Business context and reporting period
This filing is ITUS Corporation’s unaudited Form 10-Q for the quarter ended April 30, 2017, covering the three and six months then ended. Anixa Biosciences was a wholly owned subsidiary developing the Cchek cancer-detection platform; the registrant named in the filing is ITUS Corporation, not Anixa Biosciences. Management said Cchek was expected to be the company’s primary focus.
Financial performance and position
| Metric | Three months ended April 30, 2017 | Six months ended April 30, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.212 million | $2.607 million |
| Operating loss | $1.212 million | $2.607 million |
| Net income (loss) | $160,489 | $(1.429) million |
| Net income (loss) attributable to common stockholders | $160,489 | $(3.438) million |
| Net income (loss) per common share | $0.02 | $(0.37) |
The quarter’s net income was driven by a $1.548 million noncash gain on extinguishing a patent acquisition obligation, not revenue. The six-month common-stockholder loss also includes a $2.009 million deemed dividend arising from the preferred-stock redemption. Gross margin is not meaningful because the company reported no revenue.
For the six months, research and development expense was $883,000 (prior-year period: $851,000); marketing, general and administrative expense was $1.559 million (prior: $1.532 million); patent amortization was $163,000 in both periods. Interest expense rose to $371,000 from $251,000. Operating cash use was $1.806 million, compared with $1.884 million in the prior-year period.
At April 30, 2017, cash and cash equivalents were $2.877 million and short-term investments were $2.250 million. Current assets totaled $5.192 million and current liabilities $3.660 million, including a $3.000 million secured debenture. Total liabilities were $3.660 million and shareholders’ equity $3.589 million. Cash, cash equivalents and short-term investments totaled approximately $5.127 million.
Material changes and unusual items
- In March 2017, ITUS issued 947,606 common shares to settle the patent acquisition obligation. The shares’ stated fair value was approximately $2.843 million versus an obligation carrying value of approximately $4.400 million, producing the $1.548 million gain.
- The Series A preferred stock redemption resulted in $500,000 cash paid and a $3.000 million, 12% secured debenture. The debenture has $1.000 million due on or before June 1, 2017 and the balance due November 11, 2017; it is secured by company assets and restricts senior debt. The redemption also included a five-year warrant for 500,000 shares and generated the deemed dividend.
- A shareholder rights offering generated approximately $4.203 million. Common shares outstanding increased to 11,694,863 at April 30, from 8,752,387 at October 31, 2016, reflecting the rights offering and shares issued to settle the patent obligation, among other changes.
- On May 16, 2017, after quarter-end, the company sold 3,425,376 shares in a registered offering, receiving approximately $3.214 million net proceeds. It reported approximately $8.104 million of cash, cash equivalents and short-term investments as of May 25.
Outlook, commentary and risks
Management stated that, based on information available May 25, existing liquidity and expected operating cash flows should fund activities and debt obligations for the next 12 months. This is management’s estimate, not a guarantee; it noted that further capital may be needed and may not be available on acceptable terms, or at all. Additional equity or convertible debt could dilute shareholders or affect conversion and exercise prices.
Management described Cchek as an early cancer-detection platform under development with Wistar Institute. It reported preliminary study results of 92% sensitivity and 92% specificity across 88 samples (54 cancer-patient samples and 34 healthy-patient samples), and stated that efficacy had been demonstrated for 15 cancer types. These are company-reported development results, not a filing-reported commercial product or revenue milestone. The company reported no material change in risk factors from its prior Form 10-K and said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the registrant and corporate relationship: this is an ITUS Corporation filing, with Anixa Diagnostics identified as its subsidiary.
- Review the secured debenture’s payment status, interest burden, collateral and restrictions, including the stated June 1, 2017 payment deadline.
- Assess cash burn against management’s 12-month liquidity estimate and the subsequent offering proceeds.
- Verify the size, methodology and independent validation of the Cchek study results and the path to commercialization; the filing reports no revenue.
- Consider dilution from the rights offering, patent-settlement shares, subsequent public offering, and outstanding options and warrants.