Business context and reporting period
ITUS Corporation (the registrant; Anixa Biosciences is identified in this filing as Anixa Diagnostics Corporation, a wholly owned subsidiary) filed this unaudited Form 10-Q for the quarter ended July 31, 2015. ITUS develops, acquires, and licenses emerging technologies, including thin-film displays, encrypted communications, advanced materials, and cancer diagnostics. It formed Anixa Diagnostics in June 2015 to develop non-invasive cancer screening tests.
Financial results and position
| Metric | Three months ended July 31, 2015 | Nine months ended July 31, 2015 |
|---|---|---|
| Revenue | $95,000 | $9.255 million |
| Operating income (loss) | $(1.491) million | $233,000 |
| Net income (loss) | $(1.602) million | $(86,630) |
| Net loss per share | $(0.18) | $(0.01) |
| Operating cash flow | Not presented for the quarter | $2.165 million |
Nine-month revenue included a one-time $9.0 million AU Optronics settlement; licensing revenue was $255,000, compared with $1.105 million in the prior-year period. Third-quarter licensing revenue was $95,000, versus none a year earlier. The filing does not provide a meaningful product gross margin; revenue was principally from licensing and settlement arrangements.
At July 31, cash and cash equivalents were $5.161 million and short-term certificates of deposit were $2.4 million, for total cash and short-term investments of $7.561 million. Current assets were $7.754 million and current liabilities $712,000. Total liabilities were $4.282 million, including a $3.570 million patent acquisition obligation; the filing says this obligation is payable no later than November 2017 and may be reduced by royalties. The company reported no convertible debentures outstanding. Total shareholders’ equity was $5.998 million.
Nine-month cash flow was $2.165 million provided by operations, $45,000 provided by investing activities, and $411,000 used in financing activities. Cash and cash equivalents increased by $1.800 million over the period.
Material changes versus comparable periods
- Nine-month revenue rose to $9.255 million from $2.292 million, primarily because of the $9.0 million AUO settlement. The 2014 period included $1.187 million of previously deferred display technology revenue, which did not recur in 2015.
- Nine-month operating costs increased to $9.022 million from $5.772 million, including litigation and licensing expense of $3.473 million versus $267,000, primarily related to the AUO settlement. Despite higher revenue, the company recorded a small net loss, compared with a $6.453 million net loss in 2014.
- Third-quarter revenue fell to $95,000 from $1.187 million, while net results shifted from $411,000 income to a $1.602 million loss. The prior-year quarter included the final $1.187 million of deferred AUO display-technology revenue and an $850,000 gain from a change in derivative liability.
- Cash and short-term investments increased by approximately $1.7 million from October 31, 2014. The company repurchased 92,232 shares during the nine-month period for approximately $445,000. A 1-for-25 reverse stock split took effect June 26, 2015; share data in the filing reflects the split.
Outlook, risks, contingencies, and unusual items
Management stated that, based on information available August 18, 2015, existing cash, short-term investments, and expected cash flows were expected to support business activities for at least 12 months. This is not a guarantee: actual cash needs and licensing receipts could differ. If funding proves insufficient, the company may seek equity or debt financing, which could dilute shareholders; absent financing or expense reductions, it may need to curtail or cease some operations.
Revenue depends substantially on licensing and other transactions that may be non-recurring. The AUO settlement resolved litigation and included assignment of certain electrophoretic display patents to AUO; ITUS also terminated AUO’s license to its patented Nano Field Emission Display technology. The company reported resuming its Nano field emission display development program and continuing licensing efforts. No specific revenue or earnings guidance was provided.
Patent acquisition obligations had a discounted present value of $3.570 million and were classified as a Level 3 fair-value liability. The company reported no material pending legal proceedings beyond ordinary-course matters and patent enforcement suits, and no material change in risk factors from its prior Form 10-K. It also disclosed substantial net operating loss carryforwards and a full valuation allowance against deferred tax assets; no interim tax provision was recorded. Stock-based compensation was a significant non-cash expense, including $2.338 million for the nine-month period.
Key facts for investors to verify
- Confirm the filing entity and corporate relationship: the 10-Q is filed by ITUS Corporation, while Anixa Diagnostics is its subsidiary.
- Assess how much of reported revenue and cash generation depends on the non-recurring $9.0 million AUO settlement, rather than ongoing licensing activity.
- Review cash burn, operating costs, and management’s 12-month liquidity assessment against subsequent results and financing needs.
- Examine the terms, payment timing, royalty offsets, and fair-value assumptions for the $3.570 million patent acquisition obligation.
- Consider dilution and share-based compensation, including outstanding options, the stock repurchase program, and the reverse split.