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ANIXA BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.         BUSINESS AND FUNDING

Certainty, in collaboration with the H. Lee Moffitt Cancer Center and Research Institute, Inc. (“Moffitt”), is advancing toward human clinical testing its CAR-T technology for treating ovarian cancer.  Clinical grade materials are currently being manufactured and upon completion will undergo extensive testing.  Once the materials have been successfully tested, we will be prepared to submit an IND application with the FDA.  While we anticipate filing the IND by the end of 2020, we may experience delays in completing the manufacturing and testing of clinical materials due to the global coronavirus pandemic.  We do not currently anticipate any potential delays to significantly alter our expected timeline.  The IND application, after review and approval by the FDA, will enable us to begin testing our therapy in ovarian cancer patients. 

In April 2020, in collaboration with OntoChem GmbH (“OntoChem”), we have commenced a project to discover and ultimately develop anti-viral drug candidates for COVID-19.  Through this collaboration, we are utilizing advanced computational methods, machine learning, and molecular modeling techniques to perform in silico screening of over 1.2 billion compounds in chemical libraries (including publicly available compounds and OntoChem’s proprietary libraries) to evaluate if any of these compounds could disrupt one of two key enzymes of SARS-CoV-2, the virus that causes the disease COVID-19. 

While the screening process is ongoing and we anticipate discovering several drug candidates, we have identified a lead molecule as well as three similar analog compounds.  Our in silico molecular modeling indicates that any of these four compounds might disrupt the interaction of the virus’ endoribonuclease with a host human protein that is necessary for the virus to replicate upon infection.  Disrupting this protein-protein interaction is expected to dramatically reduce or eliminate the virus’ ability to cause disease.  The biological testing of these compounds will initially determine how well they bind to the endoribonuclease, and then how well this translates into reducing viral replication in human host cells.  We anticipate completing  the in vitro biological assays within the next two to three months.  If the biological activity of any of these compounds is verified, they will be tested in animal studies to further evaluate their candidacy as COVID-19 therapeutics.

Our subsidiary, Anixa Diagnostics Corporation (“Anixa Diagnostics”), is developing Cchek™, an AI driven platform of non-invasive blood tests for the early detection of cancer which is based on the body’s immune response to the presence of a malignancy.  We have demonstrated the efficacy of Cchek™ with 20 different types of cancer:  breast, lung, colon, melanoma, ovarian, liver, thyroid, pancreatic, appendiceal, uterine, osteosarcoma, leiomyosarcoma, liposarcoma, vulvar, prostate, bladder, cervical, head and neck, gastric and testicular cancers.  Breast, lung, colon and prostate cancers represent the four largest categories of cancer worldwide.

Based on a number of factors, including key scientific, clinical, and commercial considerations, for the past year the primary commercial focus for Cchek™ has been on developing a prostate cancer confirmatory test.  In February 2019 we formed a strategic alliance with ResearchDx, a CLIA certified, CAP Accredited laboratory, to prepare the Cchek™ Prostate Cancer Confirmation (“Cchek™ PCC”) test for launch as a laboratory developed test.  In December 2019, upon completion of independent analytical validation by ResearchDx, we announced the commercial launch of Cchek™ PCC.  We are currently conducting a number of activities to support the marketing of Cchek™ PCC, including the completion of a clinical validation study, development of marketing materials, education of key opinion leaders in urology and development of a reimbursement path for the test.  These activities, including the clinical validation study, have been delayed for a number of reasons, including the global coronavirus pandemic.

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Over the next several quarters, we expect the development of our breast cancer vaccine, Certainty’s CAR-T technology, our COVID-19 therapeutic discovery program and Anixa Diagnostic’s Cchek™ to be the primary focus of the Company.  As part of our legacy operations, the Company remains engaged in limited patent licensing activities in the area of encrypted audio/video conference calling.  We do not expect these activities to be a significant part of the Company’s ongoing operations nor do we expect these activities to require material financial resources or attention of senior management.

Over the past several years, our revenue was derived from technology licensing and the sale of patented technologies, including revenue from the settlement of litigation.  We have not generated any revenue to date from our cancer therapeutics and diagnostics programs.  In addition, while we pursue our cancer therapeutics and diagnostics programs, we may also make investments in and form new companies to develop additional emerging technologies.

Funding and Management’s Plans

Based on currently available information as of June 9, 2020, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows will be sufficient to fund our activities for the next twelve months.  We have implemented a business model that conserves funds by collaborating with third parties to develop our technologies.  However, our projections of future cash needs and cash flows may differ from actual results.  If current cash on hand, cash equivalents, short-term investments and cash that may be generated from our business operations are insufficient to continue to operate our business, or if we elect to invest in or acquire a company or companies or new technology or technologies that are synergistic with or complementary to our technologies, we may be required to obtain more working capital.  During the six months ended April 30, 2020, we raised an aggregate of approximately $3,034,000, net of expenses, through the sale of 1,094,063 shares of common stock in our at-the-market equity offerings. This included  approximately $427,000, net of expenses, through the sale of 112,238 shares of common stock in an at-the market equity offering which expired in November 2019 and approximately $2,607,000, net of expenses, through the sale of 981,825 shares of common stock in an at-the-market equity offering under which we may issue up to $50 million of common stock.  Under our current at-the-market equity program which is currently effective and may remain available for us to use in the future, we may sell an additional approximately $47,248,000 of common stock.  We may seek to obtain working capital during our fiscal year 2020 or thereafter through sales of our equity securities or through bank credit facilities or public or private debt from various financial institutions where possible.  We cannot be certain that additional funding will be available on acceptable terms, or at all.  If we do identify sources for additional funding, the sale of additional equity securities or convertible debt could result in dilution to our stockholders. We can give no assurance that we will generate sufficient cash flows in the future to satisfy our liquidity requirements or sustain future operations, or that other sources of funding, such as sales of equity or debt, would be available or would be approved by our security holders, if needed, on favorable terms or at all.  If we fail to obtain additional working capital as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition.  Furthermore, such lack of funds may inhibit our ability to respond to competitive pressures or unanticipated capital needs, or may force us to reduce operating expenses, which would significantly harm the business and development of operations.

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Table of Contents

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, certain information and disclosures required by generally accepted accounting principles in annual financial statements have been omitted or condensed.  These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures included in our Annual Report on Form 10-K for the year ended October 31, 2019.  The accompanying October 31, 2019 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by US GAAP.  The condensed consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of April 30, 2020, and results of operations and cash flows for the interim periods represented.  The results of operations for the six months ended April 30, 2020 are not necessarily indicative of the results to be expected for the entire year.

Noncontrolling Interest

Noncontrolling interest represents Wistar’s equity ownership in Certainty and is presented as a component of equity.  The following table sets forth the changes in noncontrolling interest for the six months ended April 30, 2020:

Revenue Recognition

Since fiscal 2016 our revenue has been derived solely from technology licensing and the sale of patented technologies.  Revenue is recognized upon transfer of control of intellectual property rights and satisfaction of other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive. 

On November 1, 2018 we adopted Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers using the modified retrospective method.  Upon adoption of ASU 2014-09 we are required to make certain judgments and estimates in connection with the accounting for revenue.  Such areas may include determining the existence of a contract and identifying each party’s rights and obligations to transfer goods and services, identifying the performance obligations in the contract, determining the transaction price and allocating the transaction price to separate performance obligations, estimating the timing of satisfaction of performance obligations, determining whether a promise to grant a license is distinct from other promised goods or services and evaluating whether a license transfers to a customer at a point in time or over time.

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Our revenue arrangements provide for the payment of contractually determined, one-time, paid-up license fees in settlement of litigation and in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by the Company.  These arrangements typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by the Company, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation.  In such instances, the intellectual property rights granted have been perpetual in nature, extending until the expiration of the related patents.  Pursuant to the terms of these agreements, we have no further obligations with respect to the granted intellectual property rights, including no obligation to maintain or upgrade the technology, or provide future support or services.  Licensees obtained control of the intellectual property rights they have acquired upon execution of the agreement.  Accordingly, the performance obligations from these agreements were satisfied and 100% of the revenue was recognized upon the execution of the agreements.  The adoption of ASU 2014-09 had no impact on revenue recognized.

Cost of Revenues

Cost of revenues include the costs and expenses incurred in connection with our patent licensing and enforcement activities, including inventor royalties paid to original patent owners, contingent legal fees paid to external counsel, other patent-related legal expenses paid to external counsel, licensing and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related investment costs.  These costs are included under the caption “Operating costs and expenses” in the accompanying condensed consolidated statements of operations.

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, developing immuno-therapy drugs against cancer, development of our breast cancer vaccine and development of anti-viral drugs candidates for COVID-19, are expensed in the consolidated financial statements in the period incurred.

2.         STOCK BASED COMPENSATION

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

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Stock Option Compensation Expense

The compensation cost for service-based stock options granted to employees and directors is measured at the grant date, based on the fair value of the award using the Black-Scholes pricing model, and is expensed on a straight-line basis over the requisite service period (the vesting period of the stock option) which is one to four years.  We recorded stock-based compensation expense related to service-based stock options granted to employees and directors of approximately $2,019,000 and $1,649,000 during the six months ended April 30, 2020 and 2019, respectively, and approximately $1,055,000 and $805,000 during the three months ended April 30, 2020 and 2019, respectively.

During the six months ended April 30, 2020, we granted options to purchase 800,000 shares of common stock to employees and consultants, with exercise prices ranging from $3.84 to $4.04 per share, pursuant to the Anixa Biosciences, Inc. 2018 Share Incentive Plan (the “2018 Share Plan”).  We did not grant any options during the six months ended April 30, 2019.  During the six months ended April 30, 2020 and 2019, stock options to purchase 43,900 and 30,000 shares of common stock, respectively, were exercised with aggregate proceeds of approximately $104,000 and $80,000, respectively. 

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Stock Option Plans

During the six months ended April 30, 2020, we had three stock option plans: the Anixa Biosciences, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"), the Anixa Biosciences, Inc. 2010 Share Incentive Plan (the "2010 Share Plan") and the 2018 Share Plan, which were adopted by our Board of Directors on April 21, 2003, July 14, 2010 and January 25, 2018, respectively.  The 2018 Share Plan was approved by our shareholders on March 29, 2018.

2003 Plan

During the six months ended April 30, 2020, the remaining outstanding options granted under the 2003 Share Plan expired.  In accordance with the provisions of the 2003 Share Plan, the plan terminated with respect to the ability to grant future options on April 21, 2013.  Information regarding the 2003 Share Plan for the six months ended April 30, 2020 is as follows:

Information regarding the 2003 Share Plan for the six months ended April 30, 2019 is as follows:

The following table summarizes information about stock options outstanding and exercisable under the 2003 Share Plan as of April 30, 2019:

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2010 Plan

The 2010 Share Plan provides for the grant of nonqualified stock options, stock appreciation rights, stock awards, performance awards and stock units to employees, directors and consultants.  As of April 30, 2020, the 2010 Share Plan had 800,000 shares available for future grants.  Information regarding the 2010 Share Plan for the six months ended April 30, 2020 is as follows:

The following table summarizes information about stock options outstanding and exercisable under the 2010 Share Plan as of April 30, 2020:

Information regarding the 2010 Share Plan for the six months ended April 30, 2019 is as follows:

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The following table summarizes information about stock options outstanding and exercisable under the 2010 Share Plan as of April 30, 2019:

            2018 Plan

The 2018 Share Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, performance awards and stock units to employees, directors and consultants.  As of April 30, 2020, the 2018 Share Plan had 2,000,000 shares available for future grants.  Information regarding the 2018 Share Plan for the six months ended April 30, 2020 is as follows:

The following table summarizes information about stock options outstanding and exercisable under the 2018 Share Plan as of April 30, 2020:

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Information regarding the 2018 Share Plan for the six months ended April 30, 2019 is as follows:

The following table summarizes information about stock options outstanding and exercisable under the 2018 Share Plan as of April 30, 2019:

Outside of Share Plans

In addition to options granted under the 2003 Share Plan, the 2010 Share Plan and the 2018 Share Plan, during the years ended October 31, 2012 and 2013, the Board of Directors approved the grant of stock options to certain employees and directors.  Information regarding stock options that were granted outside of Share Plans for the six months ended April 30, 2020 is as follows:

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The following table summarizes information about stock options outstanding and exercisable that were granted outside of Share Plans as of  April 30, 2020:

Information regarding stock options that were granted outside of Share Plans for the six months ended April 30, 2019 is as follows:

The following table summarizes information about stock options outstanding and exercisable that were granted outside of Share Plans as of April 30, 2019:

Stock Awards

For stock awards granted to employees, directors and consultants that vest upon grant we recognize expense at the date of grant based on the grant date market price of the underlying common stock.  We did not grant any stock awards that vested upon grant during the six months ended April 30, 2020 or 2019.

On May 8, 2018, a restricted stock award of 1,500,000 shares of common stock was granted under the 2018 Share Plan to our Chairman, President and Chief Executive Officer.  The restricted stock award vests in its entirety upon achievement of a target trading price of $11.00 per share of the Company’s common stock before May 31, 2021.  For restricted stock awards vesting upon achievement of a price target of our common stock we use a Monte Carlo Simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period (median time to vest).  During the six-month and three-month periods ended April 30, 2019, we recorded compensation expense related to the restricted stock award of approximately $1,954,000 and $470,000, respectively.  We did not record any compensation expense related to the restricted stock award during the six-month period ended April 30, 2020.

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Employee Stock Purchase Plan

            The Company maintains the Anixa Biosciences, Inc. Employee Stock Purchase Plan which permits eligible employees to purchase shares at not less than 85% of the market value of the Company’s common stock on the offering date or the purchase date of the applicable offering period, whichever is lower.  The plan was adopted by our Board of Directors on August 13, 2018 and approved by our shareholders on September 27, 2018.  During the six months ended April 30, 2020, employees purchased 9,618 shares with aggregate proceeds of approximately $15,000.  During the six months ended April 30, 2019, employees purchased 5,411 shares with aggregate proceeds of approximately $19,000.

Warrants

During the six months ended April 30, 2019 we issued a warrant, expiring on November 1, 2023, to purchase 25,000 shares of common stock at $4.04 per share, vesting over 12 months, to a consultant for investor relations services.  On November 1, 2019 the warrant was exchanged for a stock option with the same terms as the warrant.  During the six-month and three-month periods ended April 30, 2019, we recorded consulting expense of approximately $43,000 and $21,000, respectively, based on the fair value of the warrant recognized on a straight-line basis over the vesting period.  No warrants were issued during the six months ended April 30, 2020.

As of April 30, 2020, we also had warrants outstanding to purchase 500,000 shares of common stock at $5.03 per share expiring on November 30, 2021.

3.         FAIR VALUE MEASUREMENTS

US GAAP defines fair value and establishes a framework for measuring fair value.  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.

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

The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of April 30, 2020:

The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2019: