ITUS CORPORATION

ANIXA BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(UNAUDITED)

1. BUSINESS AND FUNDING

Description of Business

As used herein, “we,” “us,” “our,” the “Company” or “ITUS”“Anixa” means ITUS CorporationAnixa Biosciences, Inc. and its wholly-ownedconsolidated subsidiaries. From inception through October 2012, ourOur primary operations involvedinvolve developing therapies and vaccines that are focused on critical unmet needs in oncology and infectious disease. Our vaccine programs include (i) the development of patented technologies ina preventative vaccine against triple negative breast cancer (“TNBC”), the areasmost lethal form of thin-film displaysbreast cancer, as well other forms of breast cancer and encryption.  Commencing in October 2012(ii) the primary operationsdevelopment of a preventative vaccine against ovarian cancer. Our therapeutics programs include (i) the development of a chimeric endocrine receptor T-cell therapy, a novel form of chimeric antigen receptor T-cell (“CAR-T”) technology, initially focused on treating ovarian cancer, which is being developed at our subsidiary, Certainty Therapeutics, Inc. (“Certainty”), and (ii) until March 2023, the development of anti-viral drug candidates for the treatment of COVID-19 focused on inhibiting certain protein functions of the Company involved the development, acquisition, licensing, and enforcement of patented technologies that were eithervirus.

We hold an exclusive worldwide, royalty-bearing license to use certain intellectual property owned or controlled by the Company.

In June of 2015, the Company announced the formation of a new subsidiary, Anixa Diagnostics CorporationThe Cleveland Clinic Foundation (“Anixa”Cleveland Clinic”), relating to certain breast cancer vaccine technology developed at Cleveland Clinic. Utilizing this technology, we are working in collaboration with Cleveland Clinic to develop a platformmethod to vaccinate women against contracting breast cancer, focused specifically on TNBC. The focus of this vaccine is a specific protein, α-lactalbumin, that is only expressed during lactation in a healthy mother’s mammary tissue. This protein disappears when the mother is no longer lactating, but reappears in many forms of breast cancer, especially TNBC. Studies have shown that vaccinating against this protein prevents breast cancer in mice.

Following the U.S. Food and Drug Administration’s (“FDA”) authorization to proceed with clinical trials in December 2020, in October 2021, we commenced dosing patients in a Phase 1 clinical trial of our breast cancer vaccine. This study, which is being funded by a U.S. Department of Defense grant, is a multiple-ascending dose Phase 1 trial to determine the maximum tolerated dose (“MTD”) of the vaccine in patients with early-stage, triple-negative breast cancer as well as monitor immune response. The study is being conducted at Cleveland Clinic. The first segment of the study, Phase 1a, will consist of 18 to 24 patients who have completed treatment for non-invasiveearly-stage, triple-negative breast cancer within the past three years and are currently tumor-free but at high risk for recurrence. Studies show that 42% of TNBC patients will have a recurrence of their cancer, with most of the recurrences occurring in the first two to three years after standard of care treatment. During the course of the Phase 1a study, participants will receive three vaccinations, each two weeks apart, and will be closely monitored for side effects and immune response. In April 2023, we presented the immunological data collected to date at the annual meeting of the American Association for Cancer Research. The data presented show that in the vaccinated women who had been tested to date, various levels of antigen-specific T cell responses were observed at all dose levels. In January 2023, the number of participants in each dose cohort was expanded, and as of August 2023, we have completed vaccinating all patients in these expanded cohorts. The patient blood testssamples are currently being analyzed, and we anticipate presenting data from all Phase 1a trial participants vaccinated to date at the San Antonio Breast Cancer Symposium in December 2023. In the coming months, we will begin vaccinating participants in two additional dose cohorts at dose levels higher than the currently determined maximum tolerated dose and lower than the highest dose where we saw dose limiting toxicity. Further, we have commenced recruitment for participants in the second segment of the trial, Phase 1b, that will include participants who have never had cancer, but carry certain genetic mutations that indicate a greater risk of developing TNBC in the future. Finally, we have also commenced recruitment for participants in the third segment of the trial, Phase 1c, that will include participants who are currently undergoing treatment with pembrolizumab (Keytruda®).

In November 2020, we executed a license agreement with Cleveland Clinic pursuant to which the Company was granted an exclusive worldwide, royalty-bearing license to use certain intellectual property owned or controlled by Cleveland Clinic relating to certain ovarian cancer vaccine technology. This technology pertains to among other things, the use of vaccines for the early detectiontreatment or prevention of cancer.  That platform is called CchekÔ ovarian cancers which express the anti-Mullerian hormone receptor 2 protein containing an extracellular domain (“AMHR2-ED”). In Julyhealthy tissue, this protein regulates growth and development of 2015, ITUS announcedegg-containing follicles in the ovary. While expression of AMHR2-ED naturally and markedly declines during menopause, this protein is expressed at high levels in the ovaries of postmenopausal women with ovarian cancer. Researchers at Cleveland Clinic believe that a collaborativevaccine targeting AMHR2-ED could prevent the occurrence of ovarian cancer. We entered into a joint development agreement with Cleveland Clinic to advance this vaccine toward human clinical testing.

In May 2021, Cleveland Clinic was granted an award for our ovarian cancer vaccine technology by the National Cancer Institute’s (“NCI”) PREVENT program. The NCI is a part of the National Institutes of Health (“NIH”). The PREVENT program is a peer-reviewed agent development program designed to support pre-clinical development of innovative interventions and biomarkers for cancer prevention and interception towards clinical trials. The scientific and financial resources of the PREVENT program are being used for our ovarian cancer vaccine technology to perform virtually all pre-clinical research agreementand development, manufacturing and IND-enabling studies. This work is being performed at NCI facilities, by NCI scientific staff and with NCI financial resources and will require no material financial expenditures by the Company, nor the transfer of any rights of the Company’s assets.

Our subsidiary, Certainty, is developing immuno-therapy drugs against cancer. Certainty holds an exclusive worldwide, royalty-bearing license to use certain intellectual property owned or controlled by The Wistar Institute (“Wistar”), the nation’s first independent biomedical research institute and a leading National Cancer InstituteNCI designated cancer research center, for the purpose of validating our cancer detection methodologies and establishing protocols for identifying certain biomarkers in the blood which we identified and which are known to be associated with malignancies.  In August of 2016 and again in August of 2017, ITUS announced the renewal and expansion of our relationship with Wistar.

From October of 2015 through January of 2017, ITUS announced that we had demonstrated the efficacy of our CchekÔ early cancer detection platform with 15 different types of cancer, including:  breast, lung, colon, melanoma, ovarian, liver, thyroid, pancreatic, appendiceal, uterine, osteosarcoma, leiomyosarcoma, liposarcoma, vulvar and prostate.  Breast, lung, colon and prostate cancers represent the four largest categories of cancer worldwide.

In November of 2017, the Company announced the formation of a new subsidiary, Certainty Therapeutics, Inc. (“Certainty”), to develop immuno-therapy drugs against cancer.  Certainty entered into a license agreement with Wistar pursuant to which Certainty was granted an exclusive worldwide, royalty-bearing license to use certain intellectual property owned or controlled by Wistar relating to Wistar’s chimeric endocrine receptor targeted therapy technology (such technology being akin to chimeric antigen receptor T-cell (“CAR-T”) technology).technology. We plan tohave initially focusfocused on the development of a treatment for ovarian cancer, but we also may pursue future applications of the technology for the development of treatments for additional solid tumors. The license agreement requires Certainty to make certain cash and equity payments to Wistar.Wistar upon achievement of specific development milestones. With respect to Certainty’s equity obligations to Wistar, Certainty issued to Wistar shares of its common stock equal to five percent (5%(5%) of the common stock of Certainty.

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On November 20, 2017, we announced that Certainty, entered into ain collaboration agreement with the H. Lee Moffitt Cancer Center and Research Institute, Inc. (“Moffitt”) to advance toward, has begun human clinical testing of the CAR-T technology licensed by Certainty from Wistar aimed initially at treating ovarian cancer. Certainty intendsWe received authorization from the FDA in August 2021, to workcommence enrollment and treatment of patients in a Phase 1 clinical trial. We began patient recruitment for the trial in March 2022, and in August 2022, we treated the first patient in the trial, and the treatment was well-tolerated by the patient. Further, in May 2023 and August 2023, we treated the second and third patients in the trial, respectively, at the same dose level as the first patient, and the treatment appears to have been well-tolerated by both patients. We anticipate that we will begin enrolling the successive patient cohort, that we expect to give a three-times higher dose of cells, in the fourth quarter of 2023. This study is a dose-escalation trial with researcherstwo arms based on delivery method—intraperitoneal or intravenous—to determine the maximum tolerated dose in patients with recurrent epithelial ovarian cancer and to assess persistence, expansion and efficacy of the modified T-cells. The study is being conducted at Moffitt and will consist of 24 to complete studies necessary48 patients who have received at least two prior lines of chemotherapy. The study is estimated to submitbe completed in two to four years depending on multiple factors including when maximum tolerated dose is reached, the rate of patient enrollment, and how long we maintain the two different delivery methods.

In April 2020, we entered into a collaboration with OntoChem GmbH (“OntoChem”) which was later assigned to MolGenie GmbH (“MolGenie”), a company spun-out from OntoChem focused on drug discovery and development, to discover and ultimately develop anti-viral drug candidates against COVID-19. Through this collaboration, we identified compounds that appeared to be effective in disrupting the main protease of SARS-CoV-2, the virus that causes the disease COVID-19. While our compounds have shown promise as an Investigational New Drug (“IND”) application with the U.S. Food and Drug Administration (“FDA”).

On January 29, 2018, we announced theeffective treatment, results of animal studies indicate that there is not sufficient oral bioavailability, and it is unclear whether an orally delivered treatment may be developed. We do not currently believe that there is a study augmenting dataviable market for an injectable treatment given the current oral treatments available. Furthermore, we believe the needed additional investment in research for alternative delivery methods would divert resources from more promising projects. Therefore, on March 9, 2023, we decided to pause further development of our preliminary study releasedCOVID-19 therapeutic. We continue to prosecute our U.S. patent applications of this technology and may decide to restart development at some time in December 2016. The majority of patient samples collected for this study were from breast cancer and prostate cancer patients, but several other types were also included. With the additional cancers included in this study, we have now demonstrated our technology with 20 types of cancer from solid tumors. In addition to the 15 cancer types noted above, we have evaluated bladder, cervical, head and neck, gastric and testicular cancers.future.

Over the next several quarters, we expect Cchek™the development of our vaccines and Certainty’s ovarian cancer treatmenttherapeutics 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.its various patent portfolios. 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 quarters,years, our revenue was derived from technology licensing and the sale of patented technologies, including revenue from the settlement of litigation.litigation (during the nine months ended July 31, 2023, we derived approximately $210,000 of revenue from these activities). We have not generated any revenue to date from our vaccine or therapeutics programs. In addition, to Anixawhile we pursue our vaccine and Certainty, the Companytherapeutics programs, we may also make investments in and form new companies to develop additional emerging technologies. We do not expect to begin generating revenue with respect to any of our current vaccine or therapy programs in the near term. We hope to achieve a profitable outcome by eventually licensing our technologies to large pharmaceutical companies that have the resources and infrastructure in place to manufacture, market and sell our technologies as vaccines or therapeutics. The eventual licensing of any of our technologies may take several years, if it is to occur at all, and may depend on positive results from human clinical trials.

Funding and Management’s Plans

During the three months ended January 31, 2018, cash used in operating activities was approximately $1,340,000.  Net cash provided by investing activities was approximately $847,000, which reflects the purchase of certificates of deposit totaling $1,250,000, offset by proceeds from the sale or maturity of certificates of deposit totaling $2,100,000 and the purchase of property and equipment of approximately $3,000.  As a result, our cash, cash equivalents and short-term investments at January 31, 2018 decreased by approximately $1,342,000 to approximately $5,497,000 from approximately $6,839,000 at the end of fiscal year 2017.

Based on currently available information as of March 8, 2018,September 6, 2023, we believe that our existing cash, cash equivalents, short-term investments and expected cash flows will be sufficient to fund our activities for at least the next 12twelve 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 complimentarycomplementary to our technologies, we may be required to obtain more working capital. Under our at-the-market equity program as of July 31, 2023, we may sell up to $100 million of common stock. We did not sell any shares under our at-the-market equity program during the three and nine months ended July 31, 2023. We may seek to obtain working capital during our fiscal year ending 20182023 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 couldwill result in dilution to our shareholders.  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.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 Contents2. SIGNIFICANT ACCOUNTING POLICIES

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 fiscal year ended October 31, 2017.2022. The accompanying October 31, 20172022 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”).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 JanuaryJuly 31, 2018,2023, and results of operations and cash flows for the interim periods represented. The results of operations for the three and nine months ended JanuaryJuly 31, 20182023 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 threenine months ended JanuaryJuly 31, 2018:2023 (in thousands):

SCHEDULE OF CHANGES IN NONCONTROLLING INTEREST

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Revenue Recognition

Our revenue has been derived solely from technology licensing and the sale of patented technologies. Revenue is recognized when (i) persuasive evidenceupon transfer of control of intellectual property rights and satisfaction of other contractual performance obligations to licensees in an arrangement exists, (ii) allamount that reflects the consideration we expect to receive.

Our revenue recognition policy requires us 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 have been substantially performed pursuant to transfer goods and services, identifying the termsperformance obligations in the contract, determining the transaction price and allocating the transaction price to separate performance obligations, estimating the timing of the arrangement, (iii) amounts are fixedsatisfaction of performance obligations, determining whether a promise to grant a license is distinct from other promised goods or determinable,services and (iv) the collectability of amounts is reasonably assured.evaluating whether a license transfers to a customer at a point in time or over time.

Patent Licensing Revenue

In certain instances, our pastOur revenue arrangements have providedprovide for the payment, within 30 days of execution of the agreement, 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 hadhave no further obligations.   As such,obligations with respect to the earnings processgranted 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 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.agreements.

Intangible Assets

Cost of Revenues

Our only identifiable intangible assets are patents and patent rights.  We capitalize patent and patent rights acquisition

Cost of revenues include the costs and amortizeexpenses 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 and licensing and enforcement related research, consulting and other expenses paid to third-parties. 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 immuno-therapy drugs against cancer, developing anti-viral drug candidates for COVID-19 (through March 2023), developing our breast cancer vaccine, and developing our ovarian cancer vaccine, are expensed in the consolidated financial statements in the period incurred.

Investment Policy

The Company’s investment policy is to acquire debt securities with fixed maturities and contractual cash flows that the Company has the positive intent and ability to hold to maturity. These securities are recorded at amortized cost, over the estimated economic useful life.  We did not capitalizenet of any patent acquisition costs during the three months ended January 31, 2018applicable discount which is amortized to interest income, and 2017.  We recorded patent amortization expense of approximately $81,000 during each of the three-month periods ended January 31, 2018 and 2017, respectively.are accounted for as held-to-maturity securities.

2.         STOCK BASED3. SHARE-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.

Stock Option Compensation Expense

The compensation cost for service basedservice-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 recognized as an expenseexpensed on a straight-line basis over the requisite service period (the vesting period of the stock option) which is one to tenfour years. We recorded stock-basedshare-based compensation expense related to service-based stock options granted to employees and directors of approximately $214,000$1,153,000 and $260,000$941,000 during the three months ended JanuaryJuly 31, 20182023 and 2017,2022, respectively, and approximately $3,265,000 and $2,546,000 during the nine months ended July 31, 2023 and 2022, respectively.

For stock options granted to employees and directors that vest based on market conditions, such as the trading price of the Company’s common stock exceeding certain price targets, we use a Monte Carlo Simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period (median time to vest). On June 1, 2021, our Chairman and Chief Executive Officer and our President, Chief Operating Officer and Chief Financial Officer were awarded market condition stock options for 2,000,000 shares and 100,000 shares of common stock, respectively, that vest in four equal installments upon the Company’s share price achieving targets ranging from $5.00 to $8.00 per share, with implied service periods of three to fifteen months. We recorded market condition stock-based compensation expense during the three months ended July 31, 2023 and 2022 of approximately $0 and $388,000, respectively, and approximately $0 and $2,381,000 during the nine months ended July 31, 2023 and 2022, respectively.