10-Q 1 form10q.htm FORM 10-Q Form 10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2017

 

Commission file number 0-11254

 

 

ITUS Corporation

(Exact name of registrant as specified in its charter)

 

                     Delaware                                                                                              11-2622630     

       (State or other jurisdiction of                                                                                                                    (I.R.S. Employer

         incorporation or organization)                                                                                                                   Identification No.)

 

                                   12100 Wilshire Boulevard, Suite 1275                                                                                                                                                  

Los Angeles, CA                                                                                                         90025

(Address of principal executive offices)                                                                                                                  (Zip Code)

 

(310) 484-5200

(Registrant's telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X            No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X            No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer   [   ]  (Do not check if a smaller reporting company)

Smaller reporting company [X]

Emerging growth company   [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ____         No   X  

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

On May 25, 2017, the registrant had outstanding 15,120,239 shares of Common Stock, par value $.01 per share, which is the registrant’s only class of common stock.           


 


 

 

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

Item 1. 

Financial Statements.

Condensed Consolidated Balance Sheets as of April 30, 2017 (Unaudited) and October 31, 2016

3

   

Condensed Consolidated Statements of Operations (Unaudited) for the six months ended April 30, 2017 and 2016

4

            

Condensed Consolidated Statements of Operations (Unaudited) for the three months ended April 30, 2017 and 2016 

5

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the six months ended April 30 2017

6

   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended April 30, 2017 and 2016

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

20

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

26

Item 4.

Controls and Procedures.

26

PART II.  OTHER INFORMATION

Item 1.

Legal Proceedings.

27

Item 1A.

Risk Factors.

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

27

Item 3.

Defaults Upon Senior Securities.

27

Item 4.

Mine Safety Disclosures.

27

Item 5.

Other Information.

27

Item 6.

Exhibits.

27

SIGNATURES

                    

28

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

ITUS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

April 30,
 2017

October 31,

2016

ASSETS

Current assets:

 

 

 

 

Cash and cash equivalents

$

2,876,897

$

2,488,323

Short-term investments in certificates of deposit

 

2,250,000

 

750,000

Prepaid expenses and other current assets

 

64,647

162,069

Total current assets

 

5,191,544

 

3,400,392

Patents, net of accumulated amortization of $1,127,688 and $965,040, respectively

 

1,908,423

 

2,071,071

Property and equipment, net of accumulated depreciation of $68,228 and 
    $46,950, respectively

 

149,487

156,644

Total assets

$

7,249,454

 

$

5,628,107

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

Current liabilities:

Accounts payable and accrued expenses

$

660,023

 

$

468,756

Secured debenture (Note 7)

 

3,000,000

-

Total current liabilities

 

3,660,023

 

468,756

Patent acquisition obligation

 

-

 

4,171,876

Total liabilities

3,660,023

4,640,632

 

 

 

 

Commitments and contingencies (Note 11)

               

              

 

 

 

 

 

Shareholders’ equity:

Preferred stock, par value $100 per share; 19,860 shares authorized; no
    shares issued or outstanding

 

-

 

-

Series A convertible preferred stock, par value $100 per share; 140 shares
    authorized; -0- and 140 shares issued and outstanding, respectively

-

14,000

Common stock, par value $.01 per share; 24,000,000 shares authorized;
   11,694,863 and 8,752,387 shares issued and outstanding, respectively

 

116,949

 

87,524

Additional paid-in capital

156,066,446

152,051,144

Accumulated deficit

 

(152,593,964)

 

(151,165,193)

Total shareholders’ equity

3,589,431

987,475

 

 

 

Total liabilities and shareholders’ equity

$

7,249,454

$

5,628,107

The accompanying notes are an integral part of these condensed consolidated financial statements.


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Table of Contents

 

ITUS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

For the Six Months Ended

April 30,

2017

2016

Revenue

$

-

 

$

-

Operating costs and expenses:

 

 

 

 

 

Litigation and licensing expenses

2,346

75,162

Amortization of patents

 

162,648

 

 

162,648

Research and development expenses (including non-cash stock option
    compensation expenses of $148,628 and $91,442, respectively)

882,754

850,910

Marketing, general and administrative expenses (including non-cash stock
    option compensation expenses of $303,028 and $238,307, respectively)

 

1,559,230

 

 

1,532,106

Total operating costs and expenses

 

2,606,978

 

2,620,826

 

 

 

 

 

 

Loss from operations

(2,606,978)

(2,620,826)

 

 

 

 

 

 

Gain on extinguishment of patent acquisition obligation (Note 6)

1,547,608

-

 

 

 

 

 

 

Interest expense

(371,026)

(250,881)

 

 

 

 

 

 

Interest income 

 

1,625

 

6,724

 

 

 

 

 

 

Loss before income taxes

(1,428,771)

(2,864,983)

 

 

 

 

 

 

Provision for income taxes

 

-

 

-

 

 

 

 

 

 

Net loss

(1,428,771)

(2,864,983)

 

 

 

 

 

 

Deemed dividend to preferred stockholder (Note 7)

 

(2,008,775)

 

-

 

 

 

 

 

 

Net loss attributable to common stockholders

$

(3,437,546)

$

(2,864,983)

 

 

 

 

 

 

Net loss per common share:

Basic and diluted

$

(0.37)

 

$

(0.33)

Weighted average common shares outstanding:

 

 

 

 

 

Basic and diluted

9,236,351

8,731,489

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

ITUS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

For the Three Months Ended

April 30,

2017

2016

Revenue

$

-

 

$

-

Operating costs and expenses:

 

 

 

 

 

Litigation and licensing expenses

225

15,521

Amortization of patents

 

81,324

 

 

81,324

Research and development expenses (including non-cash stock option
    compensation expenses of $68,928 and $72,496, respectively)

 

431,124

 

 

392,589

Marketing, general and administrative expenses (including non-cash stock  
    option compensation expenses of $122,991 and $144,758 respectively)

 

699,345

 

 

658,953

Total operating costs and expenses

 

1,212,018

 

1,148,387

 

 

 

 

 

 

Loss from operations

(1,212,018)

(1,148,387)

 

 

 

 

 

 

Gain on extinguishment of patent acquisition obligation (Note 6)

1,547,608

-

 

 

 

 

 

 

Interest expense

(175,727)

(126,980)

 

 

 

 

 

 

Interest income 

 

626

 

3,473

 

 

 

 

 

 

Income (loss) before income taxes

160,489

(1,271,894)

 

 

 

 

 

 

Provision for income taxes

 

-

 

-

 

 

 

 

 

 

Net income (loss)

$

160,489

$

(1,271,894)

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

Basic

$

0.02

$

(0.15)

Diluted

$

0.02

 

$

(0.15)

Weighted average common shares outstanding:

 

 

 

 

 

Basic

9,734,171

8,736,024

Diluted

 

9,736,571

 

 

8,736,024

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

ITUS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED April 30, 2017

(UNAUDITED)

       

Additional

Paid-in

Capital

   

Total

Shareholders’

 Equity

Preferred Stock

Common Stock

Accumulated

 Deficit

Shares

 Par Value

Shares

 Par Value

Balance, October 31, 2016

140

 

$

14,000

 

8,752,387

 

$

87,524

 

$

152,051,144

 

$

(151,165,193)

 

$

987,475

Stock option compensation to employees and  directors

-

 

 

-

 

-

 

 

-

 

 

451,655

 

 

-

 

 

451,655

Common stock issued upon exercise of stock options

-

 

 

-

 

2,200

 

 

22

 

 

5,643

 

 

-

 

 

5,665

Common stock issued to consultants

-

 

 

-

 

3,463

 

 

35

 

 

17,776

 

 

-

 

 

17,811

Redemption of convertible preferred stock (Note 7)

(140)

 

 

(14,000)

 

-

 

 

-

 

 

(3,486,000)

 

 

-

 

 

(3,500,000)

Common stock issued to repay patent acquisition
    obligation (Note 6)

-

 

 

-

 

947,606

 

 

9,476

 

 

2,842,818

 

 

-

 

 

2,852,294

Common stock issued in shareholder rights offering

-

 

 

-

 

1,989,207

 

 

19,892

 

 

4,183,410

 

 

-

 

 

4,203,302

 

Net loss

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(1,428,771)

 

 

(1,428,771)

Balance, April 30, 2017

           -

 

$

-

 

11,694,863

 

$

116,949

 

$

156,066,446

 

$

(152,593,964)

 

$

3,589,431

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

 

ITUS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the six months ended

April 30,

2017

2016

Reconciliation of net loss to net cash used in operating activities:

 

 

 

 

 

Net loss

$

(1,428,771)

$

(2,864,983)

Stock option compensation to employees and directors

 

451,655

 

 

329,749

Common stock issued to consultants

17,811

11,361

Depreciation of property and equipment

 

21,278

 

 

13,881

Amortization of patents

162,648

162,648

Accretion of interest on patent acquisition obligations to interest expense

 

228,026

 

 

250,881

Accrued interest on secured debenture

30,000

-

Gain on extinguishment of patent acquisition obligation

 

(1,547,608)

 

 

-

Common stock issued to acquire patent license

-

11,800

Change in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

97,422

87,496

Accounts payable and accrued expenses

 

161,267

 

 

132,031

Royalties and contingent legal fees payable

 

-

 

(18,883)

Net cash used in operating activities

 

(1,806,272)

 

(1,884,019)

Cash flows from investing activities:

 

 

 

 

 

Disbursements to acquire short-term investments in certificates of deposit

(2,250,000)

(1,550,000)

Proceeds from maturities of short-term investments in certificates of deposit             

 

750,000

 

 

1,800,000

Payments for purchases of property and equipment

 

(14,121)

 

(141,110)

Net cash (used in) provided by investing activities

 

(1,514,121)

 

108,890

Cash flows from financing activities:

 

 

 

 

 

Redemption of convertible preferred stock

(500,000)

-

Proceeds from sale of common stock through a rights offering
    to shareholders

 

4,203,302

 

 

-

Proceeds from exercise of employee stock options

 

5,665

 

18,231

Net cash provided by financing activities

 

3,708,967

 

18,231

Net increase (decrease) in cash and cash equivalents

 

388,574

 

 

(1,756,898)

Cash and cash equivalents at beginning of period

 

2,488,323

 

4,369,219

Cash and cash equivalents at end of period

$

2,876,897

$

2,612,321

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

Redemption of Series A convertible preferred stock into secured
   debenture (Note 7)

$

(3,000,000)

$

-

Common stock issued to pay patent acquisition obligation (Note 6)

$

(4,399,902)

 

$

-

The accompanying notes are an integral part of these statements.

 

7


 

Table of Contents

 

ITUS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

 

1.         BUSINESS AND FUNDING

Description of Business

As used herein, “we,” “us,” “our,” the “Company” or “ITUS” means ITUS Corporation and its wholly-owned subsidiaries.  From inception through October 2012, our primary operations involved the development of patented technologies in the areas of thin-film displays and encryption.  Beginning in October of 2012 under the leadership of a new management team, we recapitalized the Company, changed the Company’s name and ticker symbol, relocated the Company’s headquarters, and modernized its systems.  In July of 2015, the Company’s stock was accepted for listing and began trading on the NASDAQ Capital Market.

 

In June of 2015, the Company announced the formation of a new subsidiary, Anixa Diagnostics Corporation (“Anixa”), to develop a platform for non-invasive blood tests for the early detection of cancer.  That platform is called CchekÔ .  In July of 2015, ITUS announced a collaborative research agreement with The Wistar Institute (“Wistar”), the nation’s first independent biomedical research institute and a leading National Cancer Institute designated cancer research center, for the purpose of validating our cancer detection methodologies and establishing protocols for identifying certain biomarkers in the blood which we identified and which are known to be associated with malignancies.  In August of 2016 ITUS announced the renewal and expansion of our relationship with Wistar. 

 

From October of 2015 through January of 2017, ITUS announced that we had demonstrated the efficacy of our CchekÔ early cancer detection platform with Breast Cancer, Lung Cancer Melanoma, Ovarian Cancer, Liver Cancer, Thyroid Cancer, Pancreatic Cancer, Appendiceal Cancer (cancer of the appendix), Uterine Cancer, Osteosarcoma (cancer of the bone), Leiomyosarcoma (cancer of the soft tissue), Liposarcoma (cancer of the connective tissue), Vulvar Cancer (cancer of the vulva), and Prostate Cancer, bringing the number of cancer types for which the efficacy of CchekÔ has been validated thus far to fifteen.

 

Over the next several quarters, we expect Cchek™ to be the primary focus of the Company.  As part of our legacy operations, the Company remains engaged in limited patent licensing activities in the area of encrypted audio/video conference calling.  We do not expect these activities to be a significant part of the Company’s ongoing operations.

 

In the past, our revenue has been derived from technology licensing and the sale of patented technologies, including in connection with the settlement of litigation.  In addition to Anixa, the Company may make investments in and form new companies to develop additional emerging technologies.

 

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Table of Contents

 

Funding and Management’s Plans

 

During the six months ended April 30, 2017, cash used in operating activities was approximately $1,806,000.  Net cash used by investing activities was approximately $1,514,000, which reflects the purchase of certificates of deposit totaling $2,250,000, offset by proceeds from the sale or maturity of certificates of deposit totaling $750,000 and the purchase of property and equipment of approximately $14,000.  Cash provided by financing activities was approximately $3,709,000, representing net proceeds from the sale of shares of common stock to Company shareholders through a rights offering receiving proceeds of approximately $4,203,000 and the exercise of stock options, offset by the redemption of our Series A Convertible Preferred Stock (the “Series A Preferred”) of $500,000.  As a result, our cash, cash equivalents and short-term investments at April 30, 2017 increased by approximately $1,889,000 to approximately $5,127,000 from approximately $3,238,000 at the end of fiscal year 2016.

 

Based on currently available information as of May 25, 2017, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows from operations will be sufficient to fund our activities and debt obligations for the next 12 months.  However, our projections of future cash needs and cash flows may differ from actual results.  To date, we have relied primarily upon cash from the public and private sale of equity and debt securities to generate the working capital needed to finance our operations.  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 and repay our indebtedness, we will be required to obtain more working capital.  We may seek to obtain working capital through sales of our equity securities or through bank credit facilities or public or private debt from various financial institutions where possible and as permitted pursuant to our existing indebtedness.  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.  Additionally, the sale of equity securities or issuance of debt securities may be subject to certain security holder approvals or may result in the downward adjustment of the exercise or conversion price of our outstanding securities.  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, it 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.

 

Subsequent Event

 

On May 16, 2017, the Company completed a registered public offering of 3,425,376 shares of common stock, generating net proceeds of approximately $3,214,000.  The Company intends to use the net proceeds from the offering for working capital and general corporate purposes, including the potential payment of corporate debt.

 

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As of May 25, 2017, significant balance sheet amounts affected by this offering are approximately as follows:

 

Cash, cash equivalents and short term investments

$

8,104,000

Total assets

$

10,227,000

Total shareholders’ equity

$

6,567,000

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, certain information and footnotes required by generally accepted accounting principles in annual financial statements have been omitted or condensed.  These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended October 31, 2016, as reported by us in our Annual Report on Form 10-K.  The October 31, 2016 consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”).  The condensed consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of April 30, 2017, and results of operations and cash flows for the interim periods represented.  The results of operations for the six and three months ended April 30, 2017 are not necessarily indicative of the results to be expected for the entire year.

 

Revenue Recognition

 

Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability of amounts is reasonably assured.

 

Patent Licensing

 

In certain instances, our past revenue arrangements have provided for the payment of contractually determined 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 had no further obligations.   As such, the earnings process was complete and revenue has been recognized upon the execution of the agreement, when collectability was reasonably assured, and when all other revenue recognition criteria were met.

 

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Intangible Assets

 

Our only identifiable intangible assets are patents and patent rights.  We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life.  We did not capitalize any patent acquisition costs during the six months ended April 30, 2017 and 2016. We recorded patent amortization expense of approximately $163,000 during each of the six month periods ended April 30, 2017 and 2016, respectively, and approximately $81,000 during each of the three month periods ended April 30, 2017 and 2016, respectively.

 

2.         STOCK BASED COMPENSATION

 

The Company maintains stock equity incentive plans under which the Company grants non-qualified stock options, stock appreciation rights, stock awards, performance awards, or stock units to employees, directors and consultants.

 

Stock Option Compensation Expense

 

The compensation cost for 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 ten years. We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $452,000 and $330,000 during the six months ended April 30, 2017 and 2016, respectively, and approximately $192,000 and $217,000 during the three months ended April 30, 2017 and 2016, respectively.

 

Stock Option Activity

 

During the six months ended April 30, 2017 and 2016, we granted options to purchase 106,000 shares and 545,000 shares of common stock, respectively, to employees and directors at exercise prices of $5.00 and $2.92 per share, respectively, pursuant to the ITUS Corporation 2010 Share Incentive Plan (the "2010 Share Plan”).  During the six months ended April 30, 2017 and 2016, stock options to purchase 2,200 and 7,080 shares of common stock, respectively, were exercised with aggregate proceeds of approximately $6,000 and $18,000, respectively.  

 

Stock Option Plans

As of April 30, 2017, we have two stock option plans:  the ITUS Corporation 2003 Share Incentive Plan (the "2003 Share Plan") and the 2010 Share Plan, which were adopted by our Board of Directors on April 21, 2003 and July 14, 2010, respectively. 

 

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The 2003 Share Plan provided for the grant of nonqualified stock options, stock appreciation rights, stock awards, performance awards and stock units to key employees, directors and consultants.  In accordance with the provisions of the 2003 Share Plan, the plan terminated with respect to the ability to grant future options on April 21, 2013.  Information regarding the 2003 Share Plan for the six months ended April 30, 2017 is as follows:

 

 

 

 

 Weighted

Average
Exercise Price
Per Share

 

 

 

 

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

Shares

 

 

Options Outstanding at October 31, 2016

225,600

 

$

18.69

 

 

 

Exercised

(2,200)

 

$

2.58

 

 

 

Forfeited

(34,400)

 

$

17.85

 

 

 

Options Outstanding and exercisable at

     April 30, 2017

189,000

 

$

19.03

 

$

390

 

The following table summarizes information about stock options outstanding and exercisable under the 2003 Share Plan as of April 30, 2017:

 

Number

Outstanding

and

Exercisable

Weighted Average

Remaining

Contractual Life

(in years)

 

 

 

 

 

Weighted

Average

Exercise Price

Range of

Exercise Prices

 

 

 

 

$1.79 - $7.75

39,000

1.32

 

$

2.92

$13.50 - $17.50

21,400

.45

 

$

16.46

$18.75 - $23.00

88,600

.37

 

$

22.13

$29.25

40,000

.31

 

$

29.25

 

The 2010 Share Plan provides for the grant of nonqualified stock options, stock appreciation rights, stock awards, performance awards and stock units to key employees, directors and consultants.  As of April 30, 2017, the 2010 Share Plan had 764,000 shares available for future grants.  Information regarding the 2010 Share Plan for the six months ended April 30, 2017 is as follows:

 

 

 

 

 Weighted

Average
Exercise Price
Per Share

 

Aggregate

Intrinsic

Value

 

 

 

 

 

Shares

 

 

Options Outstanding at October 31, 2016

1,080,872

 

$

3.12

 

 

 

Granted

106,000

 

$

5.00

 

 

 

Options Outstanding  at April 30, 2017

1,186,872

 

$

3.29

 

$

-

Options Exercisable at April 30, 2017

793,994

 

$

3.15

 

$

-

 

The following table summarizes information about stock options outstanding and exercisable under the 2010 Share Plan as of April 30, 2017:

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

Weighted

Average

Remaining

Contractual 
Life

(in years)

 

 

 

 

Weighted

Average

Remaining

Contractual 
Life 
(in years)

 

 

 

 

 

 

 

 

 

 

Weighted

Average

Exercise 
Price

 

 

 

 

Weighted

Average

Exercise Price

 

 

 

Range of

Exercise Prices

 

Number

Outstanding

 

 

Number

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$2.58 - $9.25

 

1,186,872

7.42

$

3.29

 

793,994

6.65

$

3.15

 

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In addition to options granted under the 2003 Share Plan and the 2010 Share Plan, the Board of Directors approved the grant of stock options to purchase 1,780,000 shares.  Information regarding stock options outstanding that were not granted under the 2003 Plan or the 2010 Plan for the six months ended April 30, 2017 is as follows:

 

 

 

 Weighted

Average 
Exercise

Price Per Share

 

Aggregate

Intrinsic

Value

 

 

 

 

 

Shares

 

 

Options Outstanding at October 31, 2016

1,780,000

 

$

2.70

 

 

 

Options Outstanding  and exercisable at

     April 30, 2017

1,780,000

 

$

2.70

 

$

-

 

The following table summarizes information about stock options outstanding and exercisable that were not granted under the 2003 Share Plan or the 2010 Share Plan as of April 30, 2017:

 

 

Number

Outstanding

and

Exercisable

 

Weighted Average

Remaining

Contractual Life

(in years)

 

 

 

 

 

 

 

 

Weighted

Average

Exercise 
Price

Range of

Exercise Prices

 

 

 

 

 

 

 

 

$2.58 - $5.56

 

1,780,000

 

5.26

 

$

2.70

 

Stock Awards

 

We account for stock awards granted to employees and consultants based on the grant date market price of the underlying common stock.  During the six months ended April 30, 2017 and 2016, we issued 3,463 shares and 3,701 shares, respectively, of common stock to consultants for services rendered.  We recorded consulting expense for the six months ended April 30, 2017 and 2016 of approximately $18,000 and $11,000, respectively, for the shares of common stock issued to consultants. 

 

3.         FAIR VALUE MEASUREMENTS

US GAAP defines fair value and establishes a framework for measuring fair value.  We have categorized our financial assets, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below.  If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

Financial assets and liabilities recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

 

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Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market which we have the ability to access at the measurement date.

 

Level 2 - Financial assets and liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.  

 

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset and liabilities.

 

The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of April 30, 2017:

 

 

Level 1

Level 2

Level 3

Total

 

 

 

 

 

      

 

 

      

 

 

 

Money market funds –  

    Cash equivalents

$

2,585,760

 

$

-

 

$

-

 

$

2,585,760

Certificates of deposit –

     Short-term investments

 

-

 

 

2,250,000

 

 

-

 

 

2,250,000

Total financial assets

$

2,585,760

 

$

2,250,000

 

$

-

 

$

4,835,760

 

The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2016:

 

 

Level 1

Level 2

Level 3

Total

 

 

 

 

 

      

 

 

      

 

 

 

Money market funds – 

    Cash equivalents

$

1,899,136

 

$

-

 

$

-

 

$

1,899,136

Certificates of deposit –

    Short-term investments

 

-

 

 

750,000

 

 

-

 

 

750,000

Total financial assets

$

1,899,136

 

$

750,000

 

$

-

 

$

2,649,136

 

The following table presents the hierarchy for our financial liabilities measured at fair value on the transaction date and then adjusted for the subsequent accretion of interest as of April 30, 2017:

 

  

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

      

 

 

      

 

 

 

Patent acquisition obligation

$

-

 

$

-

 

$

-

 

$

-

 

The following table presents the hierarchy for our financial liabilities measured at fair value on the transaction date and then adjusted for the subsequent accretion of interest as of October 31, 2016:

 

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Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

      

 

 

      

 

 

 

Patent acquisition obligation

$

-

 

$

-

 

$

4,171,876 

 

$

4,171,876

 

The following table sets forth the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

Patent acquisition obligation

 

 

Balance October 31, 2016

$

4,171,876

Accreted interest on patent obligation

 

228,026

Extinguishment of patent obligation

 

(4,399,902)

Balance April 30, 2017

$

-

 

Our non-financial assets that are measured on a non-recurring basis include our patents and property and equipment which are measured using fair value techniques whenever events or changes in circumstances indicate a condition of impairment exists.  The estimated fair value of prepaid expenses, accounts payable and accrued expenses approximates their individual carrying amounts due to the short term nature of these measurements.  Cash and cash equivalents are stated at carrying value which approximates fair value. 

 

 

4.         INVESTMENTS

 

At April 30, 2017 and October 31, 2016, we had certificates of deposit of $2,250,000 and $750,000, respectively, which were classified as short-term investments and reported at fair value. 

 

5.         ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expense consist of the following as of:

 

 

April 30,

2017

 

October 31,

2016

 

 

Accounts payable

$

448,353

 

$

373,224

Payroll and related expenses

 

59,497

 

 

49,901

Accrued interest on secured debenture

 

30,000

 

 

-

Accrued other

 

122,173

 

 

45,631

 

$

660,023

 

$

468,756

 

6.         PATENT ACQUISITION OBLIGATION

 

            On March 27, 2017, the Company issued 947,606 shares of common stock to Meetrix Communications, Inc. (“Meetrix”) in satisfaction of the obligation owed by us to Meetrix pursuant to the terms of the Patent Acquisition Agreement, dated November 11, 2013 between the Company and Meetrix.  The carrying value of the patent acquisition obligation at the date of extinguishment was approximately $4,400,000.  The fair value of the shares of common stock issued to satisfy the obligation on the date of extinguishment was approximately $2,843,000, resulting in the recognition of a gain on the debt extinguishment of approximately $1,548,000.

 

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7.         PREFERRED STOCK REDEMPTION

 

On November 11, 2016, the holder of all our outstanding Series A Preferred with an aggregate stated value of $3,500,000 exercised its right of redemption to receive such amount from proceeds from the sale of the Company’s equity securities.  On December 6, 2016, we entered into an agreement with the holder of the Series A Preferred setting forth the terms under which such redemption would take place (the “Series A Redemption Terms”).  Pursuant to the Series A Redemption Terms, on December 9, 2016 the holder of the Series A Preferred received (i) $500,000 in cash, (ii) a 12% secured debenture evidencing the remaining $3,000,000 amount to be redeemed, $1,000,000 of which is due on or before June 1, 2017 and the remainder of which is due November 11, 2017 (the “Redemption Debenture”), and (iii) a 5 year warrant to purchase 500,000 shares of the Company’s common stock at an exercise price equal to 10% below the thirty (30) day volume weighted average closing price of our common stock at closing (the “Redemption Warrant”). The Redemption Debenture is secured by a lien on the Company’s assets and prohibits the Company from incurring any senior indebtedness other than equipment financing in connection with the Company’s business.

 

The difference between the fair value of the consideration given to the holder of our Series A Preferred and the carrying value of the Series A Preferred represents a return to the preferred stockholder which is treated in a similar manner as that of dividends paid on preferred stock.  In the redemption, the Series A Preferred holder received $500,000 in cash, the Redemption Debenture with a present value of approximately $2,999,000 and the Redemption Warrant with a fair value of approximately $2,801,000, determined using the Black Scholes pricing model, and waived the Series A Preferred’s conversion right with an intrinsic value of approximately $792,000, resulting in total consideration given to the Series A Preferred holder of approximately $5,508,000.  The difference between the fair value of the consideration and the $3,500,000 carrying value of the Series A Preferred resulted in a deemed dividend to the Series A Preferred holder of approximately $2,008,000.

 

8.         NET INCOME (LOSS) PER SHARE OF COMMON STOCK

 

Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding.  Diluted net income (loss) per common share (“Diluted EPS”) is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding.  The treasury stock method reduces the dilutive effect of potentially dilutive securities as it assumes that any cash proceeds (from the issuance of potentially dilutive securities) are used to buy back shares at the average share price during the period.

 

Diluted EPS for the six months ended April 30, 2017 and for the six and three months ended April 30, 2016 is the same as Basic EPS, as the inclusion of the effect of common share equivalents then outstanding would be anti-dilutive.  For this reason, excluded from the calculation of Diluted EPS for the six months ended April 30, 2017 were stock options to purchase 3,155,872 shares and warrants to purchase 837,400 shares and for the six and three months ended April 30, 2016 were stock options to purchase 3,138,472 shares, warrants to purchase 707,387 shares and preferred stock convertible into 739,958 shares.

 

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Dilutive EPS for the three months ended April 30, 2017 excluded stock options to purchase 3,153,472 shares and warrants to purchase 837,400 shares because their effect would be antidilutive.  The following is a reconciliation between basic weighted average common shares outstanding and dilutive weighted average common shares outstanding for the three months ended April 30, 2017:

 

 For the Three Months Ended

April 30, 2017

Basic weighted average common shares outstanding

9,734,171

Effect of stock options

2,400

Dilutive weighted average common shares outstanding

9,736,571

 

9.         EFFECT OF RECENTLY ADOPTED AND ISSUED PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers.  This amendment updates addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services.  This standard update was effective for interim and annual reporting periods beginning after December 15, 2016, and were to be applied retrospectively or the cumulative effect as of the date of adoption, with early application not permitted.  In July 2015, a one-year deferral of the effective date of the new guidance was approved.  We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is currently ongoing.

 

In August 2014, the FASB issued Accounting Standards Update 2014-15 (“ASU 2014-15”).  This amendment requires management to assess an entity’s ability to continue as a going concern every reporting period including interim periods, and to provide related footnote disclosure in certain circumstances. Adoption of this standard is required for annual periods ending after December 15, 2016 and are to be applied retrospectively or the cumulative effect as of the date of adoption.  The adoption of this amendment on November 1, 2016 did not have an impact on our consolidated financial statements and related disclosures.

 

In November 2015, the FASB issued Accounting Standards Update 2015-17 (“ASU 2015-17”) to simplify the presentation of deferred taxes. This amendment requires that all deferred tax assets and liabilities, along with any related valuation allowances, be classified as noncurrent on the balance sheet.  Adoption of this standard is required for annual periods beginning after December 15, 2016.  The adoption of this amendment on November 1, 2016 did not have an impact on our consolidated financial statements and related disclosures.

 

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In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”) which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities.  The new lease standard does not substantially change lessor accounting. For public companies, the standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method.  The requirements of this standard include a significant increase in required disclosures.  We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is ongoing.

 

In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”) that changes the accounting for certain aspects of share-based payments to employees.  The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur.  The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted.  We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is ongoing.

 

In May 2017, the FASB issued Accounting Standards Update 2017-09 (“ASU 2017-09”) that provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting.  This update is effective for all entities for fiscal years beginning after December 15, 2017, and interim periods within those years.  Early adoption is permitted.  We began a detailed assessment of the impact that this guidance will have on our consolidated financial statements and related disclosures, and our analysis is ongoing.

 

10.       INCOME TAXES

 

We file Federal, New York, California and Pennsylvania state income tax returns.  Due to net operating losses, the statute of limitations for Federal and New York State income tax returns remains open to examination by taxing authorities since the fiscal year ended October 31, 1997.  We account for interest and penalties related to income tax matters, if any, in marketing, general and administrative expenses. There are no unrecognized income tax benefits as of April 30, 2017 and October 31, 2016.

 

We recognize deferred tax assets and liabilities for the estimated future tax effects of events that have been recognized in our financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. We have substantial net operating loss carryforwards for Federal and New York State income tax returns. We have provided a full valuation allowance against our deferred tax asset due to our historical pre-tax losses and the uncertainty regarding the realizability of these deferred tax assets.

 

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11.       COMMITMENT AND CONTINGENCES 

 

Litigation Matters

 

Other than suits we bring to enforce our patent rights we are not a party to any material pending legal proceedings other than that which arise in the ordinary course of business.  We believe that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.  

 

GENERAL

 

As used herein, “we,” “us,” “our,” the “Company” or “ITUS” means ITUS Corporation and its wholly-owned subsidiaries.  From inception through October 2012, our primary operations involved the development of patented technologies in the areas of thin-film displays and encryption.  Beginning in October of 2012 under the leadership of a new management team, we recapitalized the Company, changed the Company’s name and ticker symbol, relocated the Company’s headquarters, and modernized its systems.  In July of 2015, the Company’s stock was accepted for listing and began trading on the NASDAQ Capital Market.

 

In June of 2015, the Company announced the formation of a new subsidiary, Anixa Diagnostics Corporation (“Anixa”), to develop a platform for non-invasive blood tests for the early detection of cancer.  That platform is called CchekÔ .  In July of 2015, ITUS announced a collaborative research agreement with The Wistar Institute (“Wistar”), the nation’s first independent biomedical research institute and a leading National Cancer Institute designated cancer research center, for the purpose of validating our cancer detection methodologies and establishing protocols for identifying certain biomarkers in the blood which we identified and which are known to be associated with malignancies.  In August of 2016 ITUS announced the renewal and expansion of our relationship with Wistar.  In October of 2015, ITUS and Wistar announced favorable results from initial testing of a small group of Breast Cancer patients and healthy controls.  One hundred percent (100%) of the blood samples tested from patients with varying stages of Breast Cancer showed the presence of the biomarkers we identified, and none of the healthy patient blood samples contained the biomarkers.  Breast Cancer is the second most common cancer in the United States and throughout the world.

 

In April of 2016, ITUS announced that we had demonstrated the efficacy of our CchekÔ early cancer detection platform with Lung Cancer.  Lung cancer is the leading cause of death among cancers in the U.S. and throughout the world, accounting for approximately 27 percent of all cancer related deaths in the U.S. and 19 percent worldwide.  In September of 2016, ITUS announced that we had demonstrated the efficacy of our CchekÔ early cancer detection platform with Colon Cancer. Colon Cancer is the third most common cancer in men and the second most common cancer in woman worldwide, with approximately 1.4 million new cases diagnosed each year, and approximately 700,000 deaths. At the end of September 2016 through the end of October 2016, the Company made similar announcements with respect to the efficacy of our CchekÔ early cancer detection platform for Melanoma, Ovarian Cancer, Liver Cancer, Thyroid Cancer, and Pancreatic Cancer. On November 15, 2016, ITUS announced that we had demonstrated the efficacy of our CchekÔ early cancer detection platform with six additional cancer types including Appendiceal Cancer (cancer of the appendix), Uterine Cancer, Osteosarcoma (cancer of the bone), Leiomyosarcoma (cancer of the soft tissue), Liposarcoma (cancer of the connective tissue), and Vulvar Cancer (cancer of the vulva).

 

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On December 7, 2016, ITUS announced preliminary results from itsCchek™  cancer patient efficacy study.  Using its most recent protocols and methods for measuring a patient’s immunological response to a malignancy, the Company achieved sensitivity of 92% and specificity of 92% for 88 patient samples, including 54 samples from patients with multiple types and severities of cancer, and 34 healthy patients. 

 

On January 30, 2017, the Company announced that we had demonstrated the efficacy of CchekÔ for Prostate Cancer, bringing the number of cancer types for which the efficacy of CchekÔ has been validated thus far to fifteen.

 

Over the next several quarters, we expect Cchek™ to be the primary focus of the Company.  As part of our legacy operations, the Company remains engaged in limited patent licensing activities in the area of encrypted audio/video conference calling.  We do not expect these activities to be a significant part of the Company’s ongoing operations.

In the past, our revenue has been derived from technology licensing and the sale of patented technologies, including in connection with the settlement of litigation.  In addition to Anixa, the Company may make investments in and form new companies to develop additional emerging technologies.

RESULTS OF OPERATIONS

 

Six months ended April 30, 2017 compared with six months ended April 30, 2016

 

Revenue

 

We had no revenue in the six month periods ended April 30, 2017 and 2016.

 

Litigation and Licensing Expenses

 

Litigation and licensing expenses were approximately $2,000 in the six months ended April 30, 2017 compared to approximately $75,000 in the comparable prior year period.  Litigation and licensing expenses in the prior period were primarily related to our  encrypted audio/video conference calling patents.  Litigation and licensing expenses, other than contingent legal fees, are expensed in the period incurred. 

 

Amortization of Patents

 

Amortization of patents was approximately $163,000 in each of the six month periods ended April 30, 2017 and 2016, respectively.  We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. 

 

Research and Development Expenses

 

Research and development expenses related primarily to the development of our Cchek™ early cancer detection platform and increased by approximately $32,000 to approximately $883,000 in the six months ended April 30, 2017, from approximately $851,000 in the six months ended April 30, 2016.  The increase in research and development expenses was primarily due to an increase in patent development costs related to our Cchek™ platform of approximately $100,000 and an increase in costs related to our collaboration with Wistar of approximately $36,000, offset by a decrease in employee compensation and related costs of approximately $88,000 and reduced outside development costs associated with our thin-film display technology of approximately $21,000.

 

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Marketing, General and Administrative Expenses

 

Marketing, general and administrative expenses increased by approximately $27,000 to approximately $1,559,000 in the six months ended April 30, 2017, from approximately $1,532,000 in the six months ended April 30, 2016. The increase in marketing, general and administrative expenses was principally due to an increase in employee compensation expense of approximately $41,000 and an increase in corporate insurance costs of approximately $30,000, offset by a decrease in consulting expense of approximately $54,000.

 

Gain on Extinguishment of Patent Acquisition Obligation

 

The gain on extinguishment of patent acquisition obligation of approximately $1,548,000 resulted from the difference in the carrying value of the patent acquisition obligation and the fair value of the shares of common stock issued to satisfy the obligation on the date of extinguishment.

 

Interest Expense

 

Interest expense increased by approximately $120,000 to approximately $371,000 for the six months ended April 30, 2017 from approximately $251,000 in the six months ended April 30, 2016.  The increase in interest expense was principally due to $143,000 of interest related to the secured debenture issued in December 2017, offset by the early extinguishment of the patent acquisition obligation.  The remaining interest expense for both periods presented represents the accreted interest on our patent acquisition obligation through the extinguishment date.

 

Interest Income

 

Interest income decreased to approximately $2,000 in the six months ended April 30, 2017 compared to approximately $7,000 in the six months ended April 30, 2016 due to a decrease in the amount invested in money market funds and certificates of deposit during the current period.

 

Deemed Dividend to Preferred Stockholder

 

The deemed dividend to preferred stockholder of approximately $2,008,000 resulted from the redemption of our Series A Preferred. The difference between the fair value of the consideration given to the holder of our Series A Preferred and the carrying value of the Series A Preferred represented a return to the preferred stockholder and was treated in a similar manner as that of dividends paid on preferred stock.

 

Three months ended April 30, 2017 compared with three months ended April 30, 2016

 

Revenue

 

We had no revenue in the three month periods ended April 30, 2017 and 2016.

 

Litigation and Licensing Expenses

 

Litigation and licensing expenses were approximately $200 in the three months ended April 30, 2017 compared to approximately $16,000 in the comparable prior year period.  Litigation and licensing expenses, other than contingent legal fees, are expensed in the period incurred.

 

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Amortization of Patents

 

Amortization of patents was approximately $81,000 in each of the three month periods ended April 30, 2017 and 2016, respectively.  We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. 

 

Research and Development Expenses

 

Research and development expenses related primarily to the development of ourCchek™ early cancer detection platform and increased by approximately $38,000 to approximately $431,000 in the three months ended April 30, 2017, from approximately $393,000 in the three months ended April 30, 2016.  The increase in research and development expenses was primarily due to an increase in patent development costs related to our Cchek™ platform.

 

Marketing, General and Administrative Expenses

 

Marketing, general and administrative expenses increased by approximately $40,000 to approximately $699,000 in the three months ended April 30, 2017, from approximately $659,000 in the three months ended April 30, 2016. The increase in marketing, general and administrative expenses was principally due to an increase in legal and auditing fees of approximately $32,000 and an increase in corporate insurance costs of approximately $11,000, offset by a decrease in investor relations expenses of approximately $25,000.

 

Gain on Extinguishment of Patent Acquisition Obligation

 

The gain on extinguishment of patent acquisition obligation of approximately $1,548,000 resulted from the difference in the carrying value of the patent acquisition obligation and the fair value of the shares of common stock issued to satisfy the obligation on the date of extinguishment.

 

Interest Expense

 

Interest expense increased by approximately $49,000 to approximately $176,000 for the three months ended April 30, 2017 from approximately $127,000 in the three months ended April 30, 2016.  The increase in interest expense was principally due to $89,000 of interest related to the secured debenture issued in December 2017, offset by the early extinguishment of the patent acquisition obligation.  The remaining interest expense for both periods presented represents the accreted interest on our patent acquisition obligation through the extinguishment date.

 

Interest Income

 

Interest income decreased to approximately $600 in the three months ended April 30, 2017 compared to approximately $3,000 in the three months ended April 30, 2016 due to a decrease in the amount invested in money market funds and certificates of deposit during the current period.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash, cash equivalents and short-term investments.

 

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Based on currently available information as of May 25, 2017, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows from operations will be sufficient to fund our activities and debt obligations for the next 12 months.  However, our projections of future cash needs and cash flows may differ from actual results.  To date, we have relied primarily upon cash from the public and private sale of equity and debt securities to generate the working capital needed to finance our operations.  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 and repay our indebtedness, we will be required to obtain more working capital.  We may seek to obtain working capital through sales of our equity securities or through bank credit facilities or public or private debt from various financial institutions where possible and as permitted pursuant to our existing indebtedness.  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.  Additionally, the sale of equity securities or issuance of debt securities may be subject to certain security holder approvals or may result in the downward adjustment of the exercise or conversion price of our outstanding securities.  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, it 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.

 

During the six months ended April 30, 2017, cash used in operating activities was approximately $1,806,000.  Net cash used by investing activities was approximately $1,514,000, which reflects the purchase of certificates of deposit totaling $2,250,000, offset by proceeds from the sale or maturity of certificates of deposit totaling $750,000 and the purchase of property and equipment of approximately $14,000.  Cash provided by financing activities was approximately $3,709,000, representing net proceeds from the sale of shares of common stock to Company shareholders through a rights offering receiving proceeds of approximately $4,203,000 and the exercise of stock options, offset by the redemption of our Series A Convertible Preferred Stock (the “Series A Preferred”).  As a result, our cash, cash equivalents and short-term investments at April 30, 2017 increased by approximately $1,889,000 to approximately $5,127,000 from approximately $3,238,000 at the end of fiscal year 2016.

 

On May 16, 2017, the Company completed a registered public offering of 3,425,376 shares of common stock, generating net proceeds of approximately $3,214,000.  The Company intends to use the net proceeds from the offering for working capital and general corporate purposes, including the potential payment of corporate debt.  As of May 25, 2017, the Company has cash, cash equivalents and short term investments of approximately $8,104,000.

 

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CRITIAL 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 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 3 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, the following accounting policies require our most difficult, subjective or complex judgments:

 

·         Revenue Recognition; and

·         Stock-Based Compensation

Revenue Recognition

 

Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability of amounts is reasonably assured.

Stock-Based Compensation

 

The compensation cost for 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 ten years.  The Black-Scholes pricing model requires the input of highly subjective assumptions.  These variables include, but are not limited to, our stock price volatility over the term of the stock options, and actual and projected employee stock option exercise behaviors. We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $452,000 and $330,000 during the six months ended April 30, 2017 and 2016, respectively.

 

EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS

 

We discuss the effect of recently issued pronouncements in the Notes to our Condensed Consolidated Financial Statements.

 

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FORWARD-LOOKING STATEMENTS

 

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 (the “Securities Act”), 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, 2016 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.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

As of April 30, 2017, we had investments in short-term, fixed rate and highly liquid instruments that have historically been reinvested when they mature throughout the year. Although our existing instruments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on these securities could be affected at the time of reinvestment, if any.

 

Item 4.  Controls and Procedures.

 

We carried out an evaluation, under the supervision and with the participation of our management including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. 

 

There was no change in our internal control over financial reporting during the second quarter of fiscal year 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings. 

Other than suits we bring to enforce our patent rights we are not a party to any material pending legal proceedings other than that which arise in the ordinary course of business.  We believe that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors.

 

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.   

 

During the three months ended April 30, 2017, the Company did not issue any unregistered shares.

 

Item 3.  Defaults Upon Senior Securities.  None.

 

Item 4Mine Safety Disclosures.  Not Applicable.

 

Item 5.  Other Information.

 

            (a)        On May 16, 2017, the Company closed a registered public offering of 3,425,376 shares of common stock, generating gross proceeds of approximately $3,597,000.

 

(b)        There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors.

 

Item 6.  Exhibits.

 

31.1     Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 26, 2017.

 

31.2     Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 26, 2017.

 

32.1     Statement of Chief Executive Officer, pursuant to Section 1350 of Title 18 of the United States Code, dated May 26, 2017.

 

32.2     Statement of Chief Financial Officer, pursuant to Section 1350 of Title 18 of the United States Code, dated May 26, 2017.


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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ITUS CORPORATION

By:

/s/ Robert A. Berman

Robert A. Berman

President and Chief Executive Officer  

May 26, 2017 

(Principal Executive Officer)

By:

/s/ Michael J. Catelani

Michael J. Catelani

Chief Financial Officer

(Principal Financial and

May 26, 2017 

Accounting Officer)



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