CytoDyn Inc. - Quarter Report: 2020 August (Form 10-Q)

 

 

 

FORM 10-Q

 

 

 

Commission File Number: 000-49908

 

 

 

(Registrant’s telephone number, including area code)

S-T

 

non-accelerated

Rule 12b-2

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

12b-2

On September 30, 2020, there were 570,751,049 shares outstanding of the registrant’s $0.001 par value common stock.

 

 

 

		PAGE
PART I			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			36
ITEM 4. CONTROLS AND PROCEDURES			36
PART II			36
ITEM 1. LEGAL PROCEEDINGS			36
ITEM 1A. RISK FACTORS			37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			38
ITEM 4. MINE SAFETY DISCLOSURES			38
ITEM 5. OTHER INFORMATION			38
ITEM 6. EXHIBITS			39

CytoDyn Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share data)

 

See accompanying notes to unaudited consolidated financial statements.

 

3

CytoDyn Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

See accompanying notes to unaudited consolidated financial statements.

 

4

CytoDyn Inc.

Consolidated Statement of Changes in Stockholders’ (Deficit)/ Equity

(Unaudited)

(In thousands, expect per share data)

 

 

CytoDyn Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

Note 1 – Organization

graft-vs-host

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

Reclassifications

Going Concern

The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash is maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. Balances in excess of federally insured limits at August 31, 2020 and May 31, 2020 approximated $18.0 million and $14.0 million, respectively.

Research and development costs are expensed as incurred. Clinical trial costs incurred through third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development collaboration arrangements or other contractual agreements, the milestone payment obligations are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable.

pre-launch

 

9

The Company capitalizes inventories procured or produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when the results of clinical trials have reached a status sufficient to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and the Company has determined it is probable that these capitalized costs will provide some future economic benefit in excess of capitalized costs. The material factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive Phase clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the compilation of the regulatory application. The Company closely monitors the status of the product within the regulatory review and approval process, including all relevant communication with regulatory authorities. If the Company is aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory may no longer qualify for capitalization.

 

pre-launch

pre-approval

 

10

 

non-lease

U.S. GAAP requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award (requisite service period) or when designated milestones have been achieved.

The Company accounts for stock-based awards established by the fair market value of the instrument using the Black-Scholes option pricing model utilizing certain weighted average assumptions including stock price volatility, expected term and risk-free interest rates, as of the grant date. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the stock-based award. The expected volatility is based on the historical volatility of the Company’s common stock on monthly intervals. The computation of the expected option term is based on the “simplified method,” as the Company issuances are considered “plain vanilla” options. For stock-based awards with defined vesting, the Company recognizes compensation expense over the requisite service period or when designated milestones have been achieved. The Company estimates forfeitures at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Based on limited historical experience of forfeitures, the Company estimated future unvested forfeitures at 0% for all periods presented. Periodically, the Company will issue restricted common stock to executives or third parties as compensation for services rendered. Such stock awards are valued at fair market value on the effective date of the Company’s obligation.

Under the Company’s Certificate of Incorporation, as amended, the Company is authorized to issue up to 800,000,000 shares of common stock. As of August 31, 2020, the Company had 569,882,808 shares of common stock outstanding.

The Company’s Board is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of August 31, 2020, the Company had 400,000 shares authorized and 87,100 shares outstanding of Series B convertible preferred stock, 8,203 shares authorized and outstanding of Series C convertible preferred stock, and 11,737 shares authorized and 8,452 shares outstanding of Series D convertible preferred stock. The remaining authorized preferred shares have no specified rights.

 

11

Treasury stock purchases are accounted for under the par value method, whereby the cost of the acquired stock is recorded at par value. As of August 31, 2020, the Company holds 442,578 shares of $0.001 par value common stock as treasury stock.

During the three months ended August 31, 2020, the Company incurred approximately $3.4 million of debt discount related to the issuance of the July 2020 Note, as described in Note 5. The discount is amortized over the life of the convertible promissory note. During the three months ended August 31, 2020 and August 31, 2019, the Company recorded approximately $1.3 million and $1.0 million of related amortization, respectively.

During the three months ended August 31, 2020, the Company incurred $0.1 million of direct costs associated with the issuance of the July 2020 Note, as described in Note 5. During the three months ended August 31, 2020 and August 31, 2019, the Company recognized related amortization of approximately $4,000 and $284,000, respectively.

During the three months ended August 31, 2020 and the year ended May 31, 2020, the Company incurred approximately $0.4 million and $2.3 million respectively, in direct incremental costs associated with the sale of equity securities as fully described in Note 11. The costs were recorded as a component of equity upon receipt of the proceeds.

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share would include the weighted average common shares outstanding and potentially dilutive common stock equivalents. Because of the net losses for all periods presented, the basic and diluted weighted average shares outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share. For this reason, common stock options and warrants to purchase approximately 87 million and 155 million shares of common stock were not included in the computation of basic and diluted weighted average number of shares of common stock outstanding for the three months ended August 31, 2020 and August 31, 2019, respectively. As of August 31, 2020 and August 31, 2019 the Company had convertible notes outstanding, 9.8 million and 11.6 million common shares, respectively; and shares of Series D, Series C and Series B convertible preferred stock, including undeclared dividends, that could potentially convert in the aggregate into approximately 30.3 million and 11.7 million common shares, respectively.

Deferred taxes are provided on the asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

12

740-10,

740-10.

In accordance with Section 15 of the Internal Revenue Code, the Company utilized a federal statutory rate of 21% for the three months ended August 31, 2020 and August 31, 2019. The net tax expense for the three months ended August 31, 2020 and  is zero. The Company has a full valuation allowance as of August 31, 2020 and May 31, 2020, as management does not consider it more than likely than not that the benefits from the deferred taxes will be realized.

Recent accounting pronouncements, other than below, issued by the FASB (including its EITF), the AICPA and the SEC did not or are not believed by management to have a material effect on the Company’s present or future financial statements.

No. 2019-12,

No. 2020-06,

No. 2020-06

 impact if any,

 consolidated

-

-

progress

related to

 production

of pre-launch inventories

 the

from pre-filing meetings

.

Inventories as of August 31, 2020 and May 31, 2020 are presented below (in thousands):

 

 

On January 28, 2020, the Company filed a certificate of designation (the “Series D Certificate of Designation”) to authorize 11,737 shares of Series D Convertible Preferred Stock, $0.001 par value per share (“Series D Preferred Stock”), and on January 31, 2020 issued 7,570 shares of Series D Convertible Preferred Stock, at $1,000.00 per share for cash proceeds totaling $7,565,000, net of offering costs of $5,000. On March 13, 2020, the Company issued an additional 882 shares of Series D Preferred Stock at $1,000.00 per share resulting in net proceeds of $882,000. As of August 31, 2020, 8,452 shares remain outstanding. The Series D Certificate of Designation provides, among other things, that holders of Series D Preferred Stock shall be entitled to receive cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series D Preferred Stock, to be paid, at the option of the holder, in cash or in shares of common stock at the rate of $0.50 per share. Any dividends paid by the Company will first be paid to the holders of Series D Preferred Stock prior and in preference to any payment or distribution to holders of common stock. Dividends on the Series D Preferred Stock shall be cumulative and there are no sinking fund provisions applicable to the Series D Preferred Stock. The Series D Dividends are to be paid annually in arrears on the last day of December each year. The Series D Preferred Stock does not have redemption rights. The stated value per share for the Series D Preferred Stock is $1,000.00 (the “Series D Stated Value”). In the event of any liquidation, dissolution or winding up of the Company, the holders of Series D Preferred Stock will be entitled, on a pari passu basis with the holders of the Series C Preferred Stock and in preference to any payment or distribution to any holders of the Series B Preferred Stock or common stock, an amount per share equal to the Series D Stated Value plus the amount of any accrued and unpaid dividends.. If, at any time while the Series D Preferred Stock is outstanding, the Company effects any reorganization, merger or sale of the Company or substantially all of its assets (each a “Fundamental Transaction”), a holder of the Series D Preferred Stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series D Preferred Stock immediately prior to the Fundamental Transaction. Each share of Series D Preferred Stock is convertible at any time at the holder’s option into that number of fully paid and nonassessable shares of common stock determined by dividing the Series D Stated Value by the conversion price of $0.80 (subject to adjustment as set forth in the certificate of designation for the Series D Preferred Stock). No fractional shares will be issued upon the conversion of the Series D Preferred Stock. Except as otherwise provided in the Series D Certificate of Designation or as otherwise required by law, the Series D Preferred Stock has no voting rights. As of August 31, 2020, the accrued dividends were approximately $0.5 million or 606,000 shares of common stock.

On March 20, 2019, the Company filed a certificate of designation (the “Series C Certificate of Designation”) to authorize 5,000 shares and issued 3,246 shares of Series C Convertible Preferred Stock, $0.001 par value per share (“Series C Preferred Stock”), at $1,000.00 per share for cash proceeds totaling $3,083,700, net of offering costs of $162,300. On August 29, 2019, the Company issued the remaining 1,754 shares of Series C Preferred Stock at $1,000.00 per share for cash proceeds totaling $1,542,545, net of offering costs and legal fees totaling $211,455. On October 11, 2019, the Company amended its certificate of designation to authorize an increase in authorized Series C Preferred Stock from 5,000 shares to 20,000 shares. Between October 21, 2019 and November 8, 2019, the Company issued an additional 2,788 shares of Series C Convertible Preferred Stock, and on December 6, 2020 the Company issued 415 shares of Series C Convertible Preferred Stock. On January 28, 2020, the Company further amended its Series C Certificate of Designation to reduce the number of authorized shares of Series C Preferred Stock from 20,000 shares to 8,203 shares, all of which remain outstanding as of August 31, 2020. The Series C Certificate of Designation provides, among other things, that holders of Series C Preferred Stock shall be entitled to receive, out of any assets at the time legally available therefor, cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series C Preferred Stock, to be paid per share of Series C Preferred Stock, which dividends shall accrue whether or not declared. Any dividends paid by the Company will first be paid to the holders of Series C Preferred Stock prior and in preference to any payment or distribution to holders of common stock. Dividends on the Series C Preferred Stock are mandatory and cumulative and there are no sinking fund provisions applicable to the Series C Preferred Stock. The Series C Dividends are to be paid annually in arrears on the last day of December each year. The Series C Preferred Stock does not have redemption rights. The stated value per share for the Series C Preferred Stock is $1,000 (the “Series C Stated Value”). In the event of any liquidation, dissolution or winding up of the Company, the Series C Preferred Stock will be, on a pari passu basis with the holders of the Series D preferred Stock and prior and in preference to any payment or distribution on any shares of common stock, currently outstanding series of preferred stock, or subsequent series of preferred stock, an amount per share equal to the Series C Stated Value and the amount of any accrued and unpaid dividends. If, at any time while the Series C Preferred Stock is outstanding, the Company effects any Fundamental Transaction, a holder of the Series C Preferred Stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series C Preferred Stock immediately prior to the Fundamental Transaction. Each share of Series C Preferred Stock is convertible at any time at the holder’s option into that number of fully paid and nonassessable shares of the Company’s common stock determined by dividing the Series C Stated Value by the conversion price of $0.50 per share (subject to adjustment as set forth in the Certificate of Designation). No fractional shares will be issued upon the conversion of the Series C Preferred Stock. Except as otherwise provided in the Certificate of Designation or as otherwise required by law, the Series C Preferred Stock has no voting rights. As of August 31, 2020, and August 31, 2019, the accrued dividends were approximately $0.9 million or 1,832,000 shares of common stock, and approximately $0.1 million or 296,000 of shares of common stock, respectively.

 

 

per share. The holders of the Series B Preferred Stock can only convert their shares to shares of common stock provided the Company has sufficient authorized shares of common stock at the time of conversion. Accordingly, the conversion option was contingent upon the Company increasing its authorized common shares, which occurred in April 2010, when the Company’s stockholders approved an increase in the authorized shares of common stock to

At the commitment date, which occurred upon such stockholder approval, the conversion option related to the Series B Preferred Stock was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive dividend to the Series B Preferred Stock holders of approximately

The constructive dividend increased and decreased additional paid-in capital by identical amounts. The Series B Preferred Stock has liquidation preferences over the common shares at

per share, plus any accrued and unpaid dividends. Dividends are payable to the Series B Preferred Stock holders when declared by the Board of Directors at the rate of

per share per annum. Such dividends are cumulative and accrue whether or not declared and whether or not there are any profits, surplus or other funds or assets of the Company legally available. Except as provided by law, the Series B holders have no voting rights. On July 30, 2020, the Board declared a dividend and elected to pay such dividend in the form of cash in the aggregate amount of approximately

to all Series B Convertible Preferred stockholders. The dividend was payable on July 30, 2020, to Series B Convertible Preferred stockholders as of July 30, 2020. As of August 31, 2020, and August 31, 2019, the undeclared dividends were approximately

 

 

shares of common stock, and approximately

non-cash

incurrs

During the fiscal year ended May 31, 2020, holders of the 2019 Short-term Convertible Note in the aggregate principal amount of

including accrued but unpaid interest, tendered a notices of conversion at the stated conversion rate of

shares of common stock in satisfaction of the conversion notices. The Company recognized approximately

 

million to the Company (the “June 2018 Note”). The June 2018 Note incurred interest of

and  convertible into common stock, at a conversion rate of $0.55 per share. The June 2018 Note provided for conversion in total, or in part, of the outstanding balance, into common stock of the Company at any time after six months from the issue date upon five trading days’ notice, subject to certain adjustments and ownership limitations specified in the June 2018 Note, and allowed for redemption, at any time after six months from the issue date upon five trading days’ notice, subject to maximum monthly redemption amount of $350,000. The securities purchase agreement required the Company to reserve shares for future conversions or redemptions by dividing the outstanding principal balance plus accrued interest by the conversion price of

Effective November 15, 2018, the June 2018 Note was amended to allow the investor to redeem the monthly redemption amount of $350,000 in cash or stock, at the lesser of (i) $0.55, or (ii) the lowest closing bid price of the Company’s common stock during the 20

ays prior to the conversion, multiplied by a conversion factor of 85%. The variable rate redemption provision meets the definition of a derivative instrument and subsequent to the amendment, it no longer meets the criteria to be considered indexed to the Company’s own stock. As of November 15, 2018, the redemption provision require bifurcation as a derivative liability at fair value under the guidance in ASC Topic 815,

.

write-off

During the year ended May 31, 2020, the Company received a redemption notice requesting an aggregate redemption of $4,476,000 settling the remaining outstanding balance in full, including accrued but unpaid interest. In satisfaction of the redemption notice, the Company issued shares of common stock totaling 8,512,622 and paid cash totaling $525,000 to the June 2018 Note holder in accordance with the terms of the June 2018 Note. Following the redemptions, the June 2018 Note  fully satisfied and there is no outstanding balance.

During the three months ended August 31, 2019, the Company recognized approximately $0.1 million, of interest expense related to the June 2018 Note, respectively.

two-year

 

incurred

was

 

The

 

investor  redeem any portion of the January 2019 Note, at any time after six months from the issue date upon five trading days’ notice, subject to a maximum monthly redemption amount of $350,000. The monthly redemption amount may be paid in cash or stock, at the Company’s election, at the lesser of (i) $0.50, or (ii) the lowest closing bid price of the Company’s common stock during the 20 days prior to the conversion, multiplied by a conversion factor of 85%. The redemption provision met the definition of a derivative instrument and did not meet the criteria to be considered indexed to the Company’s own stock. Therefore, the redemption provision require bifurcation as a derivative liability at fair value under the guidance in ASC Topic 815. The securities purchase agreement require the Company to reserve 20,000,000 shares for future conversions or redemptions.

5-year

 

Under the guidance of ASC 815, after allocation of proceeds to the redemption provision, relative fair value of equity classified warrants and the beneficial conversion feature, there were no proceeds remaining to allocate to convertible note payable. Therefore, principal, accrued interest, debt discount and offering costs will be recognized as interest expense, which represents the accretion of the convertible note payable and related debt discount and issuance costs. During the three months ended August 31, 2019, the Company recognized approximately $0.1 million, of interest expense related to the January 2019 Note. During the year ended May 31, 2020, the Company received a redemption notice from the holder of the Company’s January 2019 Note, requesting an aggregate redemption of approximately

$

settling the remaining outstanding balance in full, including accrued interest. In satisfaction of the redemption notice, the Company issued shares of common stock totaling

and paid cash totaling

$

two-year

 

March 31 Note 

both the March Note and the July Note).

Interest accrues on the outstanding balance of the Note at 10% per annum. Upon the occurrence of an vent of efault, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. In addition, upon any Event of Default, the nvestor may accelerate the outstanding balance payable under the Note, which will increase automatically upon such acceleration by 15%, 10% or 5%, depending on the nature of the Event of Default.

as referenced herein and not otherwise defined shall have the same meaning as set forth in the  Note

The investor may convert all or any part the outstanding balance of the March 2020 Note into shares of common stock at an initial conversion price of

$4.50

per share upon five trading days’ notice, subject to certain adjustments and volume and ownership limitations specified in the March 2020 Note. On April 3, 2020, the Company amended the March 2020 Note limiting monthly issuances of common stock resulting from conversions to

1,000,000

The nvestor may redeem any portion of theNote, at any time after six months from the issue date, upon three trading days’ notice, subject to a Maximum Monthly Redemption Amount of $950,000. The Note requirethe Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the Note, in part or in full, at a 15% premium to par value, at any time upon fifteen trading days’ notice.

Pursuant to the terms of the Agreement and theNote, the Company must obtain the nvestor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $15 million. Upon any such approval, the outstanding principal balance of the

 shall increase automatically by 5% upon the issuance of such additional debt.

S-

3

o

b

 

March 2020

 

 March

 2020

$1.7 million as of August 31, 2020, is being amortized over the term of the Note. From June 26, 2020 to July 27, 2020, the  converted in aggregate $9,537,500 of combined principal and accrued interest into 2,119,444 shares of common stock at the $4.50 per share conversion price. In connection with these conversions the Company recorded amortization of the debt discount of approximately $917,000.

million (the “July 2020 Note”). The Company received consideration of

Interest

accrues on the outstanding balance of the July 2020 Note at

10%

per annum. Upon the occurrence of an event of default, interest accrues at the lesser of

22%

per annum or the maximum rate permitted by applicable law. In addition, upon any event of default, the investor may accelerate the outstanding balance payable under the July 2020 Note, which will increase automatically upon such acceleration by

15%, 10% or 5%,

The investor may convert all or any part the outstanding balance of the July 2020 Note into shares of common stock at an initial conversion price of

$10.00 per share upon five trading days’

The investor may redeem any portion of the July 2020 Note, at

any time after six months from the issue date, upon three trading days’ notice, subject to a Maximum Monthly Redemption Amount of $1,600,000. The Note requires the Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the

July 2020

Note, in part or in full, at a 15% premium to par value, at any time upon fifteen trading days’ notice.

Pursuant to the terms of the Agreement and the

July 2020

Note, the Company must obtain thenvestor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $25 million. Upon any such approval, the outstanding principal balance of the

July 2020

Note shall increase automatically by 5% upon the issuance of such additional debt.

 

The original issue discount of $3.4 million and issuance cost of $0.1 million related to

July 2020 Note

has been recorded as a discount on the

July 2020 Note

and the discount is being amortized over the term of the

July 2020 Note

. Amortization of debt discounts and issuance costs during the three months ended August 31, 2020 amounted to approximately $0.1 million, and are recorded as interest expense in the accompanying consolidated statements of operations. The unamortized discount and issuance costs balance for the

July 2020 Note

of approximately $3.3 million as of August 31, 2020, is being amortized over the term of the

July 2020 Note

.

The investor and placement agent warrants, issued in connection with a registered direct offering in September 2016, contained a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer or share exchange, whereby such other Person or group acquires more than

The following tables summarize the fair value of the warrant derivative liability and related common shares as of inception date September 15, 2016, prior fiscal year end date May 31, 2020 and current reporting date August 31, 2020 (in thousands):

 

million

non-cash

gain

Note 7 – Stock Options and Warrants

 shares available for future stock-based grants under the 2012 Plan, as amended.

Stock Options

the Company’s common

and advisors

proceeds of approximately

On June 16, 2020, the Company issued compensa warrants covering an aggregate of 105,000 shares of common stock to consultants. The warrants have a five-year term and an exercise price of $3.07. The grant date fair value of these warrants was $2.11 per share.

During the quarter ended August 31, 2020, the Company issued 27,927,669 shares of common stock in connection with the exercise of 28,657,889 warrants. The stated exercise price ranged from $0.30 to $1.35 per share, which resulted in aggregate gross proceeds of approximately $13.5 million.

Compensation expense related to stock options warrants for the three months ended August 31, 2020 and August 31, 2019 was approximately $2.0 million and $0.6 million, respectively. The grant date fair value of options, warrants, and common stock vested during the three months ended August 31, 2020 and 2019 was approximately $4.4 million and $0.5 million, respectively. As of August 31, 2020, there was approximately $4.8 million of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 0.97 years.

The following table represents stock option and warrant activity as of and for the three months ended August 31, 2020 (in thousands, except per share data):

 

 

T

leronlimab (PRO 140)

leronlimab (PRO 140)

leronlimab (PRO 140)

start-up

 hares

,

the Company w have an option to repurchase such Restricted Shares from Dr. Pestell at a purchase price of $0.001 per share. The Restricted Shares w vest and be released from the Stock Restriction Agreement in three equal annual installments commencing one year after the closing date of the acquisition of ProstaGene. On July 25, 2019, the Company’s Board terminated the employment of Dr. Richard G. Pestell prior to the vesting of any of the Restricted Shares. The vesting and/or release or forfeiture of the Restricted Shares is currently subject to litigation between the Company and Dr. Pestell.

A summary of the net purchase price and allocation to the acquired assets is as follows (in thousands):

 

The following presents intangible assets activity, inclusive of patents (in thousands):

 

Amortization expense related to all intangible assets was approximately $0.5 million and $0.5 million for the three months ended August 31, 2020 and 2019. The estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives is estimated to be approximately $2.0 million for the next year, approximately $1.5 million the following year, approximately $1.1 million for the next year, and $1.0 million per year for the following 2 years.

know-how”

December. Future annual license fees and royalty rate will vary depending on whether the Company manufactures leronlimab (PRO 140), utilizes the third-party licensor as a contract manufacturer, or utilizes an independent party as a contract manufacturer. The licensor does not charge an annual license fee when it serves as the manufacturer. In addition, the Company will incur royalties of up to 0.75% to 2% of net sales, depending upon who serves as the manufacturer, when the Company commences  first commercial sale, which will continue as long as the license agreement is maintained.

August 31,

0

,

ended Au

ramp-up

two-year

 

pre-approval

set-up

In addition to our manufacturing agreement with Samsung, the Company also previously entered into an arrangement with another third-party contract manufacturer to provide process transfer, validation and manufacturing services for leronlimab. In the event that the Company terminates the agreement with this manufacturer, the Company may incur certain financial penalties which would become payable to the manufacturer. Conditioned upon the timing of termination, the financial penalties may total approximately $2.1 million. These amount and timing of the financial commitments under an agreement with our secondary contract manufacturer will depend on the timing of the anticipated approval of our BLA and the initial product demand forecast, which is critical to align the timing of capital resources in order to ensure availability of sufficient quantities of commercial product.

The Company has entered into project work orders, as amended, for each of its CRO and related laboratory vendors. Under the terms of these agreements, the Company incurs execution fees for direct services costs, which are recorded as a current asset. In the event the Company were to terminate any trial, it may incur certain financial penalties which would become payable to the CRO. Conditioned upon the form of termination of any one trial, the financial penalties may range up to $0.7 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties may range from an approximate low of $1.9 million to an approximate high of $3.7 million.

On June 29, 2020, the Company issued the note holder of the January 2019 Note 4,000,000 shares of common stock with a settlement value of $22.5 million. These shares were issued as settlement for a claim filed by the note holder against

On June 17, 2020, the Company entered into warrant exchange certain accredited purchased common stock at a range of $0.21 to $0.70 per share exercise price ranging from $0.35 to $1.35 per share of common stock. The Company 16,543,539 shares of common stock, $0.001 which resulted in aggregateproceeds of approximately $7.4 million

In connection with this transaction the Company recognized approximately $3.3 million inducement interest expense.

On January 28, 2020, the Company awarded 11,650,000 performance shares to certain of its directors and executive officers outside of the 2012 Plan (“January 2020 Performance Shares awards vest and be settled in shares of common stock of the Company if the Company FDA Breakthrough Therapy designation for cancer within  months of the award date and if certain other requirements have been met.

On July 31, 2020, the Company issued 323,157 shares of common stock to Nader Z. Pourhassan Ph.D., Chief Executive Officer, of which 156,570 were tendered back to the Company to cover income tax withholding requirements. As a result, the Company incurred $1.6 million in stock compensation

qualified non-elective contribution

non-elective

The Audit Committee of the Board of Directors, comprised of independent directors, or the full Board of Directors, reviews and approves all related party transactions.

non-executive

non-executive

10-year

10-year

On June 12, 2019, the Company concluded a warrant tender offer (the “June 2019 Warrant Tender Offer”) for certain outstanding series of eligible warrants, offering the holders of such warrants the opportunity to amend and exercise their warrants at a reduced exercise price equal to the lower of (i) their respective existing exercise price or (ii) $0.40 per share of common stock. As an inducement to holders to participate in the June 2019 Warrant Tender Offer, the Company offered to issue to participating holders shares of common stock equal to an additional 50% of the number of shares issuable upon exercise of the eligible warrants (collectively, the “Additional Shares”). Dr. Kelly validly tendered warrants beneficially owned by him, covering an aggregate of 50,000 shares of common stock, and received 25,000 Additional Shares. Dr. Kelly participated on terms identical to those applicable to other holders in the June 2019 Warrant Tender Offer.

On July 31, 2019, the Company concluded an additional warrant tender offer on terms identical to the June 2019 Warrant Tender Offer (the “July 2019 Warrant Tender Offer”). Dr. Welch tendered warrants beneficially owned by him, covering an aggregate of 1,000,000 shares of common stock, and received 500,000 Additional Shares. Dr. Welch participated on terms identical to those applicable to other holders in the July 2019 Warrant Tender Offer”).

On September 30, 2019, an entity controlled by Dr. Welch exchanged a 2019 Short-term Convertible Note in the principal amount of $1 million and accrued but unpaid interest of $75,343, for an Exchange Note () in the principal amount of $1,075,343 and a warrant to purchase 1,000,000 shares of common stock. The terms of the exchange, the Exchange Note and the related warrant are further described in Note 5. The entity controlled by Dr. Welch participated on terms identical to the other holders in the exchange.

Company newly hired

ten-year

re-election

During September 2020, the Company issued 818,241 shares of common stock in connection with the exercise of and stock covering 822,895 shares. The stated exercise prices ranged from $0.50 to $1.35 per share, which resulted in aggregate gross of approximately $0.6 million.

On September 30, 2020 the Company’s stockholders approved 25,000,000 50,000,000

3,350,000 shares of common restricted stock units (“RSUs”) covering 1,120,000 shares of The stock options have a per share exercise price of $3.12 and vest equally over three years. The RSUs vest equally over Concurrent with the stockholder approval, the Company also stock options covering a total of 506,250 shares of common stock, or 168,750 shares for each director, which represented the remaining portion of the director compensation for the fiscal year beginning June 1, 2020. options were issued with a per share exercise price of $6.15 and vest

This filing, contains forward-looking statements. The words “anticipate,” “believe,” “expect,” “intend,” “predict,” “plan,” “seek,” “estimate,” “project,” “continue,” “could,” “may,” and similar terms and expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures and future net cash flows. Such statements reflect current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, regulatory initiatives and compliance with governmental regulations, the sufficiency of the Company’s cash position and the ability to raise additional capital, clinical priorities, the results of clinical trials for the Company’s drug candidate, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated, or otherwise indicated. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the other sections of this Quarterly Report, including our financial statements and related notes appearing elsewhere herein. To the extent not otherwise defined herein, capitalized terms shall have the same meanings as in such financial statements and related notes. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial condition, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated and set forth in such forward-looking statements.

Phase 2b/3 Pivotal Trial for HIV, as Combination Therapy

Phase 2b Extension Study for HIV, as Monotherapy

Rollover Study for HIV as Combination Therapy

Phase 2b/3 Investigative Trial for HIV, as Long-term Monotherapy

Phase 2 Trial to Evaluate the Efficacy and Safety of

 Leronlimab

 for Mild to Moderate Coronavirus Disease 2019

.

mild-to-moderate

Phase 3 Trial to Evaluate the Efficacy and Safety of Leronlimab for Patients With Severe or Critical Coronavirus Disease 2019

Phase 1b/2 Trial for Triple-Negative Breast Cancer

Compassionate Use Study of Leronlimab in Breast Cancer

Basket Trial for 22 Solid Tumor Cancers

Studies for Multiple Cancer Indications

Phase 2 Trial for Metastatic Colorectal Cancer

Phase 2 Trial for Graft-versus-Host Disease

one-for-one

Phase 2 Trial and IND for NASH

R&D expenses, which totaled approximately $15.2 million for the three months ended August 31, 2020, increased approximately $6.1 million, or 68%, over the comparable 2019 quarter due to an increase of $3.4 million in manufacturing activity related to the BLA, an increase of $1.8 million in clinical trial costs related to and an increase of $0.9 million related to studies. For the quarter ended August 31, 2020, R&D expenditures continue to be primarily devoted to: (1) increased CMC (chemistry, manufacturing and controls) activities related to clinical and commercial inventories, (2) three HIV extension studies, which continue to provide leronlimab to patients who have successfully completed a trial, clinical trials and (4) increased clinical trials for oncology and immunology indications.

We expect future R&D expenses to be dependent on the timing of FDA approval of our BLA filing, the timing of FDA clearance of our pivotal trial protocol for leronlimab as a monotherapy for HIV patients, the clinical and regulatory progression of our oncology and immunology trials, along with the outcome of the studies for several other cancer indications. R&D expenses are also expected to increase due to CMC activities in preparation for approval and commercialization of leronlimab.

For the three months ended August 31, 2020, no unrealized benefit from the change in fair value of derivative liabilities was recognized, as compared to a charge of approximately $0.6 in the comparable 2019 period, related to certain warrants which originated in September 2016 and to two convertible note instruments originated in June 2018 and January 2019 containing contingent cash settlement provisions that gave rise to a derivative liability. For each reporting period, we determine the fair value of the derivative liability and record a corresponding benefit or charge, as a consequence of a decrease or increase, respectively, in the calculated derivative liability.

The future trends in expenses will be driven, in large part, by the future outcomes of studies and clinical trials and their related effect on research and development expenses and general and administrative expenses, the manufacturing of new commercial leronlimab. We require a significant amount of additional capital and our ability to continue to fund operations will continue to depend on our ability to raise such capital. See in particular, “Capital Requirements” and “Going Concern” below and Item 1A. Risk Factors in our Annual Report on the year ended May 31, 2020.

We have not generated revenue to date, and we do not expect to generate product revenue until FDA approval of leronlimab as a combination therapy for HIV, unless various approvals for are realized sooner. We expect to continue to incur operating losses as expenses continue to increase as we proceed with preparation for commercialization of leronlimab and continue our and clinical trial programs. The future trends of all expenses will be driven, in large part, by the timing of the anticipated approval of our BLA, the magnitude of our commercialization readiness, future clinical trial strategy and timing of the commencement of our future revenue stream.

To date, we have not seen any impact due to on our ability to access capital. However, the spread of has led to disruption and volatility in the global capital markets, which increases the cost of, and adversely affects access to, capital and increases economic uncertainty, and may also affect our ability to access capital and obtain financing, which could in the future negatively affect our liquidity and ability to continue as a going concern.