ITUS Corporation (including Anixa Diagnostics): Q3 2017 Form 10-Q
Reporting period: Three and nine months ended July 31, 2017. The filing is by ITUS Corporation; Anixa Diagnostics is its subsidiary developing the Cchek cancer-detection platform.
Business context and results
Management identified Cchek as the company’s primary focus, with research conducted in collaboration with The Wistar Institute. ITUS also retained limited legacy patent-licensing operations. The period’s revenue came from a single, non-recurring patent license agreement.
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Revenue | 2017: $362,500; 2016: $100,000 | 2017: $362,500; 2016: $100,000 |
| Operating expenses | 2017: $2.09 million; 2016: $1.07 million | 2017: $4.70 million; 2016: $3.70 million |
| Operating loss | 2017: $1.73 million; 2016: $974,884 | 2017: $4.34 million; 2016: $3.60 million |
| Net loss | 2017: $1.79 million; 2016: $1.10 million | 2017: $3.22 million; 2016: $3.97 million |
| Net loss attributable to common stockholders | Not separately presented for the quarter | 2017: $5.23 million, including a $2.01 million deemed preferred-stock dividend; 2016: $3.97 million |
| Basic and diluted loss per share | 2017: $0.12; 2016: $0.13 | 2017: $0.47; 2016: $0.45 |
Margins were negative, reflecting operating losses; the filing does not present a meaningful positive operating margin. No income-tax provision was recorded.
Financial position and cash flows
- At July 31, 2017, cash and cash equivalents were $1.83 million and short-term certificates of deposit were $4.25 million, totaling $6.08 million in cash, equivalents and short-term investments. Total current assets were $6.45 million.
- Current liabilities were $2.93 million, including a $2.00 million secured debenture and $926,688 of accounts payable and accrued expenses. Working capital was approximately $3.52 million. The debenture bears 12% interest, is secured by company assets, and the remaining $2 million was due November 11, 2017.
- For the nine months, operating cash use was $3.06 million; investing cash use was $3.52 million, largely reflecting purchases of certificates of deposit; financing cash provided was $5.92 million. Cash and cash equivalents declined $655,000, while cash, equivalents and short-term investments increased about $2.85 million from October 31, 2016.
- Financing included approximately $4.20 million from a shareholder rights offering and $3.21 million from a public offering, partly offset by a $1.00 million debenture payment and $500,000 cash redemption of preferred stock. Common shares outstanding rose from 8.75 million to 15.12 million during the period.
Material changes and unusual items
- Nine-month revenue rose to $362,500 from $100,000, but remained dependent on a single one-time license in each period. The entire 2017 nine-month revenue was recorded in the July quarter.
- Nine-month operating expenses increased about $1.00 million. General and administrative expense rose about $904,000, principally due to severance-related compensation, higher investor/public-relations consulting and legal fees. R&D rose about $103,000, mainly due to increased Wistar collaboration costs.
- ITUS issued 947,606 shares to settle its patent acquisition obligation. The transaction produced a reported $1.55 million gain because the shares’ fair value was below the obligation’s carrying value.
- The Series A preferred-stock redemption involved cash, a secured debenture and a five-year warrant; the accounting for the transaction produced a $2.01 million deemed dividend attributable to common stockholders.
- Accrued severance costs were $352,928 at July 31; the company reported severance benefits of approximately $598,000, including accelerated option vesting expense of approximately $285,000. Payments were scheduled in installments from August 2017 through June 2018.
Outlook, risks and subsequent events
As of September 8, management believed existing cash, short-term investments and expected operating cash flows would fund activities and debt obligations for the next 12 months. This is management’s estimate, not a guarantee. The company warned that additional financing might be needed; equity or convertible-debt financing could dilute shareholders, and funding may not be available on acceptable terms or at all.
- On August 18, 2017, Nasdaq notified the company that its share price did not meet the $1.00 minimum bid requirement. ITUS had until February 14, 2018 to regain compliance; the notice had no immediate effect on listing.
- On September 6, 2017, the company repriced options covering 2,029,600 shares to an exercise price of $0.67. ITUS expected an additional non-cash compensation charge in Q4 but had not determined its amount.
- Management reported Cchek efficacy validation for 15 cancer types. These are company-reported development claims; the filing does not provide the underlying validation data or establish regulatory approval.
- The company reported no material change in risk factors from its prior annual report and stated that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether ITUS met Nasdaq’s minimum-bid requirement by the February 14, 2018 deadline and any subsequent listing developments.
- Repayment or refinancing of the $2.00 million secured debenture due November 11, 2017, and the effect of the 12% rate and security lien.
- Actual cash burn, available liquidity and financing needs relative to management’s 12-month sufficiency statement.
- Whether Cchek’s reported results are independently validated, clinically meaningful and on a path toward regulatory clearance and commercialization.
- The eventual expense from the September option repricing, and the continuing effects of share issuance, options and warrants on dilution.