Business context and reporting period
This is ITUS Corporation’s Form 10-K for the fiscal year ended October 31, 2017, filed January 9, 2018. The filing describes Anixa Diagnostics Corporation as a wholly owned subsidiary developing Cchek, a blood-based cancer-detection platform; ITUS also formed Certainty Therapeutics in November 2017 to develop cancer immunotherapies. The filing entity is ITUS Corporation, notwithstanding the request metadata naming Anixa Biosciences Inc.
The company was shifting from patent licensing and enforcement toward early-stage cancer diagnostics and therapeutics. Its seven employees and limited operating resources supported research largely through external collaborators. The new businesses had no revenue.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $362,500 | $300,000 |
| Research and development expense | $1.598 million | $1.556 million |
| Marketing, general and administrative expense | $4.411 million | $2.710 million |
| Operating loss | $6.076 million | $4.509 million |
| Net loss | $5.009 million | $5.016 million |
| Net loss attributable to common stockholders | $7.018 million | $5.016 million |
| Basic and diluted loss per share | $0.58 | $0.57 |
| Cash used in operating activities | $3.797 million | $3.382 million |
FY2017 revenue came from one non-recurring patent-license agreement; the prior year’s $300,000 came from two agreements. No product revenue or meaningful product margin was reported. The filing does not provide a clear gross-margin measure for these licensing revenues.
At October 31, 2017, cash and cash equivalents were $3.339 million and short-term certificates of deposit were $3.500 million. Current assets were $7.014 million, current liabilities $0.889 million, and working capital approximately $6.124 million. Total assets were $8.812 million; total liabilities were $0.889 million, with no patent acquisition obligation remaining. The company reported cash, cash equivalents and short-term investments of approximately $6.839 million.
Cash used in investing activities was $2.735 million, primarily reflecting net purchases of certificates of deposit; cash provided by financing activities was $7.383 million. Financing included approximately $10.876 million of equity proceeds, offset principally by $3.000 million of secured-debenture payments and $0.500 million to redeem preferred stock. Cash, cash equivalents and short-term investments increased about $3.601 million year over year.
Material changes versus the prior comparable period
- Operating loss widened by approximately $1.567 million, as higher G&A expense more than offset lower litigation and licensing expenses and modestly higher revenue.
- G&A expense rose approximately $1.701 million, including higher director compensation, employee and severance costs, stock-option expense, legal and accounting fees, investor relations spending, and rent.
- R&D expense increased approximately $41,000. Management cited increased Wistar collaboration and blood-sample costs, partly offset by lower employee compensation and legacy technology costs.
- Net loss was nearly unchanged, partly because a $1.548 million gain from extinguishing the patent acquisition obligation offset other costs. A $2.009 million deemed dividend related to the Series A preferred-stock redemption increased the loss attributable to common stockholders.
- Common shares outstanding increased from 8.752 million to 16.603 million during FY2017, reflecting financing, debt repayment and other issuances.
Outlook, commentary, risks and unusual items
Management said, based on information available January 9, 2018, that existing liquidity and expected cash flows should fund activities for the next 12 months. The prior-year going-concern doubt was considered alleviated after nearly $12 million of financing and debt repayment. This outlook is uncertain: the company expected continued losses and stated it could need additional capital, potentially dilutive equity or debt.
- Cchek: The company reported preliminary sensitivity and specificity of 92% each in a set of 88 samples (54 cancer patients and 34 healthy individuals). Testing was unblinded and non-uniform, and the company said results require confirmation in adequately sized, blinded clinical studies. Benign conditions and other immune-system effects had not been extensively evaluated. Regulatory approval, clinical utility, reimbursement and commercial acceptance remained unresolved.
- Development timing: Management expected increased sample availability and said sufficient data might support regulatory discussions within 6 to 12 months. Patient-sample volumes had previously fallen short of expectations. The company anticipated FDA pathways for diagnostics, while also discussing possible CLIA certification.
- Therapeutics: Certainty licensed Wistar technology and partnered with Moffitt to conduct studies toward an IND application for an ovarian-cancer CAR-T candidate. Human testing had not begun; toxicity studies and reproducibility of earlier preclinical results remained important uncertainties.
- Funding and dilution: The businesses were pre-revenue and depended on capital markets and collaborators. The filing warned that future financing may be unavailable or dilutive. It also noted limited authorized common shares available for issuance.
- Other exposures: One licensee accounted for all FY2017 patent-licensing revenue. The company vacated its Los Angeles office but remained liable under the lease and was marketing the space for sublease. It reported no material pending legal proceedings beyond ordinary-course matters and patent enforcement suits.
- Unusual financing/accounting items: The patent acquisition obligation was settled with 947,606 shares, producing the $1.548 million gain. The preferred-stock redemption involved cash, a secured debenture and a warrant, and generated the $2.009 million deemed dividend. The debenture was paid in full during FY2017.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether larger, blinded and appropriately controlled Cchek studies reproduce the preliminary accuracy results, including testing against benign and inflammatory conditions.
- Whether patient-sample access, regulatory consultations and the stated 6-to-12-month development milestones progress as planned.
- Cash burn and runway relative to the company’s 12-month funding expectation, and whether further financing or dilution becomes necessary.
- Preclinical safety and efficacy evidence for the ovarian-cancer therapy, progress toward an IND, and the terms and obligations of the Wistar and Moffitt agreements.
- How much recurring revenue, if any, can be generated from legacy licensing, given that FY2017 revenue was non-recurring and concentrated in one licensee.
- The effect of outstanding options, warrants and other share issuances on fully diluted ownership, alongside the remaining authorized-share capacity.