NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2017
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 has developed a class of therapeutic monoclonal antibodies to address unmet medical needs in the areas of HIV and graft-versus-host
disease.
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 2017 presentation. These reclassifications did not have any effect on total current assets, total assets, total current liabilities, total liabilities, total
stockholders (deficit) equity, net loss or earnings per share.
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 $25,763,801 and $25,703,612 for the
years ended May 31, 2017 and May 31, 2016, respectively, and has an accumulated deficit of $122,989,715 as of May 31, 2017. 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 lead product
candidate, obtain U.S. Food & Drug Administration (FDA) approval, outsource manufacturing of its lead product candidate, and ultimately achieve initial revenues and attain profitability. The Company is currently engaging in
significant research and development activities related to its lead product candidate, and expects to incur significant research and development expenses in the future primarily related to its clinical trials. These research and development
activities are subject to significant risks and uncertainties. The Company intends to finance its future development activities and its 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 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
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, 2017 and May 31, 2016 approximated $1.5 million and $9.4 million, respectively.
42
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 years ended May 31, 2017 and May 31, 2016. 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 7 and 9.
Research and
Development
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
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 commercial use 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 (BLA), 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, 2017 and
May 31, 2016, the Company did not have
pre-launch
inventory that qualified for capitalization pursuant to U.S. GAAP ASC 330 Inventory.
Fair Value of Financial Instruments
At May 31, 2017
and May 31, 2016, 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, and FASB ASC 480 Distinguishing
Liabilities from Equity (ASC 480), as it relates to warrant liability, 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 the Company was unable to
corroborate with observable market data.
43
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of May 31,
2017 and May 31, 2016 is as follows:
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Fair Value Measurement at
May 31, 2017 (1)
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Fair Value Measurement at
May 31, 2016
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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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Derivative liability
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|
$
|
3,014,667
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|
|
$
|
3,014,667
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|
|
$
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|
|
|
$
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|
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|
|
|
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Total liability
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$
|
3,014,667
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|
|
$
|
3,014,667
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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, 2017 and May 31, 2016.
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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 warrant. 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 liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the year ended May 31, 2017 and May 31, 2016:
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Balance at May 31, 2015
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$
|
2,008,907
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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
|
|
|
(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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Balance at May 31, 2016
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$
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Investor warrants issued with registered direct equity offering
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|
$
|
4,360,000
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|
Placement agent warrants issued with registered direct equity offering
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|
|
819,200
|
|
Fair value adjustments
|
|
|
(2,164,533
|
)
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|
|
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|
Balance at May 31, 2017
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|
$
|
3,014,667
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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) 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 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. 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.
Common Stock
On March 18, 2016, at a special meeting of stockholders, 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. Subsequently, on August 24, 2016, at the Annual Meeting of Stockholders, a proposal was approved to increase the total number of authorized shares of common stock from 250,000,000 to 350,000,000.
44
Preferred Stock
The Companys Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of May 31, 2017,
the Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock, of which 92,100 shares were outstanding. The remaining preferred shares authorized have no specified rights.
Debt Discount and Issuance Costs
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 4, and recorded approximately $709,000 of debt issuance costs and recorded approximately
$-0-
and $605,000 of related amortization for the years ended May 31, 2017 and May 31, 2016, respectively. During the year ended May 31, 2017, the Company
incurred approximately $92,000 of debt discount related to convertible promissory notes issued with detachable warrants. The discount will be amortized over the life of the convertible promissory notes.
Offering Costs
During the years ended May 31, 2017
and May 31, 2016, the Company incurred approximately $1.8 and $3.9 million in direct incremental costs associated with the sale of equity securities, respectively. The offering costs were recorded as a component of equity upon receipt of
the proceeds, as fully described in Notes 10 and 11.
Stock for Services
The Company periodically issues warrants to consultants for various services. The Black-Scholes option pricing model, as described more fully above, is
utilized to measure the fair value of the equity instruments on the date of issuance. The Company recognizes the compensation expense associated with the equity instruments over the requisite service or vesting period.
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 77,859,626 and 63,307,150 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, 2017 and May 31, 2016, respectively.
As of May 31, 2017, shares of Series B convertible preferred stock in the aggregate of 92,100 shares can potentially convert into 921,000 shares of common stock. As of May 31, 2017, convertible promissory notes in the aggregate principal
amount of $1,150,000 can potentially convert into 1,533,333 shares of common stock.
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 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 July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-11,
Earnings
Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).
The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or
embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the
instrument is indexed to an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no
longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share
(EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, DebtDebt with Conversion and Other Options), including related EPS
guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not
have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the
amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.
The amendments in this Update
provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements
have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance.
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
45
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 Company evaluated this ASU and began early adoption
beginning with the annual period ended May 31, 2016. 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 adoption of the
guidance did not have a material impact on the Companys financial position, overall results of operations or cash flows.
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 4 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 92,100 shares remain outstanding at May 31, 2017. 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 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, and bore interest at rates ranging from 5% to 10% per year, payable in cash semi-annually in arrears beginning on April 1, 2013. At May 31, 2017 and May 31,
2016, there were no convertible notes outstanding related to this offering.
46
In connection with the initial sale of the 2013 Convertible Notes, detachable common stock warrants to purchase a
total of 8,527,984 common shares with a
two-year
term 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 years ended May 31, 2017 and May 31, 2016, the Company recognized approximately $
-0-
and $7,000, 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. Activity related to the 2013 Convertible Notes for the year ended May 31, 2017 and May 31, 2016 was as follows:
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May 31, 2017
|
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|
May 31, 2016
|
|
Face amount of Notes
|
|
$
|
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|
|
$
|
50,000
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|
|
|
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|
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Unamortized discount
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|
|
|
|
|
|
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Conversions
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|
|
|
|
(50,000
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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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The Company determined the fair value of the extended warrants described below, as follows:
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2016
|
|
2017
|
Expected dividend yield
|
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0%
|
|
0%
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Stock price volatility
|
|
64.56% - 69.30%
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|
4.00%
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Expected term
|
|
1 year
|
|
1 month
|
Risk-free interest rate
|
|
0.33%
|
|
77.00%
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Grant-date fair value
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|
$0.15-$0.18
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$0.11
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During each of the fiscal years ended May 31, 2015 and 2016, the board approved a
one-year
extension of expiration dates on the aforementioned detachable common stock warrants, which had an original term of two years, covering approximately 6.3 million shares of common stock, with an
exercise price of $1.00 per share. The first extension of expiration dates ranged from October 2015 through January 2016 and the second extension deferred the expiration dates to October 2016 through January 2017. The extensions were effective upon
the receipt of certain executed documentation from the warrantholders. Pursuant to U.S. GAAP, the Company recognized
non-cash
interest expense in fiscal years ended May 31, 2017 and 2016 of approximately
$72,000 and $867,000, respectively, in connection with these extensions, which represented the incremental increase in the fair value of the modified warrants.
As fully disclosed in Note 6 below, these warrants were granted an additional and final extension with all extended expirations dates being May 31, 2017,
subsequently extended until June 30, 2017. 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 rate and expected dividend yield at the commitment date.
AVCP Convertible Notes
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 Alpha Venture Capital Partners, L.P. (AVCP), an affiliate of one of the
Companys directors. 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
47
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.
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 AVCP, an affiliate of one of the
Companys directors. As described in greater detail below, along with the AVCP Bridge Note, the AVCP
Two-Year
Note was subsequently 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.
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 $
-0-
and
$94,000 in
non-cash
amortization expense for the years ended May 31, 2017 and May 31, 2016, respectively.
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:
|
|
|
|
|
|
|
Warrants issued on
September 26, 2014
|
|
Warrants issued on
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, during the
48
year ended May 31, 2016, the Company recognized a loss on extinguishment of the AVCP Convertible Notes of approximately $584,000, 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 notes 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 notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,627
|
)
|
|
|
|
|
Fair Value of Common Stock Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,714,168
|
|
|
|
|
|
Loss on Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(584,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,862,257
|
|
|
$
|
94,344
|
|
|
$
|
(646,505
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value of the derivative liability and linked common shares of the AVCP Notes, as of
the derivative liability inception dates (September 26, 2014 and February 6, 2015) and fiscal year end May 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
Shares Indexed
|
|
|
Derivative Liability
|
|
Derivative Liability May 31, 2014
|
|
|
|
|
|
$
|
|
|
September 26, 2014
|
|
|
2,000,000
|
|
|
|
767,038
|
|
February 6, 2015
|
|
|
1,500,000
|
|
|
|
403,226
|
|
Change in fair value 2015
|
|
|
1,685,185
|
|
|
|
838,643
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2015
|
|
|
5,185,185
|
|
|
$
|
2,008,907
|
|
|
|
|
Change in fair value 2016
|
|
|
|
|
|
|
(646,505
|
)
|
Conversion of notes payable June 24, 2015
|
|
|
(5,185,185
|
)
|
|
|
(1,362,402
|
)
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2016
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017 and May 31, 2016, the Company recognized a
non-cash
gain of approximately of
$-0-
and $647,000, due to the change in derivative liability related to the fundamental transaction feature in the registered direct warrants and 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 (Lattice) 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.
49
Significant inputs and assumptions used in the Lattice for the derivative liability related to the AVCP notes
payable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2014
|
|
|
February 6,
2015
|
|
|
May 31,
2015
|
|
|
June 23,
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.
|
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.
2015
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 2015 Short-Term Convertible Notes) and related warrants to investors for cash. Each 2015 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 2015 Short-Term Convertible Notes bore interest of 7% per annum, payable in cash upon maturity. In connection with the issuance of the 2015 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 2015 Short-Term Convertible Notes, and a
corresponding increase to additional
paid-in
capital. The debt discounts are amortized over the life of the 2015 Short-Term Convertible Notes. The Company recognized approximately
$-0-
and $1,784,000 as interest expense related to the amortization of the debt during the year ended May 31, 2017 and 2016, respectively. There were no 2015 Short-Term
Convertible Notes outstanding at May 31, 2017 or May 31, 2016. The unamortized discounts were fully amortized upon any conversion of the 2015 Short-Term Convertible Notes before maturity.
During the year ended May 31, 2016, the Company tendered an offer to settle the balances of the 2015 Short-Term Convertible Notes. The Company offered to
exchange the 2015 Short-Term Convertible Notes for (i) the issuance of restricted shares of common stock, for the settlement of the balance of the 2015 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 2015 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 2015 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 2015 Short-Term
50
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.
Activity related to the 2015 Short-Term Convertible Notes for fiscal year ended May 31, 2017 and May 31, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
Face amount of Notes
|
|
$
|
|
|
|
$
|
3,981,050
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
Tender offer conversions
|
|
|
|
|
|
|
(2,693,800
|
)
|
Conversions
|
|
|
|
|
|
|
(525,000
|
)
|
Payments upon maturity
|
|
|
|
|
|
|
(762,250
|
)
|
|
|
|
|
|
|
|
|
|
Total carrying value of Notes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
2017 Short-Term Convertible Notes
During the year ended May 31, 2017, the Company issued $1.15 million of unsecured convertible promissory notes, with a maturity date of
January 31, 2018, (the 2017 Notes) and related warrants to investors for cash. The principal amount of the 2017 Notes, including any accrued but unpaid interest thereon, is convertible at the election of the holder at any time into
shares of common shares at any time prior to maturity at a conversion price of $0.75 per share. The 2017 Notes bear simple interest at the annual rate of 7%. Principal and accrued interest, to the extent not previously paid or converted, is due and
payable on the maturity date. At the commitment date, the conversion price was greater than the fair value of the common stock. Accordingly, no beneficial conversion feature was recorded. The Company incurred approximately $92,000 of debt discount
related to the detachable warrants issued with the 2017 Notes, which will be amortized over the term of the notes.
In connection with the sale of the
2017 Notes, detachable common stock warrants to purchase a total of 383,333 common shares, with an exercise price of $1.35 per share and a five-year term 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, expected term of the warrants, risk-free interest rates and expected dividend yield at the grant date.
|
|
|
|
|
2017
|
Expected dividend yield
|
|
0%
|
Stock price volatility
|
|
69.00%
|
Expected term
|
|
5 year
|
Risk-free interest rate
|
|
1.75%
|
Grant-date fair value
|
|
$0.24
|
The fair value of the warrants were recorded as a debt discount to the 2017 Notes and a corresponding increase to additional
paid-in
capital. The
non-cash
debt discount, of approximately $92,000 will be amortized over the term of the 2017 Notes.
Note 5 - Derivative Liability:
Registered Direct
Equity Offering
The investor warrants issued with the September 2016 registered direct equity offering, and the placement agent warrants issued in
conjunction with the offering, as fully described in Note 11, contain 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). If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a successor entity, then the warrantholder has the option to receive cash, equal to the fair value of the remaining
unexercised portion of the warrant. Due to this contingent cash settlement provision, the investor and placement agent warrants require liability classification as derivatives in accordance with ASC 480 and ASC 815 and are recorded at fair
value.
51
The following tables summarize the fair value of the warrant derivative liability and related common shares as of
inception date September 15, 2016 and May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Shares Indexed
|
|
|
Derivative Liability
|
|
Balance May 31, 2016
|
|
|
|
|
|
$
|
|
|
Inception date September 15, 2016
|
|
|
7,733,334
|
|
|
|
5,179,200
|
|
Balance May 31, 2017
|
|
|
7,733,334
|
|
|
$
|
3,014,667
|
|
Changes in the fair value of the derivative liability are reported as Change in fair value of derivative liability
in the Consolidated Statements of Operations. During the year ended May 31, 2017, the Company recognized a net
non-cash
gain of approximately $2.2 million, due to the changes in the fair value of the
liability associated with such classified warrants and
non-cash
interest expense of approximately $540,000.
ASC
820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Fair values for the warrants were determined using a Binomial Lattice
(Lattice) valuation model.
The Company estimated the fair value of the warrant derivative liability as of inception, and May 31, 2017,
using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
September 15,
2016
|
|
|
May 31,
2017
|
|
Fair value of underlying stock
|
|
$
|
0.78
|
|
|
$
|
0.60
|
|
Risk free rate
|
|
|
1.20
|
%
|
|
|
1.71
|
%
|
Expected term (in years)
|
|
|
5
|
|
|
|
4.29
|
|
Stock price volatility
|
|
|
106
|
%
|
|
|
94
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Probability of Fundamental Transaction
|
|
|
50
|
%
|
|
|
50
|
%
|
Probability of holder requesting cash payment
|
|
|
50
|
%
|
|
|
50
|
%
|
Due to the fundamental transaction provisions, which could provide for early redemption of the warrants, the model also
considered subjective assumptions related to the fundamental transaction provision. The fair value of the warrants will be significantly influenced by the fair value of the Companys stock price, stock price volatility, changes in interest and
managements assumptions related to the fundamental transaction provision.
Note 6 Stock Options and Warrants
The Company has one active stock-based equity plan at May 31, 2017, 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 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. On February 12, 2017, the Board of Directors approved an amendment to
the 2012 Plan to increase the number of shares available for issuance from 7,000,000 to 15,000,000 shares of common stock and modify certain other provisions in the 2012 Plan. The amendment is conditioned upon stockholder approval at the 2017 annual
meeting of stockholders. As of May 31, 2017, the Company had 7,543,807 shares available for future stock-based grants under the 2012 Plan, as amended, but subject to future stockholder approval.
Stock Options
During the year ended May 31, 2017,
the Companys Compensation Committee of the Board of Directors granted a time-based option covering 550,000 shares of common stock and a milestone-based option covering 450,000 shares of common stock to the Executive Chairman. The time-based
option has an exercise price of $0.76 and a
ten-year
term. The option vests in equal monthly installments over the next two years and has a grant date fair value of $0.64 per share. The grant of the
milestone-based option is conditioned on
52
stockholder approval of the increase in the number of shares authorized for issuance under the 2012 Plan, as discussed above. The milestone-based option will not be exercisable unless and until
approval of the share increase, for the 2012 Plan, as discussed above, is obtained from the stockholders. At that time the vesting will be contingent upon the achievement of certain strategic milestones specified in the option agreement.
During the year ended May 31, 2017, the Company granted annual stock option awards to directors to purchase a total of 300,000 shares of common stock
with an exercise price of $1.09 per share. These option awards vest quarterly over one year and have a
ten-year
term. The grant date fair value related to these options was $0.78 per share. An additional stock
option covering 100,000 shares of common stock was granted to a director. The option has an exercise price of $0.68 and vests 25% immediately with the remainder ratably over one year, has a
ten-year
term and
grant date fair value of $0.53 per share. In April 2017, an option award was granted to the Companys newly appointed director, subject to stockholder approval of the increase in the number of shares authorized for issuance under the 2012 Plan,
in a
pro-rata
amount covering 7,123 shares of common stock with an exercise price of $0.61 per share. The option vested May 31, 2017 and has a
ten-year
term and
grant date fair value of $0.36 per share.
During the year ended May 31, 2017, the Company granted options covering an aggregate of 1,050,000 shares
of common stock to executive management and certain employees with exercise prices of $1.09 and $1.10 per share. The options vest annually over three years, have a
ten-year
term and grant date fair values of
$0.75 and $0.76 per share, respectively.
Warrants
In connection with a private equity offering completed in June 2016, as fully described in Note 10, the Company issued common stock warrants covering 182,375
shares of common stock to investors. The warrants have a five-year term and an exercise price of $1.35 per share. During the year ended May 31, 2017, holders of warrants covering 774,097 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 $398,000. Additionally, warrants covering 138,864 shares with an exercise price of $0.75 per share were exercised pursuant to a cashless exercise
provision.
In connection with a registered direct equity offering completed in September 2016, as fully described in Note 11, the Company issued common
stock warrants covering 6,666,667 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $1.00 per share. In connection with this offering, the Company also issued common stock warrants covering
1,066,667 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.825 per share.
During the year ended May 31, 2017, in connection with the December, January and February registered direct equity offerings, as fully described in
Note 11, the Company issued common stock warrants covering 5,602,821 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $1.00 per share. In connection with these offerings, the Company also
issued common stock warrants covering 576,451 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.825 per share.
In January 2017, the Company determined to extend the expiration dates of certain warrants to May 31, 2017, covering an aggregate of 6,310,667 shares of
common stock. The warrants were originally issued in connection with the sale of the 2013 Convertible Notes, as identified in Note 4. The warrants currently have an exercise price of $1.00 per share, and all but two warrants were exercisable through
October 2016. One warrant, for the purchase of 186,667 shares of common stock, was exercisable through December 2016 and one warrant, for the purchase of 160,000 shares of common stock, is exercisable until January 15, 2017. The extension to
May 31, 2017 is contingent upon the execution of a release of claims by each of the warrantholders, the delivery of the form of exercise, and the receipt of the exercise proceeds to the Company.
On May 31, 2017, in connection with the sale of the 2017 Convertible Notes, as fully described in Note 4, the Company issued common stock warrants
covering 383,333 shares of common stock to note holders. The investor warrants have a five-year term and an exercise price of $1.35 per share.
Compensation expense related to stock options and warrants for the fiscal years ended May 31, 2017 and May 31, 2016 was approximately $1,205,000 and
$2,353,000, respectively. The grant date fair value of options and warrants vested during the fiscal years ended May 31, 2017 and May 31, 2016, was approximately $949,000 and $1,712,000, respectively. As of May 31, 2017, there was
approximately $940,000 of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted-average period of 1.78 years.
53
The following table represents stock option and warrant activity for the periods ended May 31, 2017 and
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
16,935,437
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(912,961
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(1,470,000
|
)
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding - May 31, 2017
|
|
|
77,859,626
|
|
|
|
0.86
|
|
|
|
3.40
|
|
|
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable - May 31, 2017
|
|
|
74,535,543
|
|
|
$
|
0.85
|
|
|
|
3.17
|
|
|
$
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Acquisition of patents
As discussed in Note 9 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, 2017, 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.
The
following presents intangible assets activity:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(1,618,770
|
)
|
|
|
(1,268,750
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
1,881,230
|
|
|
|
2,231,250
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
1,917,219
|
|
|
$
|
2,267,239
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible patents was approximately $350,000 for each of the fiscal years ended May 31,
2017 and May 31, 2016. 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 8 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 accrued and 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 accrued and timely paid by June 30, 2016. 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. This annual license fee is currently being accrued for a payment in December 2017.
54
Note 9 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 U.S. 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 result 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 for
system
know-how
technology, see Note 8, 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, as amended, for each of its clinical
trials with its clinical research organization (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 from an approximate low of
$0.1 million to an approximate high of $0.5 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 $1.8 million.
During the year ended May 31, 2017, the Company entered into agreements with commercial manufacturing
companies. Under the terms of the agreements, the Company prepaid approximately $2.1 million of execution fees for process validation and manufacturing activities, which is reflected as a current asset, as of May 31, 2017. In the event the
Company were to terminate any of the agreements, it may incur certain financial penalties which would become payable to the manufacturers. Conditioned on the timing of termination, the financial penalties may range from an approximate low of
$1.2 million to an approximate high of $3.6 million.
Note 10 - Private Securities Offerings
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 $0.75 and $1.00 per share with warrant coverage of 50% and 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.
In June 2016, the Company conducted a private equity offering, in which
accredited investors purchase unregistered common stock at $1.00 per share with warrant coverage of 25%, based on the number of shares of common stock purchased. Pursuant to the offering, the Company sold a total of 729,500 shares of common stock
for aggregate gross proceeds of $729,500 and issued to the investors warrants with a five-year term covering 182,375 shares of common stock with an exercise price of $1.35 per share.
55
Note 11 - Registered Direct Equity Offerings
In September 2016, the Company entered into securities purchase agreements with certain institutional investors for the sale of 13,333,334 shares of common
stock at a purchase price of $0.75 per share in a registered direct equity offering (the Registered Offering), pursuant to a registration statement on Form
S-3.
The investors in this Registered
Offering also received warrants to purchase 6,666,667 shares of common stock with an exercise price of $1.00 per share and a five-year term. The Company received net proceeds from the offering of approximately $9 million after placement fees of
8% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 1,066,667 shares (or 8% of total shares sold to investors) with a per share exercise price of $0.825 and a five-year term.
A summary of the cash proceeds of the offering is as follows:
|
|
|
|
|
Gross proceeds from sale of common stock
|
|
$
|
10,000,000
|
|
Placement agent fees and expenses
|
|
|
1,010,000
|
|
|
|
|
|
|
Total net proceeds
|
|
$
|
8,990,000
|
|
|
|
|
|
|
As fully described in Note 6 above, the investor warrants and the placement agent warrants issued in connection with the
Registered Offering are required to be accounted for in accordance with ASC 480 and ASC 815.
A summary of the ASC 480 allocation of the proceeds of the
offering is as follows:
|
|
|
|
|
Allocated to common stock and additional paid in capital
|
|
$
|
6,334,417
|
|
Allocated to warrant liabilities
|
|
|
2,655,583
|
|
|
|
|
|
|
Total net proceeds
|
|
$
|
8,990,000
|
|
|
|
|
|
|
Closing costs included 1,066,667 warrants valued at $819,200 for placement agent fees. Based upon the estimated fair value of
the stock and warrants in the units, the Company allocated $241,986 to financing expense and $577,214 as stock issuance costs.
On December 12, 2016,
the Company entered into securities purchase agreements with certain investors for the sale of 4,000,000 shares of common stock at a purchase price of $0.75 per share in a registered direct offering (the December Offering), pursuant to a
registration statement on Form
S-3.
The investors in this December Offering also received warrants to purchase 2,000,000 shares of common stock with an exercise price of $1.00 per share and a five-year term.
The Company received net proceeds from the December Offering of $3.0 million.
On January 31, 2017, the Company entered into
subscription agreements with certain investors for the sale of 1,534,999 shares of common stock at a purchase price of $0.75 per share in a registered direct offering (the January Offering), pursuant to a registration statement on Form
S-3.
The investors in the January Offering also received warrants to purchase 767,498 shares of common stock with an exercise price of $1.00 per share and a five-year term. The Company received net proceeds from the
January Offering of approximately $1.0 million after placement fees of 9% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 122,799 shares (or 8% of total shares sold to investors) with a
per share exercise price of $0.825 and a five-year term.
On February 28, 2017, the Company entered into subscription agreements
with certain investors for the sale of 5,670,661 shares of common stock at a purchase price of $0.75 per share in a registered direct offering (the February Offering), pursuant to a registration statement on Form
S-3.
The investors in the February Offering also received warrants to purchase 2,835,323 shares of common stock with an exercise price of $1.00 per share and a five-year term. The Company received net proceeds from
the February Offering of approximately $3.8 million after placement fees of 9% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 453,652 shares (or 8% of total shares sold to investors) with
a per share exercise price of $0.825 and a five-year term.
Note 12 Employee 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. During the year ended May 31, 2017 and May 31, 2016, the Company incurred an expense of approximately $40,300 and $22,000, respectively, for qualified
non-elective
contributions.
56
Note 13 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, 2016 and 2017.
Reconciliation of the federal statutory income tax rate of 34% to the effective income tax rate is as follows for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Income tax provision at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net
|
|
|
|
|
|
|
|
|
Rate change
|
|
|
|
|
|
|
|
|
Derivative gain/loss
|
|
|
2.8
|
|
|
|
0.9
|
|
Loss on debt conversion
|
|
|
|
|
|
|
(0.8
|
)
|
Inducement expense
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
Miscellaneous
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
Valuation allowance
|
|
|
(35.7
|
)
|
|
|
(32.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax asset (liability)
non-current:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
32,530,436
|
|
|
$
|
23,510,608
|
|
SFAS 123r expense on
non-qualified
stock options
|
|
|
4,284,246
|
|
|
|
3,873,597
|
|
Charitable contributions
|
|
|
25,500
|
|
|
|
56,950
|
|
Accrued expenses
|
|
|
216,645
|
|
|
|
378,321
|
|
Fixed assets
|
|
|
1,300
|
|
|
|
(1,236
|
)
|
Amortization
|
|
|
186,772
|
|
|
|
147,098
|
|
Capitalized debt issuance costs
|
|
|
157,992
|
|
|
|
|
|
Debt discount
|
|
|
(31,072
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(37,371,819
|
)
|
|
|
(27,965,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The income 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, 2017, the Company had available net operating loss carry forwards of
approximately $95.6 million, which expire beginning in 2029.
The Companys income tax returns remain subject to examination by all tax
jurisdictions for tax years May 31, 2014 through 2016.
Note 14 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 4 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 4 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 Note 4.
57
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 10 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 and his investment was approved by the Audit Committee of the Board of Directors.
On
May 31, 2017, Anthony D. Caracciolo, Executive Chairman of the Company, participated in the private placement of 2017 Notes, as fully described in Note 4 above. Mr. Caracciolo purchased a promissory note, bearing interest of 7%, for
$1,000,000 and received a warrant covering 333,333 shares of common stock at an exercise price of $1.35. The terms and conditions of Mr. Caracciolos investment was identical to those offered to all other investors in the offering and his
investment was approved by the Audit Committee of the Board of Directors.
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 15 Subsequent Events
On June 1, 2017,
the Company issued to directors, in connection with their annual compensation, options covering 450,000 shares of common stock. The options have an exercise price of $0.57, a
ten-year
term and vest quarterly
over one year. These awards reflect an increase in the annual
non-employee
director stock option awards from 50,000 to 75,000 shares per year effective for fiscal year 2018. Additionally, in conjunction with
annual incentive compensation, the Company issued options covering 800,000 shares of common stock to management and employees. The options have an exercise price of $0.57, a
ten-year
term and vest annually
over three years.
On June 1, 2017, the Company issued to a director and
non-executive
Chief Science Officer,
an option covering 600,000 shares of common stock. The options have an exercise price of $0.57, a
ten-
year term and vest
one-third
at month six, eighteen and thirty
following the grant date.
On June 14, 2017, the Companys Board of Directors approved a modification in the warrant terms issued in connection
with the 2017 Short-Term Convertible Notes, as fully described in Note 4 above. The warrant coverage was increased from 25% to 50% and the exercise price of the warrant was reduced to $1.00 per share from $1.35 per share. On June 19, 2017, in
connection with new terms, the Company issued an incremental 383,333 warrant shares to previous investors.
Between June 19, 2017 and July 10, 2017,
the Company sold approximately $3.9 million in aggregate principal amount of 2017 Notes. These notes are fully described in Note 4 above and reflect the modified warrant terms approved on June 14, 2017, as fully outlined above. The 2017 Notes
are convertible into an underlying 5,184,661 shares of Common Stock. In connection with the sale, the Company issued warrants covering 2,592,326 shares of Common Stock at an exercise price of $1.00 per share. The Warrants are currently exercisable
in full and will expire five years from issuance. In connection with the sale of notes, the Company paid placement agent fees of $262,000, which includes a nonaccountable expense fee of $20,000, and became liable for a placement agent warrant
covering 286,767 shares of Common Stock with an exercise price of $0.825 per share. The warrant will be fully exercisable upon issuance with a five-year term.
On June 21, 2017, the Company issued a warrant covering 200,000 shares of Common Stock to a third-party consultant, as consideration for services. The
warrant is exercisable at $0.64 per share and has a five-year term. The warrant vests 25% on the date of issuance, 25% on December 31, 2017 and 50% upon the completion of certain strategic milestones.
On June 30, 2017, the Company issued an aggregate of 3,295,000 shares of Common Stock, upon the exercise by investors of certain outstanding warrants at
$0.50 per share, for aggregate gross proceeds of approximately $1.6 million. The warrants previously had an exercise price of $1.00 and were scheduled to expire on May 31, 2017. As an inducement to exercise the warrants prior to their
expiration, and in exchange for the release by such investors of certain claims, the Company entered into agreements with such investors to reduce the exercise price to $0.50 per share and to extend the expiration date to June 30, 2017.
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