,000, an increase in employee stock option compensation expense of approximately $148,000, an increase in consulting expense of approximately $116,000 primarily related to the commercialization of Cchek™, our non-invasive blood test for early detection of cancer, an increase in corporate insurance expense of approximately $78,000 primarily due to an increase in directors and officers insurance premium , offset by a decrease in employee stock award compensation expense of approximately $169,000 and a decrease in legal and accounting fees of approximately $156,000 primarily related to fees incurred in fiscal year 2019 in connection with a putative shareholder derivative complaint which was settled in August 2019. Interest Income Interest income decreased by approximately $6,000 to approximately $12,000 in the three months ended April 30, 2020, from approximately $18,000 in the comparable prior year period as a result of a decrease in interest rates. Net Loss Attributable to Noncontrolling Interest The net loss attributable to noncontrolling interest, representing Wistar’s 5% ownership interest in Certainty’s net loss, decreased by approximately $19,000 to approximately $18,000 in the three months ended April 30, 2020, from approximately $37,000 in the three months ended April 30, 2019, as Certainty’s net loss decreased. The decrease in Certainty’s net loss was primarily due to decreases in employee stock option compensation expense and employee stock award compensation expense. 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 9, 2020, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows will be sufficient to fund our activities for 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 the six months ended April 30, 2020, we raised an aggregate of approximately $3,034,000, net of expenses, through the sale of 1,094,063 shares of common stock in our at-the-market equity offerings. This included approximately $427,000, net of expenses, through the sale of 112,238 shares of common stock in an at-the market equity offering which expired in November 2019 and approximately $2,607,000, net of expenses, through the sale of 981,825 shares of common stock in an at-the-market equity offering under which we may issue up to $50 million of common stock. Under our current at-the-market equity program which is currently effective and may remain available for us to use in the future, we may sell an additional approximately $47,248,000 of common stock. We may seek to obtain working capital during our fiscal year 2020 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 could 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. 31 Table of Contents During the six months ended April 30, 2020, cash used in operating activities was approximately $3,471,000. Cash used in investing activities was approximately $286,000, resulting from the purchased of certificates of deposit totaling $2,620,000 and the purchase of property and equipment of approximately $16,000, which was offset by the proceeds on maturities of certificates of deposit totaling $2,350,000. Cash provided by financing activities was approximately $3,153,000, resulting from the sale of 1,094,063 shares of common stock in our at-the-market equity offering over the past six months of approximately $3,034,000 (which is ongoing), the proceeds from sale of common stock pursuant to employee stock purchase plan of approximately $15,000 and the proceeds from exercise of stock options of approximately $104,000. As a result, our cash, cash equivalents, and short-term investments at April 30, 2020 decreased approximately $334,000 to approximately $5,508,000 from approximately $5,842,000 at the end of fiscal year 2019. 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, 2019, the following accounting policies require our most difficult, subjective or complex judgments: 32 Table of Contents 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. On November 1, 2018 we adopted Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers using the modified retrospective method. Upon adoption of ASU 2014-09 we are required 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 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. The adoption of ASU 2014-09 had no impact on revenue recognized. Stock-Based Compensation The compensation cost for service-based stock options granted to employees and directors 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. 33 Table of Contents 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). On November 1, 2018 we adopted Accounting Standards Update 2018-07 (“ASU 2018-027”) for stock-based compensation to non-employees. Upon adoption of ASU 2018-07 we estimated the fair value of unvested awards at the date of adoption, using the Black-Scholes pricing model. Future grants to consultants will be measured at the grant date, based on the fair value of the award using the Black-Scholes pricing model, consistent with our policy for grants to employees and directors. 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. 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. 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 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. EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS We discuss the effect of recently issued pronouncements in the Notes to our Condensed Consolidated Financial Statements.