Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders
ITUS Corporation
We have audited the accompanying consolidated balance sheets of ITUS Corporation (the Company) as of October 31, 2016 and 2015, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the years ended October 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the years ended October 31, 2016 and 2015, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has limited working capital and limited revenue-generating operations and a history of net losses and net operating cash flow deficits. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/s/ Haskell & White LLP
HASKELL & WHITE LLP
Irvine, California
December 7, 2016
F-1
|
October 31,
2016
|
|
October 31,
2015
|
| |
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,488,323
|
|
$
|
4,369,219
|
Shortterm investments in certificates of deposit
|
|
750,000
|
|
|
2,400,000
|
Prepaid expenses and other current assets
|
|
162,069
|
|
|
126,528
|
Total current assets
|
|
3,400,392
|
|
|
6,895,747
|
|
|
|
|
| |
Patents, net of accumulated amortization of $965,040 and $639,744, respectively
|
|
2,071,071
|
|
|
2,396,367
|
Property and equipment, net of accumulated depreciation of $46,950 and $13,617, respectively
|
|
156,644
|
|
|
43,456
|
Total assets
|
$
|
5,628,107
|
|
$
|
9,335,570
|
|
|
|
|
| |
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
| |
Accounts payable and accrued expenses
|
$
|
468,756
|
|
$
|
380,765
|
Royalties and contingent legal fees payable
|
|
-
|
|
|
213,017
|
Total current liabilities
|
|
468,756
|
|
|
593,782
|
|
|
|
|
| |
Patent acquisition obligation (Note 6)
|
|
4,171,876
|
|
|
3,688,187
|
Total liabilities
|
|
4,640,632
|
|
|
4,281,969
|
|
|
|
|
|
|
Commitments and contingencies (Notes 6 and 7)
|
|
|
|
| |
|
|
|
|
|
|
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, issued and outstanding
|
14,000
|
|
14,000
|
Common stock, par value $.01 per share; 24,000,000 shares authorized;
|
|
|
|
|
|
8,752,387 and 8,724,878 shares issued and outstanding, respectively
|
|
87,524
|
|
|
87,249
|
Additional paid-in capital
|
|
152,051,144
|
|
|
151,101,117
|
Accumulated deficit
|
|
(151,165,193)
|
|
|
(146,148,765)
|
Total shareholders equity
|
|
987,475
|
|
|
5,053,601
|
|
|
|
|
| |
Total liabilities and shareholders equity
|
$
|
5,628,107
|
|
$
|
9,335,570
|
|
|
|
|
| |
The accompanying notes are an integral part of these statements.
See Report of Independent Registered Public Accounting Firm.
F-2
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
For the years ended October 31,
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
Revenue from licensing activities
|
$
|
300,000
|
|
$
|
255,000
|
Settlement with AU Optronics Corporation
|
|
-
|
|
|
9,000,000
|
Total revenue
|
|
300,000
|
|
|
9,255,000
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
| |
Inventor royalties and contingent legal fees
|
|
111,192
|
|
|
147,670
|
Litigation and licensing expenses
|
|
106,224
|
|
|
3,500,852
|
Amortization of patents
|
|
325,296
|
|
|
325,291
|
Research and development expenses (including non-cash stock option
|
|
|
|
| |
compensation expenses of $259,930 and $306,584, respectively)
|
|
1,556,459
|
|
|
711,391
|
Marketing, general and administrative expenses (including non-cash stock
|
|
|
|
| |
option compensation expense of $613,631 and $2,369,806, respectively)
|
|
2,709,841
|
|
|
5,514,555
|
Total operating costs and expenses
|
|
4,809,012
|
|
|
10,199,759
|
|
|
|
|
|
|
Loss from operations
|
|
(4,509,012)
|
|
|
(944,759)
|
Interest expense (Note 6)
|
|
(519,946)
|
|
|
(451,906)
|
Interest income
|
|
12,530
|
|
|
17,622
|
Loss before income taxes
|
|
(5,016,428)
|
|
|
(1,379,043)
|
Provision for income taxes (Note 7)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
Net loss
|
$
|
(5,016,428)
|
|
$
|
(1,379,043)
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
| |
Basic and diluted
|
$
|
(0.57)
|
|
$
|
(0.16)
|
|
|
|
|
| |
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic and diluted
|
|
8,739,453
|
|
|
8,760,126
|
|
|
|
|
| |
The accompanying notes are an integral part of these statements.
See Report of Independent Registered Public Accounting Firm.
F-3
|
Series A
Convertable
Preferred Stock
|
|
Common Stock
|
|
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Shareholders'
Equity
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, October 31, 2014
|
140
|
|
$
|
14,000
|
|
8,788,176
|
|
$
|
87,882
|
|
$
|
148,677,413
|
|
$
|
(144,769,722)
|
|
$
|
4,009,573
|
Stock option compensation to employees and consultants
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
2,676,309
|
|
|
-
|
|
|
2,676,309
|
Common stock issued upon exercise of stock options
|
-
|
|
|
-
|
|
17,334
|
|
|
173
|
|
|
44,462
|
|
|
-
|
|
|
44,635
|
Common stock issued to consultants
|
-
|
|
|
-
|
|
11,600
|
|
|
116
|
|
|
45,984
|
|
|
-
|
|
|
46,100
|
Repurchase 92,232 shares of common stock and cancellation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of warrants to purchase 16,000 shares of common stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(343,973)
|
|
|
-
|
|
|
(343,973)
|
Retire common stock repurchased
|
-
|
|
|
-
|
|
(92,232)
|
|
|
(922)
|
|
|
922
|
|
|
-
|
|
|
-
|
Net Loss
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,379,043)
|
|
|
(1,379,043)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, October 31, 2015
|
140
|
|
|
14,000
|
|
8,724,878
|
|
|
87,249
|
|
|
151,101,117
|
|
|
(146,148,765)
|
|
|
5,053,601
|
Stock option compensation to employees and consultants
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
873,561
|
|
|
-
|
|
|
873,561
|
Common stock issued upon exercise of stock options
|
-
|
|
|
-
|
|
12,676
|
|
|
127
|
|
|
33,454
|
|
|
-
|
|
|
33,581
|
Common stock issued to consultants
|
-
|
|
|
-
|
|
10,833
|
|
|
108
|
|
|
31,252
|
|
|
-
|
|
|
31,360
|
Common stock issued to acquire patents
|
-
|
|
|
-
|
|
4,000
|
|
|
40
|
|
|
11,760
|
|
|
-
|
|
|
11,800
|
Net Loss
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,016,428)
|
|
|
(5,016,428)
|
BALANCE, October 31, 2016
|
140
|
|
$
|
14,000
|
|
8,752,387
|
|
$
|
87,524
|
|
$
|
152,051,144
|
|
$
|
(151,165,193)
|
|
$
|
987,475
|
The accompanying notes are an integral part of this statement
.
See Report of Independent Registered Public Accounting Firm.
F-4
Table of Contents
ITUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the years ended October 31,
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
$
|
(5,016,428)
|
|
$
|
(1,379,043)
|
Stock option compensation to employees and consultants
|
|
873,561
|
|
|
2,676,309
|
Common stock issued to consultants
|
|
31,360
|
|
|
46,100
|
Amortization of patents
|
|
325,296
|
|
|
325,291
|
Accretion of interest on patent acquisition obligations to interest expense
|
|
519,946
|
|
|
451,906
|
Loss on acquisition of common stock and warrants to purchase common stock
|
|
-
|
|
|
101,280
|
Common stock issued to acquire patent license
|
|
11,800
|
|
|
-
|
Depreciation and amortization of property and equipment
|
|
33,333
|
|
|
12,515
|
Loss on disposal of property and equipment
|
|
-
|
|
|
10,680
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
-
|
|
|
400,000
|
Prepaid expenses and other current assets
|
|
(35,541)
|
|
|
(65,951)
|
Accounts payable and accrued expenses
|
|
87,991
|
|
|
(868,661)
|
Royalties and contingent legal fees payable
|
|
(213,017)
|
|
|
(347,059)
|
Net cash (used in) provided by operating activities
|
|
(3,381,699)
|
|
|
1,363,367
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
| |
Disbursements to acquire short-term investments in certificates of deposit
|
|
(1,900,000)
|
|
|
(2,900,000)
|
Proceeds from maturities of short-term investments in certificates of deposit
|
|
3,550,000
|
|
|
3,000,000
|
Purchase of property and equipment
|
|
(146,521)
|
|
|
(54,776)
|
Net cash provided by investing activities
|
|
1,503,479
|
|
|
45,224
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
| |
Proceeds from exercise of employee stock options
|
|
33,581
|
|
|
44,635
|
Royalty payment applied to patent acquisition obligation
|
|
(36,257)
|
|
|
-
|
Payments to acquire 92,232 shares of common stock and cancellation of warrants
to purchase 16,000 shares of common stock
|
|
-
|
|
|
(445,253)
|
Net cash used in financing activities
|
|
(2,676)
|
|
|
(400,618)
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
(1,880,896)
|
|
|
1,007,973
|
Cash and cash equivalents at beginning of year
|
|
4,369,219
|
|
|
3,361,246
|
Cash and cash equivalents at end of year
|
$
|
2,488,323
|
|
$
|
4,369,219
|
|
|
|
|
| |
The accompanying notes are an integral part of these statements.
|
See Report of Independent Registered Public Accounting Firm.
|
F-5
Table of Contents
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. Beginning in October of 2012 under the leadership of a new management team, we recapitalized the Company, unencumbered the Companys assets, changed the Companys name and ticker symbol, relocated the Companys headquarters, and modernized its systems. In July of 2015, the Companys 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 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 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 Cchek
Ô
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 Cchek
Ô
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 Cchek
Ô
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 Cchek
Ô
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), bringing the number of cancer types for which the efficacy of
Cchek
Ô
has been validated thus far to fourteen.
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 Companys ongoing operations.
F-6
During years ended October 31, 2016 and 2015, 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.
AUO Lawsuit and Settlement
On December 29, 2014,
the Company and AUO Optronics Corporation (AUO) entered into a Settlement Agreement (the Settlement Agreement) and a Patent Assignment Agreement (the Patent Assignment Agreement and together with the Settlement Agreement, the Agreements) pursuant to which the Company received an aggregate of $9,000,000 from AUO. The Agreements were entered into to resolve a lawsuit filed by the Company against AUO, relating to the Companys patented ePaper® Electrophoretic Display, and Nano Field Emission Display (nFED) technologies.
Background
In May 2011, the Company entered into an Exclusive License Agreement (the EPD License Agreement) and a License Agreement (the Nano Display License Agreement) with AUO (together the AUO License Agreements). Under the EPD License Agreement, the Company provided AUO with an exclusive, non-transferable, worldwide license to its ePaper® Electrophoretic Display (EPD) patents and technology, in connection with AUO jointly developing EPD products with the Company. Under the Nano Display License Agreement, the Company provided AUO with a non-exclusive, non-transferable, worldwide license to its Nano Field Emission Display patents and technology, in connection with AUO jointly developing nFED products with the Company.
On January 28, 2013, the Company terminated the AUO License Agreements due to numerous alleged material and continual breaches of the agreements by AUO. On January 28, 2013, the Company also filed a lawsuit in the United States District Court for the Northern District of California against AUO and E Ink Corporation in connection with the AUO License Agreements, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment, unfair business practices, and other charges (the AUO/E Ink Lawsuit). In June 2013, the Company and AUO agreed to arbitrate the charges (the case against E Ink Corporation had been dismissed without prejudice) (the AUO/E Ink Arbitration).
The Agreements
Pursuant to the Settlement Agreement, AUO paid the Company $2,000,000 in U.S. currency, net of any Taiwanese withholding taxes. The Settlement Agreement further provides that:
·
the Company will dismiss the AUO/E Ink Lawsuit and AUO/E Ink Arbitration, with prejudice;
·
the AUO License Agreements are terminated;
·
AUO gives up all rights to the nFED Technology;
F-7
·
for a period of two years, the Company agrees not to initiate (whether on its own or through a third party) any patent infringement lawsuits against AUO or its affiliates alleging infringement by AUOs or AUOs affiliates products or services, for patents owned or controlled by the Company as of the date of the Settlement Agreement. Any potential damages for patent infringement will toll uninterrupted during this two-year period. The prohibition does not apply to patents acquired by the Company after the date of the Settlement Agreement; and
·
each of AUO and the Company mutually released each other from all claims that either may have against the other in connection with the AUO License Agreements, including any claims relating to the ePaper® Electrophoretic Display and nFED patents and technologies.
Pursuant to the Patent Assignment Agreement, AUO paid the Company $7,000,000 in U.S. currency, net of any Taiwanese withholding taxes in exchange for the Companys ePaper® Electrophoretic Display patent portfolio for which AUO was previously the exclusive licensee, consisting of:
·
10 active U.S. patents and 1 U.S. pending patent application; and
·
103 expired and/or abandoned U.S. and foreign patents and/or patent applications.
In connection with the lawsuit and settlement, the Company incurred a total of approximately $3,604,000 of legal fees and litigation costs.
Funding
In October 2015, the
Company entered into an At Market Issuance Sales Agreement (the
Agreement
) with National Securities Corporation (
National
) to create an at-the-market equity program under which it may sell up to $10,000,000 worth of its common stock (the
Shares
) from time to time through National, as sales agent. The Company has no obligation to sell any of the Shares, and may at any time suspend offers under the Agreement or terminate the Agreement. The Shares will be issued pursuant to the Company
s previously filed registration statement that was declared effective by the Securities and Exchange Commission (the SEC) on September 18, 2015. As of October 31, 2016, no Shares have been sold under the Agreement.
During the year ended October 31, 2016, cash used in operating activities was approximately $3,382,000. Cash provided by investing activities was approximately $1,503,000, which resulted from the proceeds on maturity of certificates of deposit totaling $3,550,000 which was offset by the purchase of certificates of deposit totaling $1,900,000 and the purchase of property and equipment of approximately $147,000. Our cash used in financing activities was approximately $3,000, which resulted from a royalty payment of approximately $36,000 applied to the patent acquisition obligation liability, offset by the proceeds from exercise of stock options of approximately $34,000. As a result, our cash, cash equivalents, and short-term investments at October 31, 2016 decreased approximately $3,531,000 to approximately $3,238,000 from approximately $6,769,000 at the end of fiscal year 2015.
F-8
Based on currently available information as of December 7, 2016, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows from operations will not be sufficient to fund our activities and debt obligations (Note 2) for the next 12 months.
To date, we have relied primarily upon cash from the public and private sale of equity and debt securities, as well as net proceeds from the December 2014 AUO settlement, 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, 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. W
e 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.
The accompanying financial statements have been prepared assuming that we will continue as a going concern. In order for us to have sufficient capital to execute our business plan, fund our operations and meet our debt obligations over the next 12 months, we will need to raise additional capital. Although we have been successful in the past in raising capital, we cannot provide any assurance that we will be successful in doing so in the future to the extent necessary to be able to fund our operating activities and debt obligations over the next 12 months, which raises substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2.
SUBSEQUENT EVENT
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, at closing the holder of the Series A Preferred will receive (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 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 Debenture is secured by a lien on the Companys assets and prohibits the Company from incurring any senior indebtedness
other than equipment financing in connection with the Companys business
.
3.
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.
F-9
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 salaries 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.
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.
F-10
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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
|
The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2015:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
| |
Money market funds Cash and cash equivalents
|
$
|
467,967
|
|
$
|
-
|
|
$
|
-
|
|
$
|
467,967
|
Certificates of deposit - Short term investments
|
|
-
|
|
|
2,400,000
|
|
|
-
|
|
|
2,400,000
|
Total financial assets
|
$
|
467,967
|
|
$
|
2,400,000
|
|
$
|
-
|
|
$
|
2,867,967
|
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 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, 2015:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
| |
Patent acquisition obligation
|
|
-
|
|
|
-
|
|
$
|
3,688,187
|
|
$
|
3,688,187
|
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:
F-11
Patent acquisition obligation:
|
| |
Balance October 31, 2014
|
$
|
3,236,281
|
Accretion of interest on patent obligation
|
|
451,906
|
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
|
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, 2016 and 2015, we had certificates of deposit with maturities greater than 90 days and less than 12 months when acquired of $750,000 and $2,400,000, 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, 2016 and 2015. We recorded patent amortization expense of approximately $325,000 and $325,000 during the years ended October 31, 2016 and 2015, 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.
F-12
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 $874,000 and $2,192,000, during the years ended October 31, 2016 and 2015, respectively.
Included in stock-based compensation cost for employees and directors during the years ended October 31, 2016 and 2015 was approximately $393,000 and $2,093,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but not yet vested. As of October 31, 2016, there was unrecognized compensation cost related to non-vested stock options granted to employees and directors, related to service based options of approximately $1,139,000 which will be recognized over a weighted-average period of 2.3 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-13
We recorded consulting expense, related to stock options granted to consultants, during the years ended October 31, 2016 and 2015 of approximately $-0- and $484,000, respectively. Stock-based consulting expense for the years ended October 31, 2016 and 2015 includes approximately $-0- and $484,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but vested in the current period. As of October 31, 2016, there was no unrecognized consulting expense related to non-vested stock options granted to consultants.
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 or upon achieving performance targets.
To determine the weighted average fair value of stock options on the date of grant, employees and directors are included in a single group. The fair value of stock options granted to consultants is determined on an individual basis. The stock options we granted during the year ended October 31, 2015 consisted of awards with 10-year terms that vest over one year, options with 10-year terms that vest over 36 months. The stock options we granted during the year ended October 31, 2014 consisted of awards with 10-year terms that vest over one year and options with 10-year terms that vest over 36 months, options with 5-year terms which vest immediately and options with 10-year terms which vest upon achievement of performance milestones.
The following weighted average assumptions were used in estimating the fair value of stock options granted during the years ended October 31, 2016 and 2015:
|
For the Year
Ended October 31,
|
|
|
2016
|
|
2015
|
Weighted average fair value at grant date
|
$
|
2.84
|
|
$
|
3.09
|
Valuation assumptions:
|
|
|
|
| |
Expected life (years)
|
|
5.70
|
|
|
5.75
|
Expected volatility
|
|
181.1%
|
|
|
117.8%
|
Risk-free interest rate
|
|
1.26%
|
|
|
2.01%
|
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 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-14
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, 2016 and 2015, were options to purchase 3,086,472 and 2,672,471 shares, respectively, warrants to purchase 707,379 shares and 1,028,931 shares, respectively, preferred stock convertible into 739,958 shares.
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 are 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 are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements and related disclosures.
F-15
In June 2014, the FASB issued Accounting Standards Update 2014-12 (ASU 2014-12), Compensation Stock Compensation. This amendment requires that a performance target that affects vesting and could be achieved after the requisite service period shall be treated as a performance condition. Adoption of this standard is required for annual periods beginning after December 15, 2015. Early adoption is permitted. We do not expect this update to have a significant impact on our consolidated financial statements and related disclosures.
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 do not expect this update to have a significant impact on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-03 (ASU 2015-03) to simplify the presentation of debt issuance costs. This amendment requires debt issuance costs be presented on the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. Adoption of this standard is required for interim and annual periods beginning after December 15, 2015 and is to be applied retrospectively. 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. We are currently evaluating the impact ASU 2015-17 will have on our consolidated financial statements and related disclosures.
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 are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and related disclosures.
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. Early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements and related disclosures.
F-16
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.
Two licensees accounted for 67% and 33%, respectively, of revenues from patent licensing activities during fiscal year 2016. Three licensees accounted for 53%, 37% and 10%, respectively, of revenues from patent licensing activities during fiscal year 2015.
4.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consist of the following as of:
|
October 31,
|
|
2016
|
|
2015
|
Accounts payable
|
$
|
373,224
|
|
$
|
374,703
|
Payroll and related expenses
|
|
49,901
|
|
|
-
|
Accrued other
|
|
45,631
|
|
|
6,062
|
|
$
|
468,756
|
|
$
|
380,765
|
5.
SHAREHOLDERS EQUITY
Reverse Stock Split
On June 26, 2015, we effected a 1-for-25 reverse stock split (the Stock Split) of our issued common stock and preferred stock. Each shareholders percentage ownership and proportional voting power remained unchanged as a result of the Stock Split. All applicable share data, per share amounts and related information in the consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the Stock Split. As a result of the Stock Split, the number of shares of our common stock and preferred stock authorized was also decreased by the same proportion as the outstanding shares.
Common Stock Issuances
During the years ended October 31, 2016 and 2015, we issued 10,833 shares and 11,600 shares, respectively, of common stock to consultants for services rendered, pursuant to the 2010 Share Plan. We recorded consulting expense for the years ended October 31, 2016 and 2015 of approximately $31,000 and $46,000, respectively, for shares of common stock issued to consultants.
Stock Option Plans
As of October 31, 2016, 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.
F-17
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 maximum number of shares of common stock in the 2003 Share Plan was 2,800,000 shares. The 2003 Share Plan was administered by the Stock Option Committee through June 2004, from June 2004 through July 2010, by the Board of Directors, from July 2010 through August 2012, by the Stock Option Committee, from August 2012 through November 2012, by the Executive Committee of the Board of Directors, from November 2012 to July 2015, by the Board of Directors and since July 2015 by the Compensation Committee, 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, 2016 is as follows:
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
| |
|
|
|
|
Aggregate
Intrinsic Value
|
|
Shares
|
| |
|
|
|
|
|
|
|
Options Outstanding at October 31, 2014
|
493,991
|
|
$18.00
|
|
|
|
Exercised
|
(4,000)
|
|
$2.58
|
|
| |
Forfeited
|
(123,791)
|
|
$14.71
|
|
|
|
Options Outstanding at October 31, 2015
|
366,200
|
|
$17.86
|
|
| |
Exercised
|
(11,080)
|
|
$2.58
|
|
|
|
Forfeited
|
(129,520)
|
|
$17.72
|
|
| |
Options Outstanding and Exercisable at
October 31, 2016
|
225,600
|
|
$18.69
|
|
$
|
142,470
|
The following table summarizes information about stock options outstanding and exercisable under the 2003 Share Plan as of October 31, 2016:
|
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
| |
|
|
|
|
|
Weighted
Average
Exercise Price
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
| |
|
|
|
|
|
|
|
|
| |
$ 1.79 - $ 7.75
|
|
41,200
|
|
1.77
|
|
$2.91
|
$14.75 - $17.50
|
|
50,400
|
|
.43
|
|
$16.98
|
$20.50 - $23.00
|
|
94,000
|
|
.83
|
|
$22.04
|
$29.25
|
|
40,000
|
|
.81
|
|
$29.25
|
F-18
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. The maximum number of shares of common stock in the 2010 Share Plan was initially 600,000 shares. On July 6, 2011, the 2010 Share Plan was amended by our Board of Directors to increase the maximum number of shares of common stock in the plan to 1,080,000 shares and on August 29, 2012, the maximum number of shares in the plan was further increased to 1,200,000 shares. On November 8, 2013, the Board of Directors approved an amendment to provide that effective November 8, 2013, the maximum aggregate number of shares available for future issuance will be 800,000 shares and that on the first business day in 2014 and on the first business day of each calendar year thereafter the maximum aggregate number of shares available for future issuance shall be replenished such that 800,000 shares will be available. Accordingly, on November 8, 2013, January 2, 2014 and January 2, 2015, the number of shares in the 2010 Share Plan was increased to 1,957,000 shares, 2,225,400 shares and 2,569,400 shares, respectively. In addition, on November 8, 2013, the 2010 Share Plan was amended to provide that on the first business day of each year commencing on January 2, 2014, each non-employee director of the Company at that time shall automatically be granted a 10-year stock option to purchase 12,000 shares of common stock (16,000 for the Chairman) that will vest in four equal quarterly installments. The 2010 Share Plan was administered by the Stock Option Committee through August 2012, from August 2012 through November 2012, by the Executive Committee of the Board of Directors, from November 2012 through July 2015, by the Board of Directors and since July 2015, by the Compensation Committee, 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, 2016, the 2010 Share Plan had 431,956 shares available for future grants.
Information regarding the 2010 Share Plan as of October 31, 2016 is as follows:
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
Aggregate
Intrinsic
Value
|
|
|
| |
|
Shares
|
|
|
|
|
|
|
|
| |
Options Outstanding at October 31, 2014
|
728,561
|
|
$5.75
|
|
|
|
Granted
|
60,400
|
|
$2.91
|
|
| |
Exercised
|
(13,334)
|
|
$2.58
|
|
|
|
Forfeited
|
(249,355)
|
|
$6.24
|
|
| |
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
|
|
$
|
3,569,079
|
Options Exercisable at October 31, 2016
|
659,439
|
|
$3.16
|
|
$
|
2,126,338
|
The following table summarizes information about stock options outstanding under the 2010 Share Plan as of October 31, 2016:
|
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
|
1,080,872
|
7.71
|
$3.12
|
|
659,439
|
6.71
|
$3.16
|
F-19
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.
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, 2016 is as follows:
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
Aggregate
Intrinsic
Value
|
|
|
| |
|
Shares
|
|
|
|
|
|
|
|
| |
Options Outstanding at October 31, 2014, 2015 and 2016
|
1,780,000
|
|
$2.70
|
|
|
|
Options Outstanding and exercisable at October 31, 2016
|
1,780,000
|
|
$2.70
|
|
$
|
6,494,275
|
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, 2016:
|
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
| |
|
|
|
|
|
Weighted
Average
Exercise Price
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
| |
|
|
|
|
|
|
|
|
| |
$ 2.58 - $ 5.56
|
|
1,780,000
|
|
5.76
|
|
$2.70
|
Re-Priced Stock Options
On January 28, 2015, the Board of Directors authorized management of the Company to re-price issued and outstanding stock options for all of the officers, directors and employees of the Company, at any time prior to February 16, 2015. On February 5, 2015, management acted to re-price 2,184,125 issued and outstanding stock options (the Re-Priced Options) pursuant to the authority granted by the Board of Directors. The new exercise price of the Re-Priced Options is $2.575, the closing sales price of the Companys common stock on February 5, 2015. All other terms of the previously granted Re-Priced Options remain the same. The Company recorded additional stock-based compensation of approximately $297,000, as of February 5, 2015, 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.
Preferred Stock
In May 1986, our shareholders authorized 200,000 shares of preferred stock with a par value of $100 per share. The shares of preferred stock may be issued in series at the direction of the Board of Directors, and the relative rights, preferences and limitations of such shares will all be determined by the Board of Directors. As of October 31, 2016, 140 shares of preferred stock had been designated and issued as Series A Preferred Stock.
F-20
Series A Convertible Preferred Stock
On September 9, 2014, the Company designated 140 shares of the preferred stock as Series A Convertible Preferred Stock, par value $100 per share, in accordance with the Certificate of Designation of Series A Convertible Preferred Stock filed with the Secretary of State of the State of Delaware on September 9, 2014 (the Series A Convertible Preferred Stock). On September 9, 2014, 140 shares of Series A Convertible Preferred Stock with a stated value of $25,000 per share were issued in connection with the conversion of a Convertible Debenture due November 2016.
Ranking
The Series A Convertible Preferred Stock ranked senior to the Companys common stock, to all series of any other classes of equity which may be issued and to any indebtedness, unless the Company obtained the prior written consent of the Series A Convertible Preferred Stock holder.
Redemption
At any time on or after November 11, 2016 (the Redemption Date), and upon at least 60 days prior written notice to the Company (a Redemption Notice), any holder of the Series A Convertible Preferred Stock had a one-time right to require the Company to redeem all or some of its shares of Series A Convertible Preferred Stock (a Redemption) for cash generated from a subsequent sale of the Companys equity securities. The redemption price being equal to the stated value ($25,000 per share) of the shares of Series A Convertible Preferred Stock being converted, (the Redemption Purchase Price). Upon receipt of a Redemption Notice, the Company shall complete a sale or sales of its equity securities for the purpose of accumulating net proceeds sufficient to pay the Redemption Purchase Price.
On September 9, 2016, the holder of 140 shares of the Series A Convertible Preferred Stock delivered a Redemption Notice to the Company requesting a redemption date of November 11, 2016 (it being understood by the holder of the Series A Convertible Preferred Stock that the Company may only redeem shares of Series A Convertible Preferred Stock with the 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 Stock to exchange the Series A Preferred Stock for a secured debenture, cash and warrants. See Note 2, Subsequent Event.
Optional Conversion
Holders of the Series A Convertible Preferred Stock had the right at any time convert their shares of Series A Convertible Preferred Stock into such number of shares of the Companys common stock in such an amount equal to (a) the stated value of $25,000 per share of the shares of Series A Convertible Preferred Stock being converted, divided by the conversion price of $4.73, multiplied by (b) the number of shares of Series A Preferred Stock being converted.
The holder did not have the right to convert any portion of the Series A Convertible Preferred Stock if after giving effect to such conversion, the holder, together with any affiliate thereof, would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion.
F-21
The embedded conversion option had certain anti-dilution protection provisions which would be triggered if the Company issues its common stock, or certain common stock equivalents, (as defined) at a price below $3.55 per share.
Board and Observer Rights
Each holder of Series A Convertible Preferred Stock shall have the right, upon 10 days' prior written notice, to designate one representative, reasonably acceptable to the Company, who shall be entitled to attend and observe meetings of the Companys Board of Directors in a non-voting observer capacity (the Observer).
Accounting for the Series A Convertible Preferred Stock
The Company determined that the economic characteristics and risks of the conversion feature and the preferred stock instrument were clearly and closely related as equity instruments and accordingly, the conversion feature would not require separate accounting. In addition, the redemption feature was contingent upon Series A Convertible Preferred Stock not being converted into common stock and upon the holder delivering a redemption notice to the Company. Further, the redemption purchase price may only be paid from the proceeds of a subsequent sale of equity securities. Accordingly, the Series A Convertible Preferred Stock was accounted for as an equity instrument. Further, because the conversion rate of the Series A Convertible Preferred Stock of $4.73 per share was less than the Companys closing stock price on the date of this transaction, the Company determined that the Series A Convertible Preferred Stock contained a beneficial conversion feature. The beneficial conversion feature was recorded in additional paid-in-capital as a result of the Companys accumulated deficit
.
Common Stock Purchase Warrants
As of October 31, 2016, 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 369,979 shares of common stock at $7.75 per share expiring on November 11, 2016, warrants to purchase 8,000 shares of common stock at $6.925 per share expiring on June 2, 2017 and warrants to purchase 309,400 shares of common stock at $10.00 per share expiring on July 15, 2019.
6.
COMMITMENTS AND CONTINGENCIES
Patent Acquisition Obligations
As of October 31, 2016, we have incurred obligations due no later than November 2017 related to the acquisition of patents, which have a discounted present value of approximately $4,172,000, and which amount will be reduced by royalties paid during the period, if any. The payment due in November 2017 is payable at the option of the Company in cash or common stock. We recorded interest expense of approximately $520,000 and $452,000, respectively, for the years ended October 31, 2016 and 2015, for the accretion of interest on patent acquisition obligations. The payment due date of November 2017 may be extended for up to two years if any patent infringement lawsuit initiated by the Company is stayed because of any re-exam or similar proceeding in the United States Patent and Trademark Office.
F-22
Leases
We lease approximately 3,000 square feet of office space in Los Angeles, California pursuant to a lease that expires May 31, 2019. The lease contains base rentals of approximately $11,000 per month with annual increases of approximately 3% and an escalation clause for increases in certain operating expenses.
As of October 31, 2016, our non-cancelable operating lease commitments for the years ending October 31, 2017, 2018 and 2019 were approximately $129,000, 134,000 and $80,000, respectively. Rent expense for the years ended October 31, 2016 and 2015, was approximately $104,000 and $100,000, respectively.
Litigation Matters
On December 29, 2014, we settled our lawsuit against AUO which had been filed on January 28, 2013. For a more detailed description of the settlement with AUO see Note 1, Business and Funding - Description of Business - AUO Lawsuit and Settlement.
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.
7.
INCOME TAXES
Income tax provision (benefit) consists of the following:
|
Year Ended October 31,
|
|
2016
|
|
2015
|
Federal:
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
Deferred
|
|
(1,631,000)
|
|
|
(487,000)
|
State:
|
|
|
|
| |
Current
|
|
-
|
|
|
-
|
Deferred
|
|
(134,000)
|
|
|
(120,000)
|
Adjustment to valuation allowance related to net deferred tax assets
|
|
1,765,000
|
|
|
607,000
|
|
$
|
-
|
|
$
|
-
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset, net, at October 31, 2016 and 2015, are as follows:
|
2016
|
|
2015
|
Long-term deferred tax assets:
|
|
|
|
|
|
Federal and state NOL and tax credit carryforwards
|
$
|
33,079,000
|
|
$
|
31,261,000
|
Deferred compensation
|
|
6,232,000
|
|
|
6,522,000
|
Intangibles
|
|
713,000
|
|
|
483,000
|
Other
|
|
289,000
|
|
|
282,000
|
Subtotal
|
|
40,313,000
|
|
|
38,548,000
|
|
|
|
|
|
|
Less: valuation allowance
|
|
(40,313,000)
|
|
|
(38,548,000)
|
Deferred tax asset, net
|
$
|
-
|
|
$
|
-
|
F-23
As of October 31, 2016, we had tax net operating loss and tax credit carryforwards of approximately $79,428,000 and $1,110,000, respectively, available within statutory limits (expiring at various dates between 2020 and 2035), 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, 2016, management has not determined the extent of any such limitations, if any.
We had New York, California and Pennsylvania tax net operating loss carryforwards of approximately $76,847,000, $4,849,000 and $841,000, respectively, as of October 31, 2016, available within statutory limits (expiring at various dates between 2020 and 2035), to offset future corporate taxable income and taxes payable, if any, under certain computations of such taxes.
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,
|
|
2016
|
|
2015
|
Income tax benefit at U.S.
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory income Tax rate
|
$
|
(1,706,000)
|
|
(34.0)
|
%
|
|
$
|
(469,000)
|
|
(34.0)
|
%
|
State income taxes
|
|
(411,000)
|
|
(8.2)
|
%
|
|
|
(117,000)
|
|
(8.5)
|
%
|
Permanent differences
|
|
2,000
|
|
0.1
|
%
|
|
|
1,000
|
|
0.1
|
%
|
Expiring net operating losses, credits and other
|
350,000
|
|
7.0
|
%
|
|
|
(22,000)
|
|
(1.6)
|
%
|
Change in valuation allowance
|
|
1,765,000
|
|
35.1
|
%
|
|
|
607,000
|
|
44.0
|
%
|
Income tax provision
|
$
|
-
|
|
0.0
|
%
|
|
$
|
-
|
|
0.0
|
%
|
During the two fiscal years ended October 31, 2016, we incurred no Federal and no State income taxes. We have no unrecognized tax benefits as of October 31, 2016 and 2015 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.