NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2016
Note 1 Organization
CytoDyn Inc. (the Company) was originally incorporated under the laws of Colorado on May 2, 2002 under the name RexRay
Corporation (its previous name) and, effective August 27, 2015, reincorporated under the laws of Delaware. We are a clinical-stage biotechnology company focused on the clinical development and potential commercialization of humanized monoclonal
antibodies to treat Human Immunodeficiency Virus (HIV) infection. Our lead product candidate, PRO 140, belongs to a class of HIV therapies known as entry inhibitors. These therapies block HIV from entering into and infecting certain
cells.
The Company is developing a class of therapeutic monoclonal antibodies to address unmet medical needs in the areas of HIV and graft versus host
disease.
Advanced Genetic Technologies, Inc. (AGTI) was incorporated under the laws of Florida on December 18, 2006 pursuant to an
acquisition during 2006 and is currently a dormant subsidiary.
On May 16, 2011, the Company formed a wholly owned subsidiary, CytoDyn Veterinary
Medicine LLC (CVM), to explore the possible application of the Companys existing monoclonal antibody technology to the treatment of Feline Immunodeficiency Virus. The Company views the formation of CVM as an effort to strategically
diversify the use of its monoclonal antibody technology. This entity is currently a dormant subsidiary.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The
consolidated financial statements include the accounts of CytoDyn Inc. and its wholly owned subsidiaries, AGTI and CVM, both of which are dormant entities. All intercompany transactions and balances are eliminated in consolidation.
Reclassifications
Certain prior year amounts shown in
the accompanying consolidated financial statements have been reclassified to conform to the 2016 presentation. These reclassifications did not have any effect on total current assets, total assets, total current liabilities, total liabilities, total
shareholders equity (deficit), net loss or earnings per share. The Company reincorporated in Delaware on August 27, 2015, which required a reclassification to reflect par value of common and preferred stock at $0.001 as of May 31, 2016
and May 31, 2015.
Going Concern
The
consolidated accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated
financial statements, the Company had losses for all periods presented. The Company incurred a net loss of $25,703,612 and $25,088,070 for the years ended May 31, 2016 and May 31, 2015, respectively, and has an accumulated deficit of $97,225,914 as
of May 31, 2016. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.
The consolidated
financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys continuation as a
going concern is dependent upon its ability to obtain additional operating capital, complete development of its product candidates, obtain U.S. Food & Drug Administration (FDA) approval, outsource manufacturing of the product
candidates, and ultimately achieve initial revenues and attain profitability. The Company is currently engaging in significant research and development activities related to these product candidates, and expects to incur significant research and
development expenses in the future. These research and development activities are subject to significant risks and uncertainties. The Company intends to finance future development activities and working capital needs largely from the sale of equity
and debt securities, combined with additional funding from other traditional sources. There can be no assurance, however, that the Company will be successful in these endeavors.
Use of Estimates
The preparation of the consolidated
financial statements, in accordance with accounting principles generally accepted in the United States of America, 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 expenses during the reporting period. Actual results could differ from those estimates.
39
Cash
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 May 31,
2016 and May 31, 2015 approximated $9,392,000 and $1,164,000, respectively.
Identified Intangible Assets
The Company follows the provisions of FASB ASC Topic 350 Intangibles-Goodwill and Other, which establishes accounting standards for the impairment of
long-lived assets such as intangible assets subject to amortization. The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying value, the asset is considered impaired. Impairment losses are measured as the amount by
which the carrying amount of the asset group exceeds the fair value of the asset. There were no impairment charges for the year ended May 31, 2016 and May 31, 2015. The value of the Companys patents would be significantly impaired by any
adverse developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Notes 9 and 10.
Research and Development
Research and development costs are expensed as incurred. Clinical trials 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 Inventory
The Company may scale-up and make commercial quantities of its product candidate prior to the date it anticipates that such product will receive final FDA
approval. The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or ever. This risk notwithstanding, the Company may scale-up and build
pre-launch inventories of product that have not yet received final governmental approval when the Company believes that such action is appropriate in relation to the commercial value of the product launch opportunity. The determination to capitalize
is made once the Company (or its third party development partners) has filed a Biologics License Application that has been acknowledged by the FDA as containing sufficient information to allow the FDA to conduct its review in an efficient and timely
manner and management is reasonably certain that all regulatory and legal hurdles will be cleared. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the drug product being considered. As
of May 31, 2016 and May 31, 2015, the Company did not have pre-launch inventory that qualified for capitalization pursuant to U.S. GAAP ASC 330 Inventory.
Stock-Based Compensation
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).
The Company accounts for stock based awards based on 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 at 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 Companys 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. U.S. GAAP requires forfeitures to be estimated 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.
Common Stock
On March 18, 2016, at a special meeting of shareholders, a proposal was approved to increase the total number of authorized shares of common stock of the
Company from 200,000,000 to 250,000,000.
Preferred Stock
The Companys Board of Directors is currently authorized to issue up to 5,000,000 shares of preferred stock without shareholder approval. As of
May 31, 2016, the Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock, of which 95,100 shares are outstanding. The remaining preferred shares authorized have no specified rights.
40
Debt Issuance Costs
The Company has early adopted ASU 2015-03, as described in Note 8, which requires debt issuance costs related to a recognized debt liability be presented in
the balance sheet as a direct deduction from the carrying amount of the debt liability and to be amortized over the life on the debt. During the year ended May 31, 2015, the Company incurred direct costs associated with the issuance of
short-term convertible notes as described in Note 3, and recorded approximately $709,000 of debt issuance costs and approximately $605,000 and $104,000 of related amortization for the years ended May 31, 2016 and May 31, 2015, respectively.
Offering Costs
During the year ended May 31, 2016, the
Company incurred approximately $3.9 million in direct incremental costs associated with the sale of equity securities. The offering costs were recorded as a component of equity upon receipt of the proceeds, as fully described in Note 7.
Stock for Services
The Company periodically issues stock
based awards to consultants for various services. Costs of these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the
award is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterpartys performance is complete.
Loss per Common Share
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 share 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 63,307,150 and 31,008,915 shares of common stock were not included in the computation of basic and diluted weighted average common shares outstanding for the years ended May 31, 2016 and May 31, 2015, respectively.
Additionally, as of May 31, 2016, shares of Series B convertible preferred stock in the aggregate of 95,100 shares can potentially convert into 951,000 shares of common stock.
Fair Value of Financial Instruments
At May 31, 2016 and
May 31, 2015 the carrying value of the Companys cash, accounts payable and accrued liabilities approximate their fair value due to the short-term maturity of the instruments. The Company carries derivative financial instruments at fair
value as required by U.S. GAAP.
Derivative financial instruments consist of financial instruments that contain a notional amount and one or more
underlying variables (e.g., interest rate, security price, variable conversion rate or other variables), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other
financial instruments. The Company follows the provisions of FASB ASC 815 Derivatives and Hedging (ASC 815), as their instruments are recorded as a derivative liability, at fair value, with changes in fair value reflected in
income.
Fair Value Hierarchy
The three levels of
inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient
volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the
assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology are significant to the measurement of the fair value of assets or liabilities. These Level 3 inputs
also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
41
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of May 31, 2016
and May 31, 2015 is as follows:
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|
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|
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|
|
|
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Fair Value Measurement at
May 31, 2016(1)
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|
|
Fair Value Measurement at
May 31, 2015 (1)
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|
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Using
Level 3
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Total
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Using
Level 3
|
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Total
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Liability:
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|
|
|
|
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|
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|
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|
|
|
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Derivative liability
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$
|
|
|
|
$
|
|
|
|
$
|
2,008,907
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|
|
$
|
2,008,907
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liability
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$
|
|
|
|
$
|
|
|
|
$
|
2,008,907
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|
|
$
|
2,008,907
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|
|
|
|
|
|
|
|
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|
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(1)
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The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair value hierarchy as of May 31, 2016 and 2015.
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A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurements. These instruments are not quoted on an active market, so the Company uses a Binomial Lattice Model to estimate the value of the derivative liability. A Binomial Lattice Model was used because management believes it reflects all the
assumptions that market participants would likely consider in negotiating the transfer of the convertible notes including the potential for early conversion or adjustment of the conversion price due to a future dilutive issuance. The Companys
derivative liability is classified within Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation model.
The
following is a reconciliation of the beginning and ending balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended May 31, 2016 and 2015:
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Balance at May 31, 2014
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$
|
|
|
Note issuance, September 26, 2014
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|
767,038
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Note issuance, February 6, 2015
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|
403,226
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Fair value adjustments
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|
|
838,643
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|
|
|
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Balance at May 31, 2015
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|
$
|
2,008,907
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|
|
|
|
|
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Note conversion June 24, 2015
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|
|
(521,133
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)
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Note conversion June 24, 2015
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|
|
(841,269
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)
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Fair value adjustments
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|
|
(646,505
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)
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|
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Balance at May 31, 2016
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|
$
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|
|
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|
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Income Taxes
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 bases. Future tax benefits for net operating loss carry forwards 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.
The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). A reconciliation of the beginning and ending
amount of unrecognized tax benefits has not been provided since there are no unrecognized benefits for all periods presented. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were
an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefit in interest expense and penalties in operating expenses.
Note 3 Convertible Instruments
Series B Convertible Preferred Stock
During fiscal 2010, the Company issued 400,000 shares of Series B, $0.001 par value Convertible Preferred Stock (Series B) at $5.00 per share for
cash proceeds totaling $2,009,000, of which 95,100 shares remain outstanding at May 31, 2016. Each share of the Series B is convertible into ten shares of the Companys $0.001 par value common stock, including any accrued dividends, with an
effective fixed conversion price of $0.50 per share. The holders of the Series B can only convert their shares to common shares provided the Company has sufficient authorized common shares 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 Companys
42
shareholders approved an increase in the authorized shares of common stock to 100,000,000. At the commitment date, which occurred upon such shareholder approval, the conversion option related to
the Series B was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive dividend to the Series B holders of approximately $6,000,000. The constructive dividend increased and decreased additional
paid-in capital by identical amounts. The Series B has liquidation preferences over the common shares at $5.00 per share plus any accrued dividends. Dividends are payable to the Series B holders when declared by the board of directors at the rate of
$0.25 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. The Series B holders have no voting rights.
2013 Convertible Notes
During the year ended
May 31, 2013, the Company issued $6,588,250 in aggregate original principal amount of unsecured convertible notes (the 2013 Convertible Notes) to investors for cash. Each outstanding 2013 Convertible Note was convertible at the
election of the holder at any time into common shares at a fixed conversion price. At issuance, total principal of $6,208,250 was convertible at $0.75 per share, and $380,000 was convertible at $0.65 per share. The 2013 Convertible Notes were
payable in full between November 30, 2013 and March 6, 2016, with interest rates ranging from 5% to 10% per year, payable in cash semi-annually in arrears beginning on April 1, 2013. At May 31, 2016, there were no outstanding
2013 Convertible Notes. At May 31, 2015 there was one 2013 Convertible Note outstanding with an aggregate original principal amount of $50,000, convertible at $0.75 per share, bearing interest at a rate of 5% per year, and was payable in full
on October 15, 2015. This note converted into common stock during the year ended May 31, 2016 as detailed below.
In connection with the initial sale
of the 2013 Convertible Notes, detachable common stock warrants with a two-year term to purchase a total of 8,527,984 common shares at exercise prices ranging from $0.75 to $2.00 per share were issued to the investors. The Company determined the
fair value of the warrants at issuance using the Black-Scholes option pricing model utilizing certain weighted average assumptions such as expected stock price volatility, term of the warrants, risk-free interest rates, and expected dividend yield
at the grant date.
Additionally, at the commitment date, the Company determined that the conversion feature related to the 2013 Convertible Notes was
beneficial to the investors. As a result, the Company determined the intrinsic value of the conversion feature utilizing the fair value of the underlying common stock at the commitment date and the effective conversion price after discounting the
2013 Convertible Notes for the fair value of the warrants. The fair value of the warrants and the intrinsic value of the beneficial conversion feature were recorded as a debt discount to the 2013 Convertible Notes, with a corresponding increase to
additional paid-in capital. The debt discount was amortized over the life of the 2013 Convertible Notes. During the year ended May 31, 2016 and May 31, 2015, the Company recognized approximately $7,000 and $1,926,000, respectively, as interest
expense related to amortization of the debt discount. The unamortized discount was fully amortized upon any conversion of the 2013 Convertible Notes before maturity.
During the year ended May 31, 2016, the remaining 2013 Convertible Note in the aggregate principal amount of $50,000, plus accrued but unpaid interest of
$1,322, converted into 68,428 shares of common stock. Activity related to the 2013 Convertible Notes for the fiscal year ended May 31, 2016 and May 31, 2015 was as follows:
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May 31, 2016
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|
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May 31, 2015
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Face amount of Notes
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|
$
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50,000
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|
|
$
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4,271,250
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Unamortized discount
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(6,529
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)
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Tender offer conversions
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Conversions
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(50,000
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)
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(4,221,250
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)
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Total carrying value of Notes
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$
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$
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43,471
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During the year ended May 31, 2015, certain holders of the 2013 Convertible Notes in the aggregate principal amount of
$1,175,000, plus accrued but unpaid interest of $4,703, were induced to convert their 2013 Convertible Notes into common stock, at the rate of $0.75 per share, conditioned upon their immediate exercise of certain of the foregoing warrants, covering
an aggregate of 1,413,333 shares of common stock, at an exercise price reduced from $2.00 down to $0.55 per share. The note conversions resulted in the issuance of 1,556,667 shares of common stock, a cash interest payment of $3,793 and the
Companys receipt of $777,333 from the exercise of such warrants.
In addition, during the year ended May 31, 2015, certain holders of the 2013
Convertible Notes in the aggregate principal amount of $3,046,250, plus accrued but unpaid interest of $86,296, were induced to convert their 2013 Convertible Notes into 4,181,079 shares of common stock at a conversion price of $0.75, conditioned
upon the Company issuing new warrants to replace certain of the foregoing warrants which had previously expired, covering an aggregate of 6,310,677 shares of common stock, at an exercise price of $1.00 per share, with an approximate term of seven
months from date of issuance.
43
The Company determined the fair value of the new warrants using the Black-Scholes option pricing model utilizing
certain weighted-average assumptions, such as expected stock price volatility, term of the warrants, risk-free interest rate and expected dividend yield at the commitment date.
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2015
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Expected dividend yield
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0%
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Stock price volatility
|
|
80.68%
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Expected term
|
|
.50 year
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Risk-free interest rate
|
|
0.12%
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Grant-date fair value
|
|
$0.15
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During the fiscal year ended May 31, 2016, the board approved a one-year extension of expiration dates on the aforementioned
detachable common stock warrants with an original term of two years, covering approximately 6.3 million shares of common stock, with an exercise price of $1.00 per share. Current expiration dates ranging from October 2015 through January 2016
were extended to October 2016 through January 2017. The extensions were effective October 1, 2015 upon the receipt of certain executed documentation from the warrant holders. Pursuant to U.S. GAAP, the Company recognized non-cash interest
expense of approximately $866,700 in connection with this extension, which represented the incremental increase in the fair value of the modified warrants.
The Company determined the fair value of the new warrants using the Black-Scholes option pricing model utilizing certain weighted-average assumptions, such as
expected stock price volatility, term of the warrants, risk-free interest rate and expected dividend yield at the commitment date.
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|
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2016
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Expected dividend yield
|
|
0%
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Stock price volatility
|
|
64.56%-69.30%
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Expected term
|
|
1 year
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Risk-free interest rate
|
|
0.33%
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Grant-date fair value
|
|
$0.15-$0.18
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AVCP Convertible Notes
During the year ended May 31, 2015, the Company issued an additional two-year term unsecured convertible promissory note (the AVCP Two-Year
Note) in the aggregate principal amount of $2,000,000 to Alpha Venture Capital Partners, L.P. (AVCP), an affiliate of one of the Companys directors as described under Note 9 below. As described in greater detail below, along
with the AVCP Bridge Note, the AVCP Two-Year Note has subsequently been converted in a transaction occurring during the year ended May 31, 2016. The AVCP Two-Year Note bore simple interest at the annual rate of 5%, payable quarterly. The principal
balance of the AVCP Two-Year Note was due and payable in full on September 26, 2016, subject to acceleration of payment in the event of default. Prepayment was permitted without penalty. The AVCP Two-Year Note included events of default for
nonpayment of principal or interest when due or other breaches of the AVCP Two-Year Note, as well as for breach of any term of the AVCP Two-Year Note and related warrant agreement. The principal amount of the AVCP Two-Year Note plus unpaid accrued
interest was convertible at the election of the holder into shares of the Companys common stock at any time prior to maturity at an initial conversion price of $1.00 per share. The conversion price was subject to adjustment on the same terms,
and contained similar consent rights to the issuance of additional indebtedness, as the AVCP Bridge Note above.
During the year ended May 31, 2015,
the Company issued a three-month unsecured convertible promissory note (the AVCP Bridge Note and together with the AVCP Two-Year Note, the AVCP Convertible Notes) in the aggregate principal amount of $1,500,000 to AVCP. As
described in greater detail below, the AVCP Bridge Note, along with the AVCP Two-Year Note, were subsequently converted in a transaction occurring during the year ended May 31, 2016. The principal amount of the AVCP Bridge Note plus unpaid accrued
interest was convertible at the election of the holder into shares of the Companys common stock at any time prior to maturity at an initial conversion price of $1.00 per share. The AVCP Bridge Note bore simple interest of 1.2% per month,
payable at maturity on May 5, 2015, and monthly thereafter, upon the Companys election to exercise a one-time option to extend the maturity by an additional three months, which the Company exercised on April 1, 2015 (extending the
maturity date to August 5, 2015). Prepayment was permitted without penalty subject to the Companys obligation to pay at least three months interest on the principal amount. The conversion price was subject to (i) adjustment for
stock splits and similar corporate events and (ii) reduction to a price per share that is 10% below the lowest sale price that is below $.9444 per share, for shares of common stock sold or deemed sold in future securities offerings, including
sales to AVCP and its designees subject to certain exempt transactions. Without AVCPs prior written consent, the Company was not permitted to incur additional indebtedness for borrowed money, other than up to an additional $6.0 million in
convertible promissory notes that may be issued to AVCP or related parties, unless such indebtedness was subordinated in right of payment to the Companys obligations under the AVCP Bridge Note and any additional notes issued to AVCP or related
parties.
44
As a result of the private placement of approximately $4 million in convertible notes during the fourth quarter
of fiscal year ended May 31, 2015, as described below, the conversion price of the AVCP Convertible Notes was reduced to $0.675 per share of common stock, which was 90% of the weighted-average price of the deemed issued shares of $0.75
related to the approximately $4 million offering of 2015 Convertible Notes described below. The decrease in the conversion price caused the number of shares of common stock issuable upon conversion of the AVCP Convertible Notes to increase from
3,500,000 to 5,185,185 shares of common stock.
The Company accounted for the AVCP Convertible Notes and related warrants, fully described below, as a
financing transaction, wherein proceeds were allocated to the financial instruments issued. Prior to making the accounting allocation, the AVCP Convertible Notes and warrants were evaluated for proper classification under FASB ASC 480
Distinguishing Liabilities from Equity and ASC 815. The debt discounts associated with the notes were amortized over the term of the notes and the Company recognized approximately $94,000 and $524,000 in non-cash amortization
expense for the periods ended May 31, 2016 and 2015, respectively.
ASC 815 generally requires embedded terms and features that have characteristics of
derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The embedded derivative features consisted of the
conversion price being subject to (i) adjustment for stock splits and similar corporate events and (ii) reduction to a conversion price per share that is 10% below the lowest sale price that is below $.9444 per share for common stock sold
or deemed sold in future securities offerings, subject to certain exempt transactions. The note conversion round down (or anti-dilution) provision terms were not consistent with the definition for financial instruments indexed to the Companys
stock. As such, the conversion option and conversion reset price protection in the AVCP Convertible Notes required bifurcation as a derivative liability.
In connection with the original issuance of the two AVCP Convertible Notes, the Company issued warrants to AVCP covering 250,000 and 75,000 shares of the
Companys common stock exercisable at a price of $0.50 per share on September 26, 2014 and February 6, 2015, respectively. The warrants are currently exercisable in full, include a cashless exercise feature, and will expire on
December 31, 2019 and February 29, 2020, respectively. The aforementioned warrants have a term of five years from inception and an exercise price of $0.50 per share and meet the conditions for equity classification per ASC 815. The fair
value of the warrants was determined using a Black-Scholes option model using the following assumptions:
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Warrants issued on
|
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Warrants issued on
|
|
|
September 26, 2014
|
|
February 6, 2015
|
Risk free interest rate
|
|
1.82%
|
|
1.48%
|
Expected life
|
|
5 years
|
|
5 years
|
Expected volatility
|
|
136%
|
|
119%
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
Based on the previous conclusions, the Company allocated the cash proceeds first to the derivative liability at its fair value
and then to the warrants at their relative fair value, with the residual allocated to the host AVCP Convertible Notes as presented below.
On
June 23, 2015, the Company, Alpha Venture Capital Management, LLC and AVCP entered into a Debt Conversion and Termination Agreement pursuant to which (i) AVCP agreed to convert the $3,535,627 in aggregate indebtedness as of June 23,
2015 under the AVCP Convertible Notes in exchange for 5,237,966 shares of the Companys common stock; (ii) subject to the conversion of the two AVCP Convertible Notes, the Company agreed to issue AVCP an additional five-year warrant
covering 1,000,000 shares of common stock at an exercise price of $0.675 per share and (iii) subject to the AVCPs receipt of the common shares and warrant, the parties agreed to (a) terminate the subscription agreements; and
(b) release and discharge each other party from all claims and obligations arising under the two AVCP Convertible Notes and subscription agreements. As a result of the debt conversion, the Company recognized a loss on extinguishment of the AVCP
Convertible Notes of $584,177, a non-cash gain on the change in the fair value of the derivative liability of approximately $647,000 and non-cash inducement interest expense of approximately $758,000 arising from the aforementioned warrant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, 2016
|
|
|
|
|
|
|
May 31, 2015
|
|
|
Debt Discount
|
|
|
Fair Value
|
|
|
Conversion
|
|
|
May 31, 2016
|
|
AVCP Convertible note payable
|
|
$
|
2,637,618
|
|
|
$
|
94,344
|
|
|
$
|
|
|
|
$
|
(2,731,962
|
)
|
|
$
|
|
|
Compound embedded derivative
|
|
|
2,008,907
|
|
|
|
|
|
|
|
(646,505
|
)
|
|
|
(1,362,402
|
)
|
|
|
|
|
Warrants (equity allocation)
|
|
|
215,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,627
|
)
|
|
|
|
|
Fair Value of Common Stock Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,714,168
|
|
|
|
|
|
Loss on conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(584,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,862,257
|
|
|
$
|
94,344
|
|
|
$
|
(646,505
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Short-Term Convertible Notes
During the year ended May 31, 2015, the Company issued approximately $4.0 million of six-month unsecured convertible promissory notes (the
Short-Term Convertible Notes) and related warrants to investors for cash. Each Short-Term Convertible Note was originally convertible, at the election of the holder, at any time into common shares at a $0.75 per share. The Short-Term
Convertible Notes bore interest of 7% per annum, payable in cash upon maturity. In connection with the issuance of the Short-Term Convertible Notes, the Company also issued warrants with a five-year term to purchase a total of 1,061,586 shares
of common stock at an exercise price of $0.75. The Company determined the fair value of the warrants using the Black-Scholes option pricing model utilizing certain weighted-average assumptions, such as expected stock price volatility, term of the
warrants, risk-free interest rate and expected dividend yield at the commitment date.
The Company utilized the following weighted-average assumptions to
value the above investor warrants:
|
|
|
|
|
2015
|
Expected dividend yield
|
|
0%
|
Stock price volatility
|
|
88.79%
|
Expected term
|
|
5 years
|
Risk-free interest rate
|
|
1.46%-1.58%
|
Grant-date fair value
|
|
$0.52-$0.76
|
Additionally, at the commitment date, the Company determined that the conversion feature related to the Short-Term Convertible
Notes was beneficial to the investors. As a result, the Company determined the intrinsic value of the beneficial conversion feature utilizing the fair value of the underlying common stock at the commitment date and the effective conversion price
after discounting the Short-Term Convertible Notes for the fair value of the warrants. The fair value of the warrants and the intrinsic value of the conversion feature were recorded as a debt discounts to the Short-Term Convertible Notes, and a
corresponding increase to additional paid-in capital. The debt discounts are amortized over the life of the Short-Term Convertible Notes. The Company recognized approximately $ 1,784,000 and $219,000 as interest expense related to the amortization
of the debt during the year ended May 31, 2016 and 2015, respectively. There were no Short-Term Convertible Notes outstanding at May 31, 2016. The unamortized discounts were fully amortized upon any conversion of the Short-Term Convertible Notes
before maturity.
During the year ended May 31, 2016, the Company tendered an offer to settle the balances of the Short-Term Convertible Notes. The
Company offered to exchange the Short-Term Convertible Notes for (i) the issuance of restricted shares of common stock, for the settlement of the balance of the Short-Term Convertible Notes, principal and accrued but unpaid interest as of
September 21, 2015, which was the commitment date, at a conversion price of $0.675 per share, and (ii) the amendment of the related warrants to reduce the exercise price to $0.675 per share. The offer represented a 10.0% discount to $0.75,
which was the current conversion price of the Short-Term Convertible Notes and current exercise price of the related warrants. On September 21, 2015, the offering period and withdrawal rights for the exchange offer expired, and the Company
completed the exchange offer for approximately $2.7 million in aggregate original principal amount of Short-Term Convertible Notes.
Following the
consummation of the exchange offer described above, an aggregate principal amount of $525,000 and accrued but unpaid interest of $17,830 converted into 723,773 shares of common stock. The principal and interest for Short-Term Convertible Notes that
were not exchanged in the exchange offer, or that are not otherwise converted pursuant to their terms, became due and payable between October 30, 2015 and November 15, 2015, six months from their issuance. The Company repaid the remaining
aggregate principal and interest on such Convertible Notes of approximately $789,000 Short-Term Convertible Notes on their respective maturity dates. Related to the tender offer conversions, the Company recognized approximately $330,000 in non-cash
interest expense and approximately $108,000 commission expense to assist the Company in conversion of the debt at the commitment date.
46
Activity related to the Short-Term Convertible Notes for fiscal year ended May 31, 2016 and May 31, 2015 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
Face amount of Notes
|
|
$
|
3,981,050
|
|
|
$
|
3,981,050
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
(2,390,063
|
)
|
Tender offer conversions
|
|
|
(2,693,800
|
)
|
|
|
|
|
Conversions
|
|
|
(525,000
|
)
|
|
|
|
|
Payments upon maturity
|
|
|
(762,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of Notes
|
|
$
|
|
|
|
$
|
1,590,987
|
|
|
|
|
|
|
|
|
|
|
Note 4Derivative Liability:
The following tables summarize the fair value of the derivative liability and linked common shares as of the derivative liability inception
dates (September 26, 2014 and February 6, 2015) and fiscal year end May 31, 2016 and May 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2014
|
|
|
February 6,
2015
|
|
|
May 31,
2015
|
|
|
May 31,
2016
|
|
Total derivative liability
|
|
$
|
767,038
|
|
|
$
|
403,266
|
|
|
$
|
2,008,907
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares indexed to derivative liability
|
|
|
2,000,000
|
|
|
|
1,500,000
|
|
|
|
5,185,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the fair value of the derivative liability, carried at fair value, are reported as Change in fair value of
derivative liability in the Consolidated Statements of Operations. During the year ended May 31, 2016 and May 31, 2015, the Company recognized a non-cash loss/gain of approximately $647,000 and $839,000, respectively, due to the change in
derivative liability related to the embedded derivative in the AVCP Notes.
ASC 815 does not permit an issuer to account separately for individual
derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be combined together and fair valued as a single,
compound embedded derivative. The Company selected a Binomial Lattice Model to value the compound embedded derivative because it believes this technique is reflective of all significant assumptions that market participants would likely consider in
negotiating the transfer of this convertible note. Such assumptions include, among other inputs, stock price volatility, risk-free rates, credit risk assumptions, early redemption and conversion assumptions, and the potential for future adjustment
of the conversion price due to a future dilutive financing.
Significant inputs and assumptions used in the Binomial Lattice Model for the derivative
liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2014
|
|
|
February 6,
2015
|
|
|
May 31,
2015
|
|
June 24,
2015
|
|
Quoted market price on valuation date
|
|
$
|
0.79
|
|
|
$
|
0.96
|
|
|
$0.99
|
|
$
|
0.90
|
|
Contractual conversion rate
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$1.00
|
|
$
|
1.00
|
|
Adjusted conversion price (a)
|
|
$
|
0.9759
|
|
|
$
|
1.0000
|
|
|
$0.675
|
|
$
|
0.675
|
|
Contractual term to maturity (years)
|
|
|
2.00
|
|
|
|
0.49
|
|
|
0.18-1.33
|
|
|
0.12
|
|
Expected volatility
|
|
|
123
|
%
|
|
|
124
|
%
|
|
90%-114%
|
|
|
48
|
%
|
Contractual interest rate
|
|
|
5
|
%
|
|
|
2
|
%
|
|
1.5%-5.0%
|
|
|
1.2
|
%
|
Risk-free rate
|
|
|
0.59
|
%
|
|
|
0.045
|
%
|
|
0.041%-0.48%
|
|
|
0.001
|
%
|
Risk adjusted rate
|
|
|
2.69
|
%
|
|
|
2.78
|
%
|
|
2.80%
|
|
|
2.80
|
%
|
Probability of event of default
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
5.00%
|
|
|
5.00
|
%
|
(a)
|
The adjusted conversion price input used in the Binomial Lattice Model considers both (i) the reduction of the conversion price to $0.675 on April 30, 2015, as result of a private placement offering in which Common
Stock was sold for a weighted average price of $0.75 and (ii) potential adjustment to the stated conversion price due to a future dilutive issuance. This input was calculated using a probability-weighted approach which considered the likelihood of
various scenarios occurring including (i) potential success or failure of various phases for PRO 140, (ii) the probability the Company will enter into a future financing and (iii) and the potential price of a future financing.
|
47
The fair value of the derivative liability is significantly influenced by the Companys trading market
price, stock price volatility, changes in interest, assumptions regarding the adjusted conversion price and early redemption or conversion of the AVCP Notes.
Note 5 Stock Options and Warrants
The Company has one active stock-based equity plan at May 31, 2016, the CytoDyn Inc. 2012 Equity Incentive Plan (the 2012 Plan)
and one stock-based equity plan that is no longer active, but under which certain prior awards remain outstanding, the CytoDyn Inc. 2004 Stock Incentive Plan (the 2004 Plan and, together with the 2012 Plan, the Incentive
Plans). The 2012 Plan was approved by shareholders at the Companys 2012 annual meeting to replace the 2004 Plan. The 2012 Plan was and was subsequently amended by shareholder approval in February 2015 to increase the number of shares
available for issuance from 3,000,000 to 5,000,000 shares of common stock and in March 2016 to increase the number of shares available for issuance from 5,000,000 to 7,000,000 shares of common stock. As of May 31, 2016, the Company had 2,000,930
shares available for future stock-based grants under the 2012 Plan.
Stock Options
During the year ended May 31, 2016, the Company granted annual stock option awards to directors to purchase a total of 350,000 shares of common stock with an
exercise price of $0.975 per share. These option awards vest quarterly over one year. The grant date fair value related to these options was $0.49 per share.
During the year ended May 31, 2016, the Company granted a director a stock option, covering 250,000 shares of common stock. The option has a per share
exercise price of $0.97, a term of five years and was fully vested upon grant date. The grant date fair value related to this option award was $0.43 per share. In addition, the Company granted another director a stock option, covering 100,000 shares
of common stock, with a per share exercise price of $0.84, a five-year term that vests equally upon issuance date and one year from issuance date. The grant date fair value related to this option award was $0.58 per share.
During the year ended May 31, 2016, the Company granted options to executive management and employees to purchase a total of 2,054,000 shares of common stock.
The exercise prices range from $0.75 to $0.90 per share. Of these option grants 1,554,000 shares vest based on certain performance targets, as set forth in the stock option agreements, of which 50% was achieved as of May 31, 2016. The remaining
500,000 shares vest as follows; 400,000 annually over three years and 100,000 vest 50% upon issuance and 50% on the first anniversary of the grant date. Each of the foregoing options has a ten-year term and grant date fair values which range from
$0.48 to $0.61 per share.
During the year ended May 31, 2016, the Compensation Committee of the Board of Directors of the Company determined to extend
the expiration dates of certain outstanding stock option awards under the 2004 Plan and 2012 Plan. For each outstanding award issued to a current employee or director of the Company under the Incentive Plans that had an original five-year term,
whether such award was vested or unvested, the term was extended by an additional five years, but only to the extent that the award was not in-the-money based upon the closing price of the Companys Common Stock, or $0.81 per share.
The other terms and conditions of such stock option awards, and all of the terms and conditions of any other stock option awards outstanding under the Incentive Plans, remained unchanged. The Company recognized a non-cash stock-based compensation
expense of approximately $548,000 in the current period in connection with this extension.
In total, the Company extended the expiration dates on stock
options covering 1,924,513 shares, with a weighted average exercise price of approximately $1.39 per share.
Warrants
During the year ended May 31, 2016, in connection with private equity offerings, as fully described in Notes 3 and 7, the Company issued common stock warrants
to investors and placement agent, covering 28,214,535 shares of common stock. The warrants have an exercise price of $0.75 or $1.35 per share, a five-year term and are exercisable immediately.
During the year ended May 31, 2016, in connection with debt conversion, as fully described in Note 3, the Company issued a warrant covering 1,000,000 shares
of common stock to AVCP. The warrant has an exercise price of $0.675, a five-year term and is immediately exercisable.
Additionally, the Company
granted warrants to consultants covering a total of 1,870,000 shares of common stock at exercise prices ranging from $0.81 to $1.35 per share. The warrants are subject to various vesting schedules, have an expiration date of five or ten years and
grant date fair values range from $0.25 to $0.60 per share.
During the year ended May 31, 2016, holders of warrants covering 795,593 shares of common
stock exercised the right to purchase such shares at either $0.50 or $0.75 per share and the Company received proceeds of approximately $549,000. Additionally, 254,708 warrants at $0.75 per share were subject to a cashless exercise.
48
Compensation expense related to stock options and warrants issued as compensation was approximately $2,353,000
and $631,000 for the year ended May 31, 2016 and 2015, respectively. The grant date fair value of options and warrants vested during the years ended May 31, 2016 and 2015, was approximately $1,711,500 and $886,000, respectively. As of
May 31, 2016, there was approximately $712,000 of unrecognized compensation costs related to share-based payments for unvested options, which is expected to be recognized over a weighted-average period 1.10 years.
The following table represents stock option and warrant activity for the periods ended May 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options and warrants outstanding - May 31, 2014
|
|
|
30,806,361
|
|
|
$
|
1.13
|
|
|
|
3.29
|
|
|
$
|
177,042
|
|
Granted
|
|
|
9,262,038
|
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,038,974
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(7,020,510
|
)
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding - May 31, 2015
|
|
|
31,008,915
|
|
|
|
0.88
|
|
|
|
2.94
|
|
|
|
5,538,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
33,838,536
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,050,301
|
)
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(490,000
|
)
|
|
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding - May 31, 2016
|
|
|
63,307,150
|
|
|
|
0.83
|
|
|
|
3.20
|
|
|
|
9,863,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable - May 31, 2016
|
|
|
60,648,362
|
|
|
|
0.83
|
|
|
|
3.42
|
|
|
|
9,795,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 License Agreements
During the year ended May 31, 2016, the Company executed a license agreement with a third-party licensor covering the licensors
system know-how technology with respect to the Companys use of proprietary cell lines to manufacture new PRO 140 material. The agreement required payment of £600,000 (approximately US$915,000) by December 15, 2015, which
was timely paid during the year ended May 31, 2016. In connection with this license agreement, the Company became the primary obligor of an additional £600,000 (approximately US$807,000 utilizing current exchange rates), which was timely paid
by June 30, 2016. During the year ended May 31, 2016, the Company accrued an additional expense of £600,000 (approximately US$870,000) in connection with the June 30, 2016 obligation. Future annual license fees and royalty rate will vary
depending on whether we manufacture PRO 140 ourselves, utilize the third-party licensor as a contract manufacturer, or utilize an independent party as a contract manufacturer. The licensor does not charge an annual license fee of £300,000
(approximately US$432,000) when it serves as the manufacturer.
Note 7Private Securities Offerings
During the year ended May 31, 2015, the Company completed a private debt offering of convertible promissory notes in the aggregate principal
amount of $3,981,050. At issuance, each note was convertible into common stock at the rate of $0.75 per share. Each note had a term of six-months and annual interest rate of 7% payable upon maturity. The Company also issued to each note holder a
warrant covering 20% of the number of shares of common stock into which the related note was convertible. Each warrant has an exercise price of $0.75 per share and a five-year term. A tender offer was made on these notes by the Company on
August 24, 2015, as fully described in Note 3, Short-Term Convertible Notes. Remaining outstanding principal, plus accrued but unpaid interest, was repaid in full upon maturity.
During the year ended May 31, 2016, the Company conducted private equity offerings (the Equity Offerings), in which accredited investors purchased
unregistered common stock at either $0.75 or $1.00 per share with warrant coverage of 50% or 25%, respectively, based on the number of shares of common stock purchased. Pursuant to the Equity Offerings, the Company sold a total of 48,659,338 shares
of common stock, $0.001 par value, for aggregate gross proceeds of approximately $37.6 million and issued five-year warrants covering 23,254,230 shares of common stock. In conjunction with the Equity Offerings, the Company paid an aggregate cash fee
of approximately $3.9 million to the placement agent and issued warrants covering an aggregate of 4,960,314 shares of common stock to the placement agent as additional compensation. The placement agent warrants had aggregate Black-Scholes valuations
of approximately $2.7 million at issuance. See Note 5 for a description of the warrants and offering costs related to the Equity Offerings.
49
Note 8 Recent Accounting Pronouncements
Recent accounting pronouncements, other than those below, issued by the FASB, the AICPA and the SEC did not or are not believed by
management to have a material effect on the Companys present or future financial statements.
In February 2016, the FASB issued Accounting Standards
Update No. 2016-02 (ASU 2016-02),
Leases (Topic 842)
effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU is to be applied using a modified retrospective approach with
optional practical expedients and other special transition provisions. Early adoption is permitted.)The ASU supersedes FASB ASC 840,
Leases,
and adds FASB ASC 842. It also amends and supersedes a number of other paragraphs throughout
the FASB ASC. Management is currently assessing the impact the adoption of ASU 2016-02 will have on the Companys Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09),
CompensationStock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting
effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for reporting periods where financial statements have not
yet been made available for issuance. The ASU requires different transition methods and disclosures based on the type of amendment included in the ASU.). Management is currently assessing the impact the adoption of ASU 2016-09 will have on the
Companys Consolidated Financial Statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03 Simplifying the
Presentation of Debt Issuance Costs (ASU2015-03) The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt
liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this standards update. The new guidance is effective for annual reporting periods beginning after
December 15, 2015, including interim periods within that reporting period and early adoption is permitted. The Company evaluated this ASU and began early adoption beginning with the annual period ended May 31, 2015. The adoption of this
guidance did not have a material impact on the Companys financial position, overall results of operations or cash flows.
In June 2014, the FASB
issued Accounting Standards Update (ASU) No. 2014-12, CompensationStock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period (ASU 2014-12). ASU 2014-12 provides guidance for awards with performance targets that could be achieved after the requisite service period has been met. The guidance is effective for annual periods beginning after
December 15, 2015, and interim periods within those annual periods, with early adoption permitted. Management is currently assessing the impact the adoption of ASU 2014-12 will have on its Consolidated Financial Statements.
In August 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial StatementsGoing Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 is intended to define managements responsibility to evaluate whether there is substantial
doubt about an organizations ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption
permitted. Management is currently assessing the impact the adoption of ASU 2014-15 will have on the Companys Consolidated Financial Statements.
Note 9 Acquisition of patents
As discussed in Note 10 below, the Company consummated an asset purchase on October 16, 2012, and paid $3,500,000 for certain assets,
including intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the PRO 140 drug substance. The Company followed the guidance in Financial Accounting Standards Topic 805 to determine if the Company
acquired a business. Based on the prescribed accounting, the Company acquired assets and not a business. As of May 31, 2016, the Company has recorded, and is amortizing, $3,500,000 of intangible assets in the form of patents. The Company estimates
the acquired patents have an estimated life of ten years. Subsequent to the acquisition date, the Company has continued to expand, amend and file new patents central to its current trial strategies, which, in turn, have extended the protection
period for certain methods of using PRO 140 and formulations comprising PRO 140 out through at least 2026 and 2031, respectively, in various countries.
50
The following presents intangible assets activity:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(1,268,750
|
)
|
|
|
(918,750
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
2,231,250
|
|
|
|
2,581,250
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
2,267,239
|
|
|
$
|
2,617,239
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible patents was approximately $350,000 for the years ended May 31, 2016 and
May 31, 2015. The estimated aggregate future amortization expense related to the Companys intangible assets with finite lives is estimated at approximately $350,000 per year for the next five years.
Note 10 Commitments and Contingencies
Under the Asset Purchase Agreement, dated July 25, 2012, between the Company and Progenics Pharmaceuticals, Inc.
(Progenics) (the Asset Purchase Agreement), the Company acquired from Progenics its rights to the HIV viral-entry inhibitor drug candidate PRO 140 (PRO 140), a humanized anti-CCR5 monoclonal antibody, as well as
certain other related assets, including the existing inventory of bulk PRO 140 drug product, intellectual property, certain related licenses and sublicenses, and U.S. Food and Drug administration (FDA) regulatory filings. On
October 16, 2012, the Company paid to Progenics $3,500,000 in cash to close the transaction. The Company is also required to pay Progenics the following milestone payments and royalties: (i) $1,500,000 at the time of the first dosing in a
U.S. Phase 3 trial or non-US equivalent, which was paid during the year ended May 31, 2016; (ii) $5,000,000 at the time of the first US new drug application approval by the FDA or other non-U.S. approval for the sale of PRO 140; and
(iii) royalty payments of up to 5% on net sales during the period beginning on the date of the first commercial sale of PRO 140 until the later of (a) the expiration of the last to expire patent included in the acquired assets, and
(b) 10 years, in each case determined on a country-by country basis. During the year ended May 31, 2016 the Company paid $1.5 million of such milestones owed to Progenics as a return of the first dosing in a U.S. Phase 3 trial. To the extent
that such milestone payments and royalties are not timely made, under the terms of the Asset Purchase Agreement, Progenics has certain repurchase rights relating to the assets sold to the Company thereunder.
Payments to the third-party licenser and to Progenics are in addition to payments due under a Development and License Agreement, dated April 30, 1999
(the PDL License), between Protein Design Labs (now AbbVie Inc.) (PDL) and Progenics, which was assigned to the Company in the Asset Purchase Agreement, pursuant to which the Company has an exclusive worldwide license to
develop, make, have made, import, use, sell, offer to sell or have sold products that incorporate the humanized form of the PRO 140 antibody developed by PDL under the agreement and must pay additional milestone payments and royalties as follows:
(i) $1,000,000 upon initiation of a Phase 3 clinical trial, which was paid during the year ended May 31, 2016; (ii) $500,000 upon filing a Biologic License Application with the FDA or non-U.S. equivalent regulatory body;
(iii) $500,000 upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iv) royalties of up to 7.5% of net sales for the longer of 10 years and the date of expiration of the last to expire licensed patent.
Additionally, the PDL License provides for an annual maintenance fee of $150,000 until royalties paid exceed that amount. During the year ended May 31, 2016 the Company paid $1 million of such milestones. To the extent that such milestone payments
and royalties are not timely made, under the terms of the PDL License, AbbVie Inc. has certain termination rights relating to the Companys license of PRO 140 thereunder. Pursuant to the foregoing Asset Purchase Agreement and PDL License, the
Company accrued an expense of $2,500,000 as of May 31, 2015 in connection with the anticipated milestone payments related to the first patient dosing in a Phase 3 clinical trial, all of which was paid during the year ended May 31, 2016, as
described above.
The Company has entered into project work orders for each of its clinical trials with its clinical research organization
(CRO) and related laboratory vendors. Under the terms of these agreements, the Company has paid approximately $2.0 million towards execution fees for direct services costs. The fees are reflected as a current asset and have an
unamortized balance of approximately $1.7 million at May 31, 2016. In connection with the Companys clinical trials, it has entered into separate project work orders for each trial with its CRO. 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 from an approximate low of $0.1 million to an approximate high of
$0.4 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties may range from an approximate low of $0.5 million to an approximate high of $1.6 million.
Note 11Employee Benefit Plan
The Company has an employee savings plan (the Plan) pursuant to Section 401(k) of the Internal Revenue Code (the
Code), covering all of its employees. The Company makes a qualified non-elective contribution of 3%, which consequently vests immediately. In addition, participants in the Plan may contribute a percentage of their compensation, but not
in excess of the maximum allowed under the Code. The Company incurred expenses for qualified non-elective contributions of approximately $25,400 and $22,000 for the years ended May 31, 2015 and 2016, respectively,
51
Note 12 Income Taxes
Deferred taxes are recorded for all existing temporary differences in the Companys assets and liabilities for income tax and financial
reporting purposes. Due to the valuation allowance for deferred tax assets, as noted below, there was no net deferred tax benefit or expense for the periods ended May 31, 2015 and 2016.
Reconciliation of the federal statutory income tax rate of 34% to the effective income tax rate is as follows for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Income tax provision at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net
|
|
|
|
|
|
|
|
|
Rate change
|
|
|
|
|
|
|
(0.6
|
)
|
Derivative gain/loss
|
|
|
0.9
|
|
|
|
(1.2
|
)
|
Loss on debt conversion
|
|
|
(0.8
|
)
|
|
|
|
|
Inducement charge
|
|
|
(1.0
|
)
|
|
|
|
|
Miscellaneous
|
|
|
(0.5
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(32.9
|
)
|
|
|
(32.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax asset (liability) current:
|
|
|
|
|
|
|
|
|
Accrued salary and expenses
|
|
$
|
378,321
|
|
|
$
|
219,100
|
|
Valuation allowance
|
|
|
(378,321
|
)
|
|
|
(219,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset (liability) non-current:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
23,510,608
|
|
|
$
|
16,857,600
|
|
Debt discount
|
|
|
|
|
|
|
(902,700
|
)
|
Expense on non-qualified stock options
|
|
|
3,873,597
|
|
|
|
3,073,500
|
|
Other
|
|
|
202,812
|
|
|
|
211,700
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(27,587,017
|
)
|
|
|
(19,240,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The tax benefit for the period presented is offset by a valuation allowance established against deferred tax assets arising
from operating losses and other temporary differences, the realization of which could not be considered more likely than not. In future periods, tax benefits and related tax deferred assets will be recognized when management considers realization of
such amounts to be more likely than not.
At May 31, 2016, the Company had available net operating loss carry forwards of approximately $69,149,000,
which expire beginning in 2022.
The Companys income tax returns remain subject to examination by all tax jurisdictions for tax years May 31,
2013 through 2015.
Note 13 Related Party Transactions
On September 26, 2014, the Company entered into a $2 million convertible promissory note with AVCP, as more fully described in Note 3
above. In October of 2014, Mr. Carl C. Dockery, the principal of AVCP, was appointed a director of the Company. On February 6, 2015, the Company entered into a second convertible promissory note in the aggregate principal amount of
$1.5 million, as more fully described in Note 3 above. On June 23, 2015, these notes and accrued but unpaid interest were converted into shares of common stock. In connection with the Debt Conversion and Termination Agreement dated
June 23, 2015, the Company issued to AVCP a warrant covering 1,000,000 shares of common stock, as more fully described in Notes 3 and 5.
52
On January 19, 2016, the Company entered into an amendment to its existing Consulting Agreement with Denis
R. Burger, Ph.D., dated February 21, 2014, as previously amended November 3, 2014 (the Consulting Agreement). The Amendment names Dr. Burger, who is currently a member of the Board of Directors, to the non-executive
position of Chief Science Officer and increases Dr. Burgers advisory responsibilities in that capacity. The Amendment also increases the compensation payable to Dr. Burger under the Consulting Agreement to $20,000 in cash per month,
which is in addition to any fees that Dr. Burger currently earns as a director. The Amendment was approved by the Audit Committee of the Board of Directors.
On May 10, 2016, Jordan G. Naydenov, a director with the Company, participated in the private equity offerings as fully described in Note 7 above. Mr.
Naydenov invested $1 million and received 1 million shares of common stock and a warrant covering 250,000 shares of common stock at an exercise price of $1.35. The terms and conditions of Mr. Naydenovs investment were identical to those
offered to all other investors in the offering.
Only independent directors approve related party transactions. The above terms and amounts are not
necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
Note 14 Subsequent Events
On June 1, 2016 the Company issued to directors, as it relates to their annual compensation, options covering a total of 300,000 shares of
common stock. The options have an exercise price of $1.09, a ten-year term and vest quarterly over one year. Additionally, in conjunction with incentive compensation, the Company issued options covering 950,000 shares of common stock
to management. The options have an exercise price of $1.09, a ten-year term and vest annually over three years beginning June 1, 2017.