NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 31, 2017
(UNAUDITED)
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.
Note 2
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results for these periods. The consolidated financial statements and notes
thereto are presented as prescribed by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements for the fiscal years ended May 31, 2017 and 2016 and notes thereto in the Companys Annual Report on Form
10-K for the fiscal year ended May 31, 2017, filed with the Securities and Exchange Commission on July 20, 2017. Operating results for the three months ended August 31, 2017 are not necessarily indicative of the results that may be
expected for the entire year. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three month periods ended
August 31, 2017 and August 31, 2016, (b) the financial position at August 31, 2017 and (c) cash flows for the three month periods ended August 31, 2017 and August 31, 2016.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company 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 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 approximately $11.6 million for the
three months ended August 31, 2017 and has an accumulated deficit of approximately $134.6 million as of August 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 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 primarily related to its clinical trials. These research and development activities are subject
to significant risks and uncertainties. The Company intends
6
to finance our future development activities and our 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 or expects to experience any losses related to these balances. Balances in excess of federally
insured limits at August 31, 2017 and May 31, 2017 approximated $0.7 million and $1.5 million, 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 three months ended August 31, 2017 and 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 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 August 31, 2017 and May 31, 2017 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 August 31,
2017 and May 31, 2017 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.
7
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.
Liability
measured at fair value on a recurring basis by level within the fair value hierarchy as of August 31, 2017 and May 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at
August 31, 2017 (1)
|
|
|
Fair Value Measurement at
May 31, 2017
|
|
|
|
Using
Level 3
|
|
|
Total
|
|
|
Using
Level 3
|
|
|
Total
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
3,377,333
|
|
|
$
|
3,377,333
|
|
|
$
|
3,014,667
|
|
|
$
|
3,014,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability
|
|
$
|
3,377,333
|
|
|
$
|
3,377,333
|
|
|
$
|
3,014,667
|
|
|
$
|
3,014,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
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 August 31, 2017, and May 31, 2017.
|
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 three months ended August 31, 2017 and the year ended May 31, 2017.
|
|
|
|
|
Investor warrants issued with registered direct equity offering
|
|
$
|
4,360,000
|
|
Placement agent warrants issued with registered direct equity offering
|
|
|
819,200
|
|
Fair value adjustments
|
|
|
(2,164,533
|
)
|
|
|
|
|
|
Balance at May 31, 2017
|
|
|
3,014,667
|
|
|
|
|
|
|
Fair value adjustments
|
|
|
362,666
|
|
|
|
|
|
|
Balance at August 31, 2017
|
|
$
|
3,377,333
|
|
|
|
|
|
|
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
8
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 revises, 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. On August 24, 2016, at the 2016 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. On
August 24, 2017, at the 2017 Annual Meeting of Stockholders, a proposal was approved to increase the total number of authorized shares of common stock from 350,000,000 to 375,000,000. Subsequent to each stockholders meeting, an amendment to the
Companys Certificate of Incorporation was filed with the Secretary of State of the State of Delaware to give effect to each authorized share increase.
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 August 31, 2017, the Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock, of which 92,100 shares are
outstanding. The remaining preferred shares authorized have no specified rights.
Debt Discount and Issuance Costs
During the three months ended August 31, 2017 and the year ended May 31, 2017, the Company incurred approximately $1.6 million and $92,000 of debt
discount related to the issuance of short-term convertible notes, issued with detachable warrants, as described in Note 4. The discount will be amortized over the life of the convertible promissory notes. During the three months ended
August 31, 2017, the Company recorded approximately $444,000 of related amortization.
During the three months ended August 31, 2017, the
Company incurred direct costs associated with the issuance of short-term convertible notes, as described in Note 4, and recorded approximately $436,000 of debt issuance costs and recognized approximately $114,000 of related amortization.
Registered Direct Offering Costs
During the year ended
May 31, 2017, the Company incurred approximately $1.8 million in direct incremental costs associated with the sale of equity securities, as described in Note 11. The offering costs were recorded as a component of equity when the proceeds were
received.
Stock for Services
The Company
periodically issues warrants to consultants for various services. The Black-Scholes option pricing model 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 shares of common stock outstanding during the period. Diluted loss
per share would include the weighted average number of shares of common stock outstanding and potentially dilutive common stock equivalents. Because of the net losses for all periods presented, the basic and diluted weighted average shares
outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share. For this reason, common stock options and warrants to purchase 80,582,715 and 62,588,165 shares of common stock were not
included in the computation of basic and diluted weighted average number of shares of common stock outstanding for the three months ended August 31, 2017 and August 31, 2016, respectively. Additionally, as of August 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.
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
9
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 and penalties in
operating expenses.
Note 3 Recent Accounting Pronouncements
Recent accounting pronouncements, other than below, issued by the FASB (including its EITF), the AICPA and the SEC did not or are not believed by management to
have a material effect on the 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. 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. Management is currently assessing the impact the adoption of ASU 2017-11 will have on the Companys Consolidated Financial Statements.
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 public business entities for reporting periods for which financial statements have not
yet been issued. Management is currently assessing the impact the adoption of ASU 2017-09 will have on the Companys Consolidated 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.
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 August 31, 2017. Each
share of the Series B is convertible into ten shares of the Companys $0.001 par common stock including any accrued dividends, with an effective fixed conversion price of $.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
10
contingent upon the Company increasing its authorized common shares, which occurred in April 2010, when the Companys stockholders approved an increase in the authorized shares of common
stock to 100,000,000. At the commitment date, which occurred upon such stockholder 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 $.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.
Short-Term Convertible Notes
During the year ended May 31, 2017, the Company issued $1.15 million of unsecured convertible promissory notes (the Notes), with
a maturity date of January 31, 2018, and related warrants to investors for cash. The principal amount of the 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 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.
On June 14, 2017, the Companys Board of Directors approved a modification in the warrant terms issued in connection with the Notes. The warrant
coverage was increased from 25% to 50% and the exercise price of the warrant was reduced from $1.35 to $1.00 per share. On June 19, 2017, in connection with the new terms, the Company issued an incremental 383,333 warrant shares to previous
investors.
During the three months ended August 31, 2017, the Company issued approximately $4.89 million in aggregate principal of additional Notes
and related warrants, as described above. At the commitment dates, the Company determined that the conversion feature related to these Notes to be 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 on the commitment dates and the effective conversion price after discounting the Notes for the fair value of the related warrants.
In connection with the sale of the Notes during the three months ended August 31, 2017, and year ended May 31, 2017, detachable common stock
warrants to purchase a total of 4,025,656 common shares, with an exercise price of $1.00 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
|
|
69.5 - 69.80%
|
Expected term
|
|
5 year
|
Risk-free interest rate
|
|
1.75 - 1.83%
|
Grant-date fair value
|
|
$0.28 - $0.39
|
The fair value of the warrants, coupled with the beneficial conversion features, were recorded as a debt discount to the Notes
and a corresponding increase to additional paid-in capital and will be amortized over the life of the Notes. The Company incurred debt discount of approximately $1.6 million during the three months ended August 31, 2017, related to the
beneficial conversion feature and detachable warrants issued with the Notes. During the year ended May 31, 2017 the Company incurred debt discount of approximately $92,000 related to the detachable warrants issued with the Notes. Accordingly,
the Company recognized approximately $0.4 million and $-0-, of non-cash debt discount during the three months ended August 31, 2017 and year ended May 31, 2017, respectively. In connection with the Notes, the Company incurred direct
issuance costs of approximately $436,000 during the three months ended August 31, 2017. The issuance costs will be amortized over the term of the Notes and accordingly, the Company recognized approximately $114,000 of debt issuance costs.
11
Activity related to the Notes was as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
2017
|
|
|
May 31, 2017
|
|
Face amount of Notes
|
|
$
|
6,038,500
|
|
|
$
|
1,150,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
(1,222,000
|
)
|
|
|
(92,000
|
)
|
Unamortized issuance costs
|
|
|
(322,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of Notes
|
|
$
|
4,494,500
|
|
|
$
|
1,058,000
|
|
|
|
|
|
|
|
|
|
|
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.
The following tables summarize the
fair value of the warrant derivative liability and related common shares as of inception date September 15, 2016, May 31, 2017 and August 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
|
|
Balance August 31, 2017
|
|
|
7,733,334
|
|
|
$
|
3,377,333
|
|
The Company recognized approximately $363,000 and $ -0- of net non-cash loss, due to the changes in the fair value of the
liability associated with such classified warrants during the three months ended August 31, 2017 and August 31, 2016, respectively.
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 date September 15, 2016, May 31, 2017
and August 31, 2017, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15,
2016
|
|
|
May 31,
2017
|
|
|
August 31,
2017
|
|
Fair value of underlying stock
|
|
$
|
0.78
|
|
|
$
|
0.60
|
|
|
$
|
0.68
|
|
Risk free rate
|
|
|
1.20
|
%
|
|
|
1.71
|
%
|
|
|
1.65
|
%
|
Expected term (in years)
|
|
|
5
|
|
|
|
4.29
|
|
|
|
4.04
|
|
Stock price volatility
|
|
|
106
|
%
|
|
|
94
|
%
|
|
|
88
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Probability of Fundamental Transaction
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Probability of holder requesting cash payment
|
|
|
50
|
%
|
|
|
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.
12
Note 6 Stock Options and Warrants
The Company has one active stock-based equity plan at August 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 stockholders at the Companys 2012 annual meeting to replace the 2004 Plan. The 2012 Plan was amended by stockholder 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, in March 2016 to increase the number of shares available for issuance from 5,000,000 to 7,000,000 shares of common stock and a recent approval to increase the total number of shares by 8,000,000 to 15,000,000, among
other amendments, on August 24, 2017. As of August 31, 2017, the Company had 5,693,807 shares available for future stock-based grants under the 2012 Plan, as amended.
Stock Options
During the three months ended
August 31, 2017, the Company granted annual stock option awards to directors to purchase a total of 450,000 shares of common stock with an exercise price of $0.57 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 $0.36 per share.
During the three months ended August 31, 2017, the Company granted an
option award covering 600,000 shares of common stock with an exercise price of $0.57 per share, to the Chief Science Officer. This option vests annually over three years, has a ten-year term and a grant date fair value of $0.35 per share.
During the three months ended August 31, 2017, the Company granted options, covering an aggregate of 800,000 shares of common stock, to executive
management and employees with exercise prices of $0.57 per share. The options vest annually over three years, have a ten-year term and grant date fair values of $0.35 per share.
Warrants
During the three months ended August 31, 2017,
the Company granted a warrant covering an aggregate of 200,000 shares of common stock, with an exercise price of $0.64 per share, to a consultant. The warrant vests 25% upon grant date, 25% on December 31, 2017 and 50% upon achieving certain
future milestones. The warrant has a five-year term and a grant date fair value of $.26 per share.
During the three months ended August 31, 2017, in
connection with unsecured convertible promissory Notes, as fully described in Note 4, the Company issued common stock warrants, covering 3,258,990 shares of common stock to note holders. The warrants have a five-year term and an exercise price of
$1.00 per share. In connection with the promissory notes, the Company issued warrants covering 350,766 to the placement agent. The warrants have a five year term and an exercise price of $0.825.
On June 14, 2017, the Companys Board of Directors approved a modification in the warrant terms issued in connection with the Notes, as fully
described in Note 4. 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 the investors during the year ended May 31, 2017.
During the three months ended August 31, 2017, the Company
determined to extend the expiration dates of certain warrants to June 30, 2017 covering 3,295,000 shares of common stock. The warrants were originally issued in connection with 2012 convertible promissory notes and had an exercise price of
$1.00 per share. The extension to June 30, 2017 was contingent upon immediate exercise of the warrants at a reduced exercise price of $0.50 per share. The Company received proceeds of approximately $1.6 million and pursuant to U.S. GAAP, the
Company recognized non-cash inducement interest expense of approximately $0.8 million, which represented the incremental increase in the fair value of the extended warrants.
The Company determined the fair value of the warrant extension 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 date of exercise.
|
|
|
|
|
2017
|
Expected dividend yield
|
|
0%
|
Stock price volatility
|
|
61.48%
|
Expected term
|
|
1 month
|
Risk-free interest rate
|
|
0.84%
|
Grant-date fair value
|
|
$0.25
|
Compensation expense related to stock options and warrants was approximately $255,000 and $335,000 for the three months ended
August 31, 2017 and August 31, 2016, respectively. The grant date fair value of options and warrants vested during the three month
13
periods ended August 31, 2017 and August 31, 2016 was approximately $447,000 and $252,000, respectively. As of August 31, 2017, there was approximately $1,357,000 of unrecognized
compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 1.66 years.
The following table represents stock option and warrant activity as of and for the three-months ended August 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options and warrants outstanding May 31, 2017
|
|
|
77,859,626
|
|
|
$
|
0.86
|
|
|
|
3.40
|
|
|
$
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,043,089
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,295,000
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(25,000
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding August 31, 2017
|
|
|
80,582,715
|
|
|
|
0.85
|
|
|
|
3.54
|
|
|
$
|
320,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable August 31, 2017
|
|
|
75,904,464
|
|
|
$
|
0.86
|
|
|
|
3.22
|
|
|
$
|
104,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 August 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:
|
|
|
|
|
|
|
|
|
|
|
August 31,
2017
|
|
|
May 31,
2017
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(1,706,289
|
)
|
|
|
(1,618,770
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
1,793,711
|
|
|
|
1,881,230
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
1,829,700
|
|
|
$
|
1,917,219
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to patents was approximately $87,500 for the three months ended August 31, 2017 and 2016,
respectively. 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.
14
Note 8 License Agreements
The Company has an executed 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. In connection with this license agreement, the Company became the primary obligor of £600,000 (approximately US$807,000 utilizing current exchange rates),
which was timely paid by June 30, 2016. The Company continues to accrue for their current annual license payment of £300,000 (approximately US$400,000 utilizing current exchange rates), which is payable annually in December. 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$400,000) when it serves as the manufacturer.
Note 9 Commitment 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. As of the date of this filing, it is managements conclusion that the
probability of achieving the subsequent future scientific research milestones is not reasonably determinable, thus the future milestone payments payable to Progenics and its sub-licensors are deemed contingent consideration and, therefore are not
currently accruable.
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. As of the date of this filing, it is managements conclusion that the probability of achieving the subsequent future scientific research milestones is not reasonably determinable, thus the
future milestone payments payable to Progenics and its sub-licensors are deemed contingent consideration and, therefore are not currently accruable.
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 $0.4 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 $1.8 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 paid approximately $2.1 million of execution fees for process validation and manufacturing activities, of which the remaining $1.7 million is
reflected as a current asset, as of August 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.
15
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 Offering
During the
year ended May 31, 2017, the Company conducted a private equity offering, in which accredited investors purchased 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, $0.001 par value, for aggregate gross proceeds of $729,500 and issued to the investors five-year warrants covering 182,375 shares of common stock with
an exercise price of $1.35 per share.
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 5 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
16
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 three months ended August 31, 2017 and 2016, the Company incurred an expense of approximately $10,800 and $8,800, respectively, for qualified non-elective contributions.
Note 13 Related Party Transactions
On
May 31, 2017, Anthony D. Caracciolo, Executive Chairman of the Company, participated in the private placement of Notes, as fully described in Note 4. Mr. Caracciolo purchased a promissory note, bearing interest of 7%, for $1,000,000 in
aggregate principal and received a warrant covering 333,333 shares of common stock at an exercise price of $1.00. The terms and conditions of Mr. Caracciolos 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 July 26, 2017, Jordan G. Naydenov, a director with the
Company, participated in the private placement of Notes, as fully described in Note 4. Mr. Naydenov purchased a promissory note, bearing interest of 7%, for $100,000 in aggregate principal and received a warrant covering 66,666 shares of common
stock at an exercise price of $1.00. 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 July 28, 2017, Alpha Venture Capital Partners, LP (AVCP), participated in the private placement of Convertible Promissory
Notes, as fully described in Note 4 above. Mr. Carl Dockery, the principal of AVCP, is a director of the Company. AVCP purchased a promissory note, bearing interest of 7%, for $50,000 in aggregate principal and received a warrant covering
33,333 shares of common stock at an exercise price of $1.00. The terms and conditions of the AVCP 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.
The Audit Committee of the Board of Directors, comprised of independent directors, reviews and approves all 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 September 7,
2017, the Company filed with the Secretary of State of Delaware a Certificate of Amendment (the Certificate of Amendment) to its Certificate of Incorporation, increasing the total number of authorized shares of Common Stock to
375,000,000. The Companys stockholders approved the Certificate of Amendment at an annual meeting of stockholders on August 24, 2017.
On
September 8, 2017, the Company entered into subscription agreements and securities purchase agreements with certain investors for the sale by the Company of 3,336,331 shares of common stock, at a purchase price of $0.75 per share in a
registered direct offering. The Investors in this offering also received warrants to purchase 1,668,163 shares of common stock. The aggregate gross proceeds for the sale of the common shares and warrants was approximately $2.5 million. The warrants
have an exercise price of $1.00 per share and have a five-year term. Net proceeds to the Company were approximately $2.24 million.
17