ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Commencing in October 2012 the primary operations of the Company involved the development, acquisition, licensing, and enforcement of patented technologies that were either owned or controlled by the Company.
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 Cchek
Ô
. In July of 2015, ITUS announced a collaborative research agreement with The Wistar Institute (Wistar), the nations 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 and again in August of 2017, 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 Cchek
Ô
early cancer detection platform with 15 different types of cancer, including: breast, lung, colon, melanoma, ovarian, liver, thyroid, pancreatic, appendiceal, uterine, osteosarcoma, leiomyosarcoma, liposarcoma, vulvar and prostate. Breast, lung, colon and prostate cancers represent the four largest categories of cancer worldwide.
In November of 2017, the Company announced the formation of a new subsidiary, Certainty Therapeutics, Inc. (Certainty), to develop immuno-therapy drugs against cancer. Certainty entered into a license agreement with Wistar pursuant to which Certainty was granted an exclusive worldwide, royalty-bearing license to use certain intellectual property owned or controlled by Wistar relating to Wistars chimeric endocrine receptor targeted therapy technology (such technology being akin to chimeric antigen receptor T-cell (CAR-T) technology). We plan to initially focus on the development of a treatment for ovarian cancer, but we also may pursue future applications of the technology for the development of treatments for additional solid tumors.
On November 20, 2017, we announced that Certainty entered into a collaboration agreement with the H. Lee Moffitt Cancer Center and Research Institute, Inc. (Moffitt) to advance toward human clinical testing the CAR-T technology licensed by Certainty from Wistar aimed initially at treating ovarian cancer. Certainty intends to work with researchers at Moffitt to complete studies necessary to submit an Investigational New Drug application with the U.S. Food and Drug Administration.
Over the next several quarters, we expect Cchek and Certaintys ovarian cancer treatment 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 Companys ongoing operations nor do we expect these activities to require material financial resources or attention of senior management.
F-6
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ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Over the past several quarters, our revenue was derived from technology licensing and the sale of patented technologies, including revenue from the settlement of litigation. In addition to Anixa and Certainty, the Company may make investments in and form new companies to develop additional emerging technologies.
Funding
As of the date of filing of our last annual report on Form 10-K, there was substantial doubt about our ability to continue as a going concern due to the limited amount of cash, cash equivalents and short-term investments we held as compared to our projected cash needs for the ensuing 12 months. We evaluated our cash position and future plans for the Company and embarked on a plan to ensure we had sufficient resources to execute our plans. Accordingly, over the past twelve months, we raised nearly $12 million through multiple financing arrangements, including a shareholder rights offering, a registered direct offering, and an at-the-market equity offering, and satisfied debt obligations through payments of cash and common stock. With no significant debt and approximately $6.8 million in cash, cash equivalents and short-term investments as of October 31, 2017, we believe that we have alleviated substantial doubt about our ability to continue as a going concern.
Based on currently available information as of January 9, 2018, 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 12 months. 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 that are synergistic with or complimentary to our technologies, we may be required to obtain more working capital. We may seek to obtain working capital during our fiscal year ended 2018 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.
During the year ended October 31, 2017, cash used in operating activities was approximately $3,797,000. Cash used in investing activities was approximately $2,735,000, resulting from the purchase of certificates of deposit totaling $5,501,000 which was offset by the proceeds on maturities of certificates of deposit totaling $2,751,000 and the sale of property and equipment of $45,000 offset by the purchase of property and equipment of approximately $30,000. Cash provided by financing activities was approximately $7,383,000, resulting from the sale of common stock in a shareholder rights offering, an at-the-market offering and a registered direct offering of approximately $4,203,000, $3,461,000 and $3,212,000, respectively, and the proceeds from exercise of stock options of approximately $7,000, offset by payments made on a secured debenture of $3,000,000 and redemption of convertible preferred stock of $500,000. As a result, our cash, cash equivalents, and short-term investments at October 31, 2017 increased approximately $3,601,000 to approximately $6,839,000 from approximately $3,238,000 at the end of fiscal year 2016.
F-7
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ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of ITUS Corporation and its wholly owned subsidiaries. All intercompany transactions have been eliminated.
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.
Inventor Royalties and Contingent Legal Fees
Inventor royalties and contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized.
Research and Development Expenses
Research and development expenses, consisting primarily of employee compensation, payments to third parties for research and development activities and other direct costs associated with developing a platform for non-invasive blood tests for early detection of cancer, are expensed in the consolidated financial statements in the year incurred.
F-8
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ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
Accounting Standards Codification (ASC) 820 Fair Value Measurements and Disclosures (ASC 820)
defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. In accordance with ASC 820, we have categorized our financial assets and liabilities, 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 consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 - Financial instruments 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 instruments 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 instruments 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 managements own assumptions about the assumptions a market participant would use in pricing the instrument.
The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2017:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
Cash and cash equivalents
|
$
|
3,079,282
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,079,282
|
Certificates of deposit -
Short term investments
|
|
-
|
|
|
3,500,000
|
|
|
-
|
|
|
3,500,000
|
Total financial assets
|
$
|
3,079,282
|
|
$
|
3,500,000
|
|
$
|
-
|
|
$
|
6,579,282
|
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 and 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
|
F-9
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ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
| |
Patent acquisition obligation
|
|
-
|
|
|
-
|
|
$
|
4,171,876
|
|
$
|
4,171,876
|
The following table sets forth a summary of the changes in the fair value of the Companys Level 3 financial liabilities that are measured at fair value on a recurring basis:
Patent acquisition obligation:
|
| |
Balance October 31, 2015
|
$
|
3,688,187
|
Accretion of interest on patent obligation
|
|
519,946
|
Royalty payment applied to patent acquisition obligation
|
|
(36,257)
|
Balance October 31, 2016
|
|
4,171,876
|
Accretion of interest on patent obligation
|
|
228,026
|
Extinguishment of patent obligation
|
|
(4,399,902)
|
Balance October 31, 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
Cash equivalents consists of highly liquid, short-term investments with original maturities of three months or less when purchased.
Short-term Investments
At October 31, 2017 and 2016, we had certificates of deposit with maturities greater than 90 days and less than 12 months when acquired of $3,500,000 and $750,000, respectively, that were classified as short-term investments and reported at fair value.
Patents
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. No patent acquisition costs were capitalized during the years ended October 31, 2017 and 2016. We recorded patent amortization expense of approximately $325,000 and $325,000 during the years ended October 31, 2017 and 2016, respectively.
Impairment
Long-lived assets, including intangible assets that are amortized, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the assets with the estimated undiscounted future cash flows associated with them. Should the analysis indicate that an asset is not recoverable, the carrying value of the asset would be reduced to fair value and a corresponding charge would be recognized.
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ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets that are not amortized are reviewed for impairment at least annually. The Company evaluates potential impairment by comparing the carrying amount of the asset with its estimated fair value. Should the carrying amount exceed the estimated fair value, a corresponding charge would be recognized for the difference.
Income Taxes
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.
Stock-Based Compensation
We maintain stock equity incentive plans under which we may grant non-qualified stock options, incentive stock options, stock appreciation rights, stock awards, performance and performance-based awards, or stock units to employees, non-employee directors and consultants.
Stock Option Compensation Expense
We account for stock options granted to employees and directors using the accounting guidance in ASC 718 Stock Compensation (ASC 718).
In accordance with ASC 718, we estimate the fair value of service based options and performance based options on the date of grant, using the Black-Scholes pricing model. For options vesting if the trading price of the Companys common stock achieves a defined target, we use a Monte Carlo simulation in estimating the fair value at grant date.
We recognize compensation expense for stock option awards over the requisite or implied service period of the grant. With respect to performance based awards, compensation expense is recognized when the performance target is deemed probable. We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $1,223,000 and $874,000, during the years ended October 31, 2017 and 2016, respectively.
Included in stock-based compensation cost for employees and directors during the years ended October 31, 2017 and 2016 was approximately $967,000 and $393,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but not yet vested. As of October 31, 2017, there was unrecognized compensation cost related to non-vested stock options granted to employees and directors, related to service based options of approximately $1,091,000, which will be recognized over a weighted-average period of 1.7 years.
We account for stock options granted to consultants using the accounting guidance included in ASC 505-50 Equity-Based Payments to Non-Employees (ASC 505-50). In accordance with ASC 505-50,
we estimate the fair value of service based stock options and performance based options at each reporting period, using the Black-Scholes pricing model. F
or options vesting if the trading price of the Companys common stock achieves a defined target we estimate the fair value at each reporting period using a Monte Carlo simulation. We recognize compensation expense for
service based stock options and options subject to market conditions
over the requisite or implied service period of the grant. For performance based awards, compensation expense is recognized when the performance target is achieved.
F-11
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recorded consulting expense, related to stock options granted to consultants, during the years ended October 31, 2017 and 2016 of approximately $3,000 and $-0-, respectively. Stock-based consulting expense for the years ended October 31, 2017 and 2016 did not include any amortization of compensation cost for stock options granted in prior periods but vested in the current period. As of October 31, 2017, there was unrecognized consulting expense related to non-vested stock options granted to consultants, related to service based options of approximately $44,000, which will be recognized over a weighted-average period of 2.1 years.
Fair Value Determination
We use the Black-Scholes pricing model in estimating the fair value of stock options which vest over a specific period of time.
The stock options we granted during the year ended October 31, 2017 consisted of awards with 10-year terms that vest over 6 to 48 months. The stock options we granted during the year ended October 31, 2016 consisted of awards with 10-year terms that vest over 6 to 36 months
The following weighted average assumptions were used in estimating the fair value of stock options granted during the years ended October 31, 2017 and 2016:
|
For the Year
Ended October 31,
|
|
|
2017
|
|
2016
|
Weighted average fair value at grant date
|
$1.72
|
|
$2.84
|
Valuation assumptions:
|
|
|
|
Expected life (years)
|
5.63
|
|
5.70
|
Expected volatility
|
119.2%
|
|
181.1%
|
Risk-free interest rate
|
1.94%
|
|
1.26%
|
Expected dividend yield
|
0%
|
|
0%
|
The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. 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 which vested immediately to terms including vesting periods of up to three years. Under the Black-Scholes pricing model, we estimated 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 options. We estimated 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.
Under ASC 718, the amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. Accordingly, if deemed necessary, we reduce the fair value of the stock option awards for expected forfeitures, which are forfeitures of the unvested portion of surrendered options. Based on our historical experience and future expectations, we have not reduced the amount of stock-based compensation expenses for anticipated forfeitures.
F-12
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We will reconsider use of the Black-Scholes pricing model if additional information becomes available in the future that indicates another model would be more appropriate. If factors change and we employ different assumptions in the application of ASC 718 in future periods, the compensation expense that we record under ASC 718 may differ significantly from what we have recorded in the current period.
Net Loss Per Share of Common Stock
In accordance with ASC 260, Earnings Per Share, basic net loss per common share (Basic EPS) is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (Diluted EPS) is computed by dividing net loss by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding. Diluted EPS for all years presented 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 years ended October 31, 2017 and 2016, were options to purchase 3,447,846 and 3,086,472 shares, respectively, warrants to purchase 829,400 shares and 707,379 shares, respectively, preferred stock convertible into -0- and 739,958 shares, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are used for, but not limited to, determining stock-based compensation, asset impairment evaluations, tax assets and liabilities, license fee revenue, the allowance for doubtful accounts, depreciation lives and other contingencies. Actual results could differ from those estimates.
Effect of Recently 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 is 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 do not expect the adoption of ASU 2014-09 to have a material impact on our consolidated financial statements and related disclosures.
F-13
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2014, the FASB issued Accounting Standards Update 2014-15 (ASU 2014-15). This amendment requires management to assess an entitys 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. We have provided additional footnote disclosure to our consolidated financial statements in accordance with ASU 2014-15 upon adoption of this amendment.
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. We do not anticipate that the adoption of this amendment will have an impact on our consolidated financial statements and related disclosures as we currently do not present deferred tax assets or liabilities.
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 currently 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 employees 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. We adopted ASU 2016-09 on November 1, 2017. We do not expect the adoption of this new guidance to have a material impact on our consolidated financial statements and related disclosures.
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.
In July 2017, the FASB issued Accounting Standards Update 2017-11 (ASU 2017-11) which changes the accounting for equity instruments that include a down round feature. For public entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted.
We do not anticipate the adoption of this amendment will have an impact on our consolidated financial statements and related disclosures as we currently do not have any such equity instruments.
F-14
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risks
Financial instruments that potentially subject us to concentrations of credit risk are cash equivalents, short-term investments and accounts receivable. Cash equivalents are primarily highly rated money market funds. Short-term investments are certificates of deposit within federally insured limits. Where applicable, management reviews our accounts receivable and other receivables for potential doubtful accounts and maintains an allowance for estimated uncollectible amounts. Our policy is to write-off uncollectable amounts at the time it is determined that collection will not occur.
One licensee accounted for 100% of revenues from patent licensing activities during fiscal year 2017. Two licensees accounted for 67% and 33%, respectively, of revenues from patent licensing activities during fiscal year 2016.
3.
ACCRUED EXPENSES
Accrued liabilities consist of the following as of:
|
October 31,
|
|
2017
|
|
2016
|
Accrued severance costs
|
$
|
237,563
|
|
$
|
-
|
Payroll and related expenses
|
|
51,643
|
|
|
49,901
|
Accrued other
|
|
119,963
|
|
|
45,631
|
|
$
|
409,169
|
|
$
|
95,532
|
4.
PATENT ACQUISITION OBLIGATION
In November 2013, we incurred a patent acquisition obligation due no later than November 2017 related to the acquisition of patents. The payment due in November 2017 was payable at the option of the Company in cash or common stock. We recorded interest expense of approximately $228,000 and $520,000, respectively, for the years ended October 31, 2017 and 2016, for the accretion of interest on patent acquisition obligation.
On March 27, 2017, the Company issued 947,606 shares of common stock in satisfaction of the obligation. 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.
5.
SHAREHOLDERS EQUITY
Common Stock Issuances
We account for stock granted to employees, directors and consultants based on the grant date market price of the underlying common stock. During the years ended October 31, 2017 and 2016, we issued 9,463 shares and 10,833 shares, respectively, of common stock to consultants for services rendered. We recorded consulting expense for the years ended October 31, 2017 and 2016 of approximately $32,000 and $31,000, respectively, for shares of common stock issued to consultants. During the year ended October 31, 2017 we issued 200,000 shares to directors for services rendered and recorded expense of $454,000.
F-15
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
As of October 31, 2017, we have two stock option plans: the ITUS Corporation 2003 Share Incentive Plan (the 2003 Share Plan) and the ITUS Corporation 2010 Share Incentive Plan (the 2010 Share Plan) which were adopted by our Board of Directors on April 21, 2003 and July 14, 2010, respectively.
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 and consultants. The 2003 Share Plan was administered by the Board of Directors or committees thereof, which determined the option price, term and provisions of each option. The exercise price with respect to all of the options granted under the 2003 Share Plan since its inception was equal to the fair market value of the underlying common stock at the grant date. In accordance with the provisions of the 2003 Share Plan, the plan terminated with respect to the grant of future options on April 21, 2013.
Information regarding the 2003 Share Plan for the two years ended October 31, 2017 is as follows:
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
| |
|
|
|
|
Aggregate
Intrinsic Value
|
|
Shares
|
| |
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2015
|
366,200
|
|
$
|
17.86
|
|
|
|
Exercised
|
(11,080)
|
|
$
|
2.58
|
|
| |
Forfeited
|
(129,520)
|
|
$
|
17.72
|
|
|
|
Options Outstanding at October 31, 2016
|
225,600
|
|
$
|
18.69
|
|
| |
Exercised
|
(5,800)
|
|
$
|
1.39
|
|
|
|
Forfeited
|
(189,200)
|
|
$
|
21.55
|
|
| |
Options Outstanding and Exercisable at
October 31, 2017
|
30,600
|
|
$
|
3.16
|
|
$
|
20,148
|
The following table summarizes information about stock options outstanding and exercisable under the 2003 Share Plan as of October 31, 2017:
|
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
| |
|
|
|
|
|
Weighted
Average
Exercise Price
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
| |
|
|
|
$ 0.67 - $ 17.50
|
|
30,600
|
|
1.13
|
|
$3.16
|
F-16
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and consultants. On the first business day of each calendar year the maximum aggregate number of shares available for future issuance is replenished such that 800,000 shares are available. The 2010 Share Plan is administered by the Board of Directors or committees thereof, which determines the option price, term and provisions of each option. The exercise price with respect to all of the options granted under the 2010 Share Plan was equal to the fair market value of the underlying common stock at the grant date. As of October 31, 2017, the 2010 Share Plan had 69,226 shares available for future grants.
Information regarding the 2010 Share Plan as of October 31, 2017 is as follows:
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
| |
|
|
|
|
Aggregate
Intrinsic
Value
|
|
Shares
|
| |
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2015
|
526,272
|
|
$
|
3.33
|
|
|
|
Granted
|
557,000
|
|
$
|
2.92
|
|
| |
Exercised
|
(2,400)
|
|
$
|
4.25
|
|
|
|
Options Outstanding at October 31, 2016
|
1,080,872
|
|
$
|
3.12
|
|
| |
Granted
|
682,000
|
|
$
|
2.03
|
|
|
|
Exercised
|
(44,400)
|
|
$
|
0.67
|
|
| |
Forfeited
|
(81,226)
|
|
$
|
6.20
|
|
|
|
Options Outstanding at October 31, 2017
|
1,637,246
|
|
$
|
1.50
|
|
$
|
1,381,380
|
Options Exercisable at October 31, 2017
|
909,024
|
|
$
|
1.72
|
|
$
|
721,433
|
The following table summarizes information about stock options outstanding under the 2010 Share Plan as of October 31, 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
|
|
$0.67
|
1,001,000
|
8.14
|
$0.67
|
|
522,778
|
7.09
|
$0.67
|
$2.27 - $7.00
|
636,246
|
6.69
|
$2.80
|
|
386,246
|
4.62
|
$3.14
|
In addition to options granted under the 2003 Share Plan and the 2010 Share Plan, during the years ended October 31, 2012 and 2013, the Board of Directors approved the grant of stock options to purchase 1,660,000 shares and 120,000 shares, respectively.
F-17
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding stock options that were not granted under the 2003 Share Plan or the 2010 Share Plan for the two years ended October 31, 2017 is as follows:
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
| |
|
Shares
|
|
|
|
|
|
|
|
|
|
| |
Options Outstanding and exercisable at
October 31, 2016
|
1,780,000
|
|
$
|
2.70
|
|
|
|
Options Outstanding and exercisable at
October 31, 2017
|
1,780,000
|
|
$
|
1.58
|
|
$
|
1,443,480
|
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 October 31, 2017:
|
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
| |
|
|
Number
Outstanding
and
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
Range of
Exercise Prices
|
|
| |
|
|
|
$0.67
|
|
1,046,000
|
|
4.91
|
|
$0.67
|
$ 2.58 - $ 5.56
|
|
734,000
|
|
4.36
|
|
$2.88
|
Re-Priced Stock Options
On September 6, 2017 the Board of Directors re-priced 2,029,600 issued and outstanding stock options (the Re-Priced Options) for all of the officers, directors and employees of the Company. The new exercise price of the Re-Priced Options is $0.67, the closing sales price of the Companys common stock on September 6, 2017. All other terms of the previously granted Re-Priced Options remain the same. The Company recorded additional stock-based compensation of approximately $261,000, as of September 6, 2017, related to this re-pricing. This amount was determined to be the incremental value of the fair value of the Re-Priced Options compared to the fair value of the original option immediately before the re-pricing. Accordingly, 18,200 stock options in the 2003 Share Plan with exercise prices of $2.58, 965,400 stock options in the 2010 Share Plan with exercise prices ranging from $0.82 to $5.30 and 1,046,000 stock options that were not granted under the 2003 Share Plan or the 2010 Share plan with exercise prices of $2.58, were re-priced.
Preferred Stock
On November 11, 2016, the holder of all our outstanding Series A Preferred Stock (the 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 Companys 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 was due on or before June 1, 2017 and the remainder of which was due November 11, 2017 (the Redemption Debenture), and (iii) a 5 year warrant to purchase 500,000 shares of the Companys 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 was secured by a lien on the Companys assets and prohibited the Company from incurring any senior indebtedness other than equipment financing in connection with the Companys business. The Redemption Debenture was paid in full during fiscal year 2017. Interest expense during the year ended October 31, 2017 in connection with the Redemption Debenture was approximately $272,000.
F-18
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Preferreds 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.
Common Stock Purchase Warrants
As of October 31, 2017, we had warrants to purchase 10,000 shares and 10,000 shares of common stock at $9.25 and $13.875 per share, respectively, expiring on August 19, 2019, warrants to purchase 309,400 shares of common stock at $10.00 per share expiring on July 15, 2019 and warrants to purchase 500,000 shares of common stock at $5.03 per share expiring on November 30, 2021.
6.
COMMITMENTS AND CONTINGENCIES
Leases
We lease approximately 2,000 square feet of office space at 3150 Almaden Expressway, San Jose, California (our principal executive offices) from an unrelated party pursuant to a lease that expires September 30, 2019. Our base rent is approximately $4,000 per month and the lease provides for annual increases of approximately 3% and an escalation clause for increases in certain operating costs. We also lease approximately 3,000 square feet of office space at 12100 Wilshire Boulevard, Los Angeles, California (our former executive offices) from an unrelated party pursuant to a lease that expires May 31, 2019. Our base rent is approximately $11,000 per month and the lease provides for annual increases of approximately 3% and an escalation clause for increases in certain operating costs.
During the fourth quarter of fiscal 2017 we vacated the office space at 12100 Wilshire Boulevard, Los Angeles, California and as of October 31, 2017 we have accrued an expense of approximately $84,000 related to future rents of the unused facilities.
As of October 31, 2017, our non-cancelable operating lease commitments for the years ending October 31, 2018 and 2019 were approximately $182,000 and $125,000, respectively. Rent expense for the years ended October 31, 2017 and 2016, was approximately $229,000 and $188,000, respectively.
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.
F-19
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.
INCOME TAXES
Income tax provision (benefit) consists of the following:
|
Year Ended October 31,
|
|
2017
|
|
2016
|
Federal:
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
Deferred
|
|
(12,534,000)
|
|
|
(1,631,000)
|
State:
|
|
|
|
| |
Current
|
|
-
|
|
|
-
|
Deferred
|
|
(4,351,000)
|
|
|
(134,000)
|
Adjustment to valuation allowance
related to net deferred tax assets
|
|
16,885,000
|
|
|
1,765,000
|
|
$
|
-
|
|
$
|
-
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset, net, at October 31, 2017 and 2016, are as follows:
|
2017
|
|
2016
|
Long-term deferred tax assets:
|
|
|
|
|
|
Federal and state NOL and tax credit carryforwards
|
$
|
18,961,000
|
|
$
|
33,079,000
|
Deferred compensation
|
|
3,718,000
|
|
|
6,232,000
|
Intangibles
|
|
543,000
|
|
|
713,000
|
Other
|
|
205,000
|
|
|
289,000
|
Subtotal
|
|
23,427,000
|
|
|
40,313,000
|
|
|
|
|
|
|
Less: valuation allowance
|
|
(23,427,000)
|
|
|
(40,313,000)
|
Deferred tax asset, net
|
$
|
-
|
|
$
|
-
|
As of October 31, 2017, we had tax net operating loss and tax credit carryforwards of approximately $83,579,000 and $1,257,000, respectively, available within statutory limits (expiring at various dates between 2018 and 2037), to offset any future regular Federal corporate taxable income and taxes payable. If the tax benefits relating to deductions of option holders income are ultimately realized, those benefits will be credited directly to additional paid-in capital. Certain changes in stock ownership can result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. As of October 31, 2017, management has not determined the extent of any such limitations, if any.
As a result of the change in future Federal statutory tax rates due to the passing of the Tax Cuts and Jobs Act of 2017, management has determined that the deferred tax assets and liabilities should no longer be valued at a federal statutory rate of 34% but rather at the rate in which the benefit of the deferred tax asset or liability will be realized by the Company. As such, the Federal statutory rate used to value the Company's deferred tax assets and liabilities is 21%.
We had New York and California tax net operating loss carryforwards of approximately $72,483,000 and $9,656,000, respectively, as of October 31, 2017, available within statutory limits (expiring at various dates between 2018 and 2037), to offset future corporate taxable income and taxes payable, if any, under certain computations of such taxes.
F-20
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have provided a valuation allowance against our deferred tax asset due to our current and historical pre-tax losses and the uncertainty regarding their realizability. The primary differences from the Federal statutory rate of 34% and the effective rate of 0% is attributable to certain permanent differences and a change in the valuation allowance. The following is a reconciliation of income taxes at the Federal statutory tax rate to income tax expense (benefit):
|
Year Ended October 31,
|
|
2017
|
|
2016
|
Income tax benefit at U.S.
Federal statutory income
Tax rate
|
$
|
(1,703,000)
|
|
(34.0%)
|
|
$
|
(1,706,000)
|
|
(34.0%)
|
State income taxes
|
|
(443,000)
|
|
(8.84%)
|
|
|
(411,000)
|
|
(8.2%)
|
Permanent differences
|
|
(10,000)
|
|
(0.20%)
|
|
|
2,000
|
|
0.1%
|
Expiring net operating
losses, credits and other
|
|
-
|
|
-
|
|
|
350,000
|
|
7.0%
|
Rate Changes
|
|
19,041,000
|
|
380.13%
|
|
|
-
|
|
-
|
Change in valuation
allowance
|
|
(16,885,000)
|
|
(337.09%)
|
|
|
1,765,000
|
|
35.1%
|
Income tax provision
|
$
|
-
|
|
0.0%
|
|
$
|
-
|
|
0.0%
|
During the two fiscal years ended October 31, 2017, we incurred no Federal and no State income taxes. We have no unrecognized tax benefits as of October 31, 2017 and 2016 and we account for interest and penalties related to income tax matters in marketing, general and administrative expenses. Tax years to which our net operating losses relate remain open to examination by Federal authorities and other jurisdictions to the extent which the net operating losses have yet to be utilized.