General
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, you should refer to our Consolidated Financial Statements
and the notes related thereto.
Results of Operations
Fiscal Year ended October 31, 2019 compared with Fiscal Year ended October 31,
2018
Revenue
In fiscal year 2019, we recorded revenue of $250,000 from one license
agreement. In fiscal year 2018, we recorded revenue of approximately $1,113,000
from two license agreements. These license agreements each provided for a
one-time, non-recurring, lump sum payment in exchange for non-exclusive
retroactive and future licenses, and/or covenants not to sue. Pursuant to the
terms of these agreements, we have no further obligations with respect to the
granted intellectual property rights, including no obligation to maintain or
upgrade the technology, or provide future support or services. Accordingly, the
performance obligations from these licenses were satisfied and 100% of the
revenue was recognized upon execution of the license agreement. As discussed in
Note 1 to our Consolidated Financial Statements, as part of our legacy
operations, the Company remains engaged in limited patent licensing activities
which we do not expect to be a significant part of our ongoing operations or
revenue.
Inventor Royalties, Contingent Legal Fees, Litigation and Licensing Expenses
Related to Patent Assertion
Inventor royalties, contingent legal fees, litigation and licensing expenses
related to patent assertion activities decreased by approximately $602,000 in
fiscal year 2019, to approximately $166,000, from approximately $768,000 in
fiscal year 2018. The decrease was primarily due to the decrease in related
revenues. Inventor royalties and contingent legal fees are expensed in the
period that the related revenues are recognized. Litigation and licensing
expenses related to patent assertion, other than contingent legal fees, are
expensed in the period incurred.
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Amortization of Patents
Amortization of patents increased by approximately $94,000 in fiscal year 2019,
to approximately $419,000, from approximately $325,000 in fiscal year 2018. We
capitalize patent and patent rights acquisition costs and amortize the cost over
the estimated economic useful life. The increase in amortization of patents was
due to a reduction in the estimated economic useful life of capitalized
patents. During fiscal year 2019, we did not capitalize any patents or patent
rights.
Research and Development Expenses
Research and development expenses are related to the development of our cancer
diagnostics and therapeutics programs and decreased by approximately $1,340,000
to approximately $5,473,000 in fiscal year 2019, from approximately $6,813,000
in fiscal year 2018. The decrease in research and development expenses was
primarily due to a decrease of approximately $1,410,000 in employee stock option
compensation expense, a decrease in employee stock award compensation expense of
approximately $351,000 and a decrease in license fees of approximately $190,000,
offset by an increase in Certainty's outside research and development expense,
excluding license expense, primarily related to its collaboration agreement with
Moffitt of approximately $344,000, an increase in Anixa Diagnostics' outside
research and development expense, excluding license expense, primarily related
to its agreement with our development partner, ResearchDx, of approximately
$193,000 and an increase in depreciation expense of approximately $30,000.
License fees in the fiscal year 2019 are related to our license agreement with
Cleveland Clinic. License fees in fiscal year 2018 are related to our license
agreement with Wistar.
General and Administrative Expenses
General and administrative expenses decreased by approximately $1,249,000 to
approximately $5,663,000 in fiscal year 2019, from approximately $6,912,000 in
fiscal year 2018. The decrease in general and administrative expenses was
principally due to a decrease in employee stock option compensation expense of
approximately $747,000, a decrease in employee stock award compensation expense
of approximately $555,000, a decrease in consultant stock option expense of
approximately $137,000, a decrease in outside services of approximately $63,000,
a decrease in investor and public relations expense of approximately $59,000 and
a decrease in rent expense of approximately $54,000, offset by patent expense
reimbursement to Cleveland Clinic of approximately $164,000, an increase in
corporate insurance expense of approximately $140,000 primarily due to an
increase in our directors and officers insurance premium and an increase in
employee compensation and related costs, other than equity-based compensation,
of approximately $46,000.
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Impairment in Carrying Amount of Patent Assets
The impairment in carrying amount of patent assets related to our legacy patent
licensing activities of approximately $419,000 in the fiscal year ended 2019
resulted from the write down of the value of our patent assets to the estimated
undiscounted future cash flows we anticipated receiving from the patent assets
as of January 31, 2019 of approximately $168,000. The impairment in carrying
amount of patent assets related to our legacy patent licensing activities of
approximately $583,000 in the fiscal year 2018 resulted from the write down of
the value of our patent assets to the estimated undiscounted future cash flows
we anticipated receiving from the patent assets as of October 31, 2018 of
approximately $838,000. Our estimates of future cash flows were based on our
most recent assessment of the market for potential licensees, as well as the
status of ongoing negotiations with potential licensees.
Interest Income
Interest income increased to approximately $71,000 in fiscal year 2019 compared
to approximately $46,000 in fiscal year 2018, due to an increase in funds
available for short-term investments.
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to noncontrolling interest, representing Wistar's 5%
ownership interest in Certainty's net loss, decreased by approximately $75,000
to approximately $172,000 in fiscal year 2019, from approximately $247,000 in
fiscal year 2018, as Certainty's net loss decreased. The decrease in
Certainty's net loss was primarily due to decreases in employee stock option
compensation expense and employee stock award compensation expense.
Liquidity and Capital Resources
Our primary sources of liquidity are cash, cash equivalents and short-term
investments.
Based on currently available information as of January 9, 2020, we believe that
our existing cash, cash equivalents, short-term investments and expected cash
flows will be sufficient to fund our activities for the next twelve months. We
have implemented a business model that conserves funds by collaborating with
third parties to develop our technologies. However, our projections of future
cash needs and cash flows may differ from actual results. 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, or if we elect to invest in or acquire a company or companies or new
technology or technologies that are synergistic with or complementary to our
technologies, we may be required to obtain more working capital. During fiscal
year 2019, we raised approximately $5,527,000 through an at-the-market equity
offering of 1,363,872 shares of common stock (as of October 31, 2019 an
additional 112,238 shares were available for sale under our at-the-market equity
program, which shares were sold in November 2019). Further, we have an
additional at-the-market equity offering under which we may issue up to $50
million of common stock, which is currently effective and under which we
commenced selling shares in November 2019, and which may remain available to us
in the future. We may seek to obtain working capital during our fiscal year
2020 or thereafter through sales of our equity securities or through bank credit
facilities or public or private debt from various financial institutions where
possible. 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, such failure 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.
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During the year ended October 31, 2019, cash used in operating activities was
approximately $4,773,000. Cash used in investing activities was approximately
$525,000, resulting from the purchases of certificates of deposit totaling
$3,850,000 and the purchase of property and equipment of approximately $175,000,
which was offset by the proceeds on maturities of certificates of deposit
totaling $3,500,000. Cash provided by financing activities was approximately
$5,734,000, resulting from the sale of 1,363,872 shares of common stock in an
at-the-market equity offering of approximately $5,527,000, the proceeds from
exercise of stock options of approximately $122,000, the proceeds from
settlement of a shareholder derivative complaint of approximately $45,000 and
the proceeds from the sale of common stock pursuant to employee stock purchase
plan of approximately $39,000. As a result, our cash, cash equivalents, and
short-term investments at October 31, 2019 increased approximately $786,000 to
approximately $5,842,000 from approximately $5,056,000 at the end of fiscal year
2018.
Off-Balance Sheet Arrangements
We have no variable interest entities or other significant off-balance sheet
obligation arrangements.
Critical Accounting Policies
The Company's 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 2 to
our Consolidated Financial Statements, the following accounting policies require
our most difficult, subjective or complex judgments:
º Revenue Recognition; and
º Stock-Based Compensation
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Revenue Recognition
Our revenue has been derived solely from technology licensing and the sale of
patented technologies. Revenue is recognized upon transfer of control of
intellectual property rights and satisfaction of other contractual performance
obligations to licensees in an amount that reflects the consideration we expect
to receive.
On November 1, 2018 we adopted Accounting Standards Update 2014-09 ("ASU
2014-09"), Revenue from Contracts with Customers. Upon adoption of ASU 2014-09
we are required to make certain judgments and estimates in connection with the
accounting for revenue. Such areas may include determining the existence of a
contract and identifying each party's rights and obligations to transfer goods
and services, identifying the performance obligations in the contract,
determining the transaction price and allocating the transaction price to
separate performance obligations, estimating the timing of satisfaction of
performance obligations, determining whether a promise to grant a license is
distinct from other promised goods or services and evaluating whether a license
transfers to a customer at a point in time or over time.
Our revenue arrangements provide for the payment of contractually determined,
one-time, paid-up license 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 have no further
obligations with respect to the granted intellectual property rights, including
no obligation to maintain or upgrade the technology, or provide future support
or services. Licensees obtained control of the intellectual property rights
they have acquired upon execution of the agreement. As such, the performance
obligation is satisfied and revenue is recognized upon the execution of the
agreement.
Stock-Based Compensation
The compensation cost for service-based 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 expensed on a straight-line basis
over the requisite service period (the vesting period of the stock option). For
employee options vesting if the trading price of the Company's common stock
exceeds certain price targets, we use a Monte Carlo Simulation in estimating the
fair value at grant date and recognize compensation cost over the implied
service period.
For stock awards granted to employees and directors that vest at date of grant
we recognize expense based on the grant date market price of the underlying
common stock. For restricted stock awards vesting upon achievement of a price
target of our common stock we use a Monte Carlo Simulation in estimating the
fair value at grant date and recognize compensation cost over the implied
service period (median time to vest).
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On November 1, 2018 we adopted Accounting Standards Update 2018-07 ("ASU
2018-027") for stock-based compensation to non-employees. Upon adoption of ASU
2018-07 we estimated the fair value of unvested awards at the date of adoption,
using the Black-Scholes pricing model. Future grants to consultants will be
measured at the grant date, based on the fair value of the award using the
Black-Scholes pricing model, consistent with our policy for grants to employees
and directors.
The Black-Scholes pricing model and the Monte Carlo Simulation we use to
estimate fair values requires valuation assumptions of expected term, expected
volatility, risk-free interest rates and expected dividend yield. The expected
term of stock options represents the weighted average period the stock options
are expected to remain outstanding. For employees we use the simplified method,
which is a weighted average of the vesting term and contractual term, to
determine expected term. The simplified method was adopted since we do not
believe that historical experience is representative of future performance
because of the impact of the changes in our operations and the change in terms
from historical options. For consultants we use the contract term for expected
term. We estimate the expected volatility of our shares of common stock based
upon the historical volatility of our share price over a period of time equal to
the expected term of the grants. We estimate the risk-free interest rate based
on the implied yield available on the applicable grant date of a U.S. Treasury
note with a term equal to the expected term of the underlying grants. We made
the dividend yield assumption based on our history of not paying dividends and
our expectation not to pay dividends in the future.
We will reconsider use of the Black-Scholes pricing model and Monte Carlo
Simulation if additional information becomes available in the future that
indicates other models would be more appropriate. If factors change and we
employ different assumptions in future periods, the compensation expense that we
record may differ significantly from what we have recorded in the current
period. See Note 2 to the Consolidated Financial Statements for additional
information.
Effect of Recent Accounting Pronouncements
We discuss the effect of recently issued pronouncements in Note 2 to the
Consolidated Financial Statements.
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