NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 2018
(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 for HIV, as well as 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 and nine months ended February 28, 2018 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 and nine month periods ended February 28, 2018 and
February 28, 2017, (b) the financial position at February 28, 2018 and (c) cash flows for the nine month periods ended February 28, 2018 and February 28, 2017.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, Advanced Genetic Technologies, Inc. and CytoDyn Veterinary Medicine LLC, 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 2018 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 loss 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 $40,526,058 for the nine months ended
February 28, 2018 and has an accumulated deficit of $163,515,773 as of February 28, 2018. 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 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.
6
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
February 28, 2018 and May 31, 2017 approximated $5.2 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 and nine months ended February 28, 2018 and 2017. 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 requirements will be satisfied. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the drug product being considered. As of February 28, 2018 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 February 28,
2018 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, 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.
7
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.
Liability measured at fair value on a recurring basis by level
within the fair value hierarchy as of February 28, 2018 and May 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
Fair Value Measurement at
|
|
|
|
February 28, 2018
(1)
|
|
|
May 31, 2017
(1)
|
|
|
|
Using
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
3,288,799
|
|
|
$
|
3,288,799
|
|
|
$
|
3,014,667
|
|
|
$
|
3,014,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability
|
|
$
|
3,288,799
|
|
|
$
|
3,288,799
|
|
|
$
|
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 February 28, 2018 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 nine months ended
February 28, 2018 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
|
|
|
274,132
|
|
|
|
|
|
|
Balance at February 28, 2018
|
|
$
|
3,288,799
|
|
|
|
|
|
|
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.
8
Common Stock
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.
On November 1, 2017, the Company held a special meeting of stockholders, at which the stockholders approved a proposal to effect a reverse stock split at a
ratio of any whole number between one-for-two and one-for-fifteen, as determined by the board of directors, and a simultaneous reduction in the total number of authorized shares of common stock to 200,000,000 at any time before August 24, 2018, if
and as determined by the board of directors.
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 February 28,
2018, 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
During the nine months ended
February 28, 2018 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 was amortized over the life of the convertible promissory notes. During the nine months ended February 28, 2018, the Company recorded approximately $1.6 million of related amortization.
Debt Issuance Cost
During the nine months ended
February 28, 2018, the Company incurred direct costs associated with the issuance of short-term convertible notes, as described in Note 4, and recorded approximately $0.4 million of debt issuance costs and recognized approximately
$0.4 million of related amortization.
Registered Direct Offering Costs
During the nine months ended February 28, 2018 and the year ended May 31, 2017, the Company incurred approximately $0.7 million and
$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 upon receipt of proceeds.
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 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 130,457,331 and 77,509,269 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 nine months ended February 28, 2018 and February 28, 2017, respectively. Additionally, as of February 28, 2018,
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 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.
9
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the US
federal corporate tax rate from 35% to 21% effective as of January 1, 2018. In accordance with Section 15 of the Internal Revenue Code, we will utilize a blended
rate of 29% for our fiscal 2018 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective
date. We recorded provisional charges for the
re-measurement
of the deferred tax assets and reduced our deferred taxes before the valuation allowance by $14,270,089 to our income tax expense. The
Company has a full valuation allowance as of February 28, 2018, as management does not consider it more than likely than not that the benefits from the deferred taxes will be realized. The current tax expense for the three-month and
nine-month periods ended February 28, 2018 is zero. As of February 28, 2018, the Company had not completed the accounting for the tax effects of enactment of the Act; however, as described, it has made a reasonable estimate of the
effects on existing deferred tax balances.
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 March 2018, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU)
No. 2018-05,
Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No.
118
. The amendments in this Update add various Securities and Exchange Commission (SEC) paragraphs pursuant to the issuance of SEC Accounting Bulletin No. 118,
Income Tax Accounting Implications of the
Tax Cuts and Jobs Act
(Act) (SAB 118). The SEC issued SAB 118 to address concerns about reporting entities ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the
period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The
Company has provided a reasonable estimate in the notes to the consolidated financial statements.
In July 2017, the 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.
10
Note 4 Convertible Instruments
Series B Convertible Preferred Stock
During fiscal 2010,
the Company issued 400,000 shares of Series B Convertible Preferred Stock par value $0.001 (Series B) at $5.00 per share for cash proceeds totaling $2,009,000, of which 92,100 shares remain outstanding at February 28, 2018.
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 $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 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 million. 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.
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. The Company incurred approximately $92,000 of debt discount related to the
detachable warrants issued with the 2017 Notes, which was amortized over the term of the notes.
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 these previous Note holders.
During the nine months ended
February 28, 2018, 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 nine months ended
February 28, 2018 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 Note holders. 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 was amortized over the life of the Notes. The Company incurred debt discount of approximately $1.6 million during the nine months ended
February 28, 2018, 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 $1.6 million and
$-0-,
of
non-cash
debt
discount during the nine months ended February 28, 2018 and year ended May 31, 2017, respectively. In connection with the Notes, the Company incurred direct issuance costs of approximately $0.4 million during the nine months ended
February 28, 2018. The issuance costs were amortized over the term of the Notes and accordingly, the Company recognized approximately $0.4 million of debt issuance costs during the nine months ended February 28, 2018.
11
On January 31, 2018, in connection with a registered direct equity offering, as fully described in Note 11,
the Notes in an aggregate principal amount of $5,788,500, plus accrued unpaid interest of approximately $243,000 were sold for 12,062,728 shares of common stock and the exercise price of the original detachable warrants was reduced from $1.00 to
$0.75 per share. The Note investors also received warrants to purchase 7,718,010 shares of common stock. The securities were sold at a combined purchase price of $0.50 per share of common stock and related warrants, for aggregate gross proceeds to
the Company of approximately $6.0 million. The Company repaid one Note, including accrued interest in the aggregate of approximately $259,000.
Activity related to the Notes was as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
|
May 31, 2017
|
|
Face amount of Notes
|
|
$
|
6,038,500
|
|
|
$
|
1,150,000
|
|
Unamortized discount
|
|
|
|
|
|
|
(92,000
|
)
|
Unamortized issuance costs
|
|
|
|
|
|
|
|
|
Registered direct offering
|
|
|
(5,788,500
|
)
|
|
|
|
|
Note repayment
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of Notes, net
|
|
$
|
|
|
|
$
|
1,058,000
|
|
|
|
|
|
|
|
|
|
|
Note 5 Derivative Liability
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 February 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
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 February 28, 2018
|
|
|
7,733,334
|
|
|
$
|
3,288,799
|
|
The Company recognized approximately $0.3 million of net
non-cash
loss and
approximately $1.2 million of net
non-cash
gain, due to the changes in the fair value of the liability associated with such classified warrants during the nine months ended February 28, 2018 and
February 28, 2017, 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 February 28,
2018, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15,
2016
|
|
|
May 31,
2017
|
|
|
February 28,
2018
|
|
Fair value of underlying stock
|
|
$
|
0.78
|
|
|
$
|
0.60
|
|
|
$
|
0.79
|
|
Risk free rate
|
|
|
1.20%
|
|
|
|
1.71%
|
|
|
|
2.58%
|
|
Expected term (in years)
|
|
|
5
|
|
|
|
4.29
|
|
|
|
3.54
|
|
Stock price volatility
|
|
|
106%
|
|
|
|
94%
|
|
|
|
75%
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Probability of Fundamental Transaction
|
|
|
50%
|
|
|
|
50%
|
|
|
|
50%
|
|
Probability of holder requesting cash payment
|
|
|
50%
|
|
|
|
50%
|
|
|
|
50%
|
|
12
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 provisions.
Note 6 Stock Options and Warrants
The Company has one active stock-based equity plan at February 28, 2018, 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 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. At the annual meeting of stockholders held on August 24, 2017, the stockholders
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. As of February 28, 2018, the Company had 4,869,397 shares available for future stock-based
grants under the 2012 Plan, as amended.
Stock Options
During the nine months ended February 28, 2018, 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 nine months ended February 28, 2018, the Company granted stock option awards to directors to purchase a total of 836,055 shares of common
stock with an exercise price of $0.56 per share. The option awards were issued in lieu of accrued and unpaid cash board compensation for the previous quarters ended May 31, 2017, August 31, 2017, November 30, 2017 and
February 28, 2018. The options awards fully vest upon grant, have a
ten-year
term and a grant date fair value of $0.31 per share.
During the nine months ended February 28, 2018, the Company granted a stock option award covering 600,000 shares of common stock with an exercise price
of $0.57 per share, to its Chief Science Officer. This option award vests annually over three years, has a
ten-year
term and a grant date fair value of $0.35 per share.
During the nine months ended February 28, 2018, the Company granted stock 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 option awards vest annually over three years, have a
ten-year
term and grant date fair values of $0.35 per share.
During the nine months ended February 28, 2018, the Company cancelled certain outstanding stock options and issued replacement options, covering an
aggregate of 1,050,000 shares of common stock to executive management and directors. The replacement options retained the original exercise price of $0.80 per share and have a five-year term, to reflect the corrected term of approximately ten years
from the original grant date. These options have a grant date fair value of $0.42 per share. In connection with this modification the Company recognized approximately $321,000 of non-cash stock based compensation expense.
Warrants
During the nine months ended February 28,
2018, 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 $0.26 per share.
During the nine months ended
February 28, 2018, the Company granted to a consultant a warrant covering an aggregate of 100,000 shares of common stock, with an exercise price of $0.75 per share. The warrant vests immediately, has a five-year term and a grant date fair value
of $0.29 per share.
During the nine months ended February 28, 2018, the Company granted to a consultant a warrant covering an aggregate of 50,000
shares of common stock, with an exercise price of $0.76 per share. The warrant vests immediately, has a five-year term and a grant date fair value of $0.26 per share.
During the nine months ended February 28, 2018, 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 promissory Notes, as fully described in Note 4. The warrant coverage was increased from 25% to 50% and the per share exercise price of the warrant was reduced to
$1.00 from $1.35. On June 19, 2017, in connection with new terms, the Company issued incremental warrants covering 383,333 shares to the Note holders during the year ended May 31, 2017.
In connection with the January 31, 2018, registered direct offering, as fully described below in Note 11, the exercise price of all detachable warrants issued
with the Notes described in Note 4, was reduced further to $0.75 per share. As a result of this modification, the Company recognized non-cash inducement interest expense of approximately $2.4 million.
13
During the nine months ended February 28, 2018, in connection with a private equity offering, as fully described in Note 10, the Company issued common stock warrants covering a total of
35,286,904 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued common stock warrants covering 2,813,491 shares of common
stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.55 per share.
On September 8, 2017, in
connection with a registered direct equity offering, as fully described in Note 11, the Company issued common stock warrants covering 1,668,163 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 213,573 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 connection with the Make-Whole Offering, fully described in Note 10, the exercise price of the investor and placement agent warrants were reduced to $0.75 and $0.715 per share, respectively.
On November 30, 2017, in connection with the registered direct equity offering dated September 8, 2017, as fully described in Note 11, the Company
issued incremental common stock warrants covering 251,504 shares of common stock to investors. The investor warrants have a five-year term from initial investment date, September 8, 2017, and an exercise price of $0.75 per share. In connection
with this offering, the Company also issued common stock warrants covering 26,702 shares of common stock to the placement agent. The placement agent warrants have a five-year term from September 8, 2017, and an exercise price of $0.715 per
share.
On October 11, 2017, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued common stock
warrants covering 940,380 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued common stock warrants covering 150,461
shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.715 per share.
On
November 24, 2017, the Company filed an Offer to Amend and Exercise (the Offer) certain warrants covering an aggregate of 51,090,113 shares of common stock, at a potentially reduced exercise price of $0.50 per share. The
original exercise price on these certain warrants ranged from $0.50 to $1.35 per share and have expiration dates beginning October 2018 continuing through October 2022. The Offer was originally scheduled to expire December 22, 2017, but was
subsequently extended three times to March 23, 2018. The Offer was subject to the completion of an election to participate and exercise by the holder, certain representations and warranties by the holder and remittance of exercise proceeds to
the Company. See Note 14 - Subsequent Events.
On January 23, 2018, in connection with a registered direct equity offering, as fully described in
Note 11, the Company issued warrants covering 3,071,014 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued warrants
covering 245,681 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.55 per share.
On January 31, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering
7,718,010 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share.
During the nine
months ended February 28, 2018, the Company determined to extend the expiration dates of certain warrants from May 31, 2017 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.
14
|
|
|
|
|
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 for the three and nine months ended February 28, 2018 and
February 28, 2017 was approximately $567,000 and $1,096,000 and $297,000 and $985,000, respectively. The grant date fair value of options and warrants vested during the three and nine month periods ended February 28, 2018 and
February 28, 2017 was approximately $763,000 and $1,337,000 and $231,000 and $762,000, respectively. As of February 28, 2018, there was approximately $0.8 million of unrecognized compensation expense related to share-based payments
for unvested options, which is expected to be recognized over a weighted average period of 1.26 years.
The following table represents stock option and
warrant activity as of and for the nine months ended February 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Options and warrants outstandingMay 31, 2017
|
|
|
77,859,626
|
|
|
$
|
0.86
|
|
|
|
3.40
|
|
|
$
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
60,465,027
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,295,000
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(4,572,322
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstandingFebruary 28, 2018
|
|
|
130,457,331
|
|
|
|
0.80
|
|
|
|
3.94
|
|
|
|
5,522,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisableFebruary 28, 2018
|
|
|
126,763,665
|
|
|
$
|
0.80
|
|
|
|
3.81
|
|
|
$
|
5,188,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 February 28, 2018, 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 clinical 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 2031 and 2038, respectively, in various countries.
The following presents intangible assets activity:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
|
May 31, 2017
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(1,881,327
|
)
|
|
|
(1,618,770
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
1,618,673
|
|
|
|
1,881,230
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
1,654,662
|
|
|
$
|
1,917,219
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to acquired patents was approximately $87,500 and $262,500 for the three and nine months ended
February 28, 2018 and 2017. 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.
15
Note 8 License Agreements
The Company has 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. 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 a current annual license fee of £300,000 (approximately US$425,000 utilizing
current exchange rates), which is payable annually in December, except for the December 2017 payment, which was extended to March 15, 2018. Future annual license fees and royalty rate will vary depending on whether the Company manufactures PRO
140, utilizes the third-party licensor as a contract manufacturer, or utilizes an independent party as a contract manufacturer. The licensor does not charge an annual license fee of £300,000 (approximately US$425,000) when it serves as the
manufacturer.
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
$3.5 million in cash to close the transaction. The Company is also required to pay Progenics the following milestone payments and royalties: (i) $1.5 million 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) $5.0 million 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 licensor 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) $1.0 million upon initiation of a Phase 3 clinical trial, which was paid during the year ended May 31, 2016; (ii) $0.5 million upon filing a Biologic License Application with the FDA or
non-U.S.
equivalent regulatory body; (iii) $0.5 million 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 $2.5 million 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 PDL, 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 $0.3 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties may range from an approximate low of $0.7 million to an
approximate high of $1.5 million.
During the year ended May 31, 2017, the Company entered into agreements with contract manufacturing
companies. Under the terms of the agreements, the Company incurred approximately $2.1 million of execution fees for process validation and manufacturing activities, of which the remaining $0.4 million is reflected as a current asset, as of
February 28, 2018. 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 up to an approximate high of $5.2 million.
16
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business.
There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Companys financial position.
Note 10 Private Equity Offerings
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.
During the nine months ended February 28, 2018, the Company conducted a private equity offering, in which accredited
investors purchased unregistered common stock at $0.50 per share with warrant coverage of 100%, based on the number of shares of common stock purchased. Pursuant to the offering, the Company sold a total of 35,286,904 shares of common stock for
aggregate gross proceeds of approximately $17.6 million and issued warrants covering an aggregate of 35,286,904 shares of common stock with a five-year term and an exercise price of $0.75 per share. In connection with the offering, the
placement agent received a warrant covering 2,813,491 shares of common stock, with an exercise price of $0.55 per share and a five-year term.
In
connection with the September 2017 Offering, as fully described below in Note 11, on November 30, 2017, the Company completed an offer and sale (the Make-Whole Offering) of an aggregate of 503,015 shares of Common Stock (the
Make-Whole Shares) and warrants to purchase up to 251,504 shares of common stock (the Make-Whole Warrants and, collectively with the Make-Whole Shares, the Make-Whole Securities). The Make-Whole Securities issued
were unregistered.
The Make-Whole Securities were offered pursuant to a form of Waiver and Subscription Agreement (the Waiver and Subscription
Agreement). The Make-Whole Securities represent the difference in the numbers of shares of Common Stock and warrants that would have been sold to investors in the September 2017 Offering had the reduced purchase price of $0.65 per share
of Common Stock and related Warrants in the October 2017 Offering, registered direct offering (as compared to $0.75 in the September 2017 Offering) and the reduced warrant exercise price of $0.75 in the October 2017 Offering (as
compared to $1.00 in the September 2017 Offering) applied to the September 2017 Offering as well. The Make-Whole Securities were offered as consideration for the release of potential claims by participating investors. In connection with these
arrangements, the exercise prices of any warrants previously sold in the September 2017 Offering to participating investors were also reduced to $0.75 from $1.00. In addition, warrants previously issued to the placement agent (or its designees)
in respect of participating investors were also proportionately adjusted to reflect a reduced exercise price of $0.715 (as compared to $0.825 in the September 2017 Offering) and 26,702 additional shares.
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
September 2016 Offering), pursuant to a registration statement on Form
S-3.
The investors in this September 2016 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 $9.0 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 shown below:
|
|
|
|
|
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 conjunction with the
September 2016 Offering are required to be accounted for in accordance with ASC 480 and ASC 815.
17
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 2016 Offering), pursuant
to a registration statement on Form
S-3.
The investors in this December 2016 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 2016 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 2017 Offering), pursuant to a registration statement
on Form
S-3.
The investors in the January 2017 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 2017 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 2017 Offering), pursuant to a registration statement on Form
S-3.
The investors in the February 2017 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 2017 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.
On September 8, 2017, the Company entered into subscription agreements
with certain investors for the sale of 3,336,331 shares of common stock at a purchase price of $0.75 per shares in a registered direct offering (the September 2017 Offering), pursuant to a registration statement on Form
S-3.
The investors in this September 2017 Offering also received warrants to purchase 1,668,163 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 September 2017 Offering of approximately $2.3 million after placement fees of 9% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 213,573 shares (or 8% of total shares
sold to investors) with a per share exercise price of $0.825 and a five-year term. As fully described in Note 10 above, the Company completed the Make-Whole Offering, in which incremental shares of common stock and warrants were issued.
Simultaneously, the exercise price of the investor and placement agent warrants related to the September 2017 Offering were reduced to $0.75 and $0.715 per share, respectively.
On October 11, 2017, the Company entered into subscription agreements with certain investors for the sale of 1,880,765 shares of common stock at a
purchase price of $0.65 per shares in a registered direct offering (the October 2017 Offering), pursuant to a registration statement on Form
S-3.
The investors in this October 2017 Offering also received
warrants to purchase 940,380 shares of common stock with an exercise price of $0.75 per share and a five-year term. The Company received net proceeds from the October 2017 Offering of approximately $1.1 million. In addition, the placement agent
received warrants covering 150,461 shares (or 8% of total shares sold to investors) with a per share exercise price of $0.715 and a five-year term.
On
January 23, 2018, the Company entered into subscription agreements with certain investors for the sale of 3,071,014 shares of common stock at a purchase price of $0.50 per shares in a registered direct offering (the January 23
Offering), pursuant to a registration statement on Form
S-3.
The investors in the January 23 Offering also received warrants to purchase 3,071,014 shares of common stock with an exercise price of
$0.75 per share and a five-year term. The Company received net proceeds from the January 23
Offering of approximately $1.4 million. In addition, the placement agent received warrants
covering 245,681 shares of common stock (or 8% of total shares sold to investors) with a per share exercise price of $0.55 and a five-year term.
On
January 31, 2018, the Company entered into subscription agreements with certain investors who owned convertible promissory notes of the Company (the Notes) for the sale by the Company of 12,062,728 shares of common stock in a
registered direct offering (the January 31 Offering). The investors in the January 31 Offering also received warrants to purchase 7,718,010 shares of common stock. The securities were sold at a combined purchase price of $0.50 per
share of common stock and related warrants, for aggregate gross proceeds to the Company of approximately $6.0 million. The Notes matured on January 31, 2018, upon which date the Company became obligated to pay the principal amount of
approximately $6.0 million on the Notes, plus accrued but unpaid interest of approximately $0.3 million, for aggregate payment obligations at maturity of approximately $6.3 million. The common stock and warrants were issued in full
satisfaction of approximately $6.0 million of such payment obligations, with one holder of an aggregate principal amount and accrued unpaid interest of approximately $0.3 million electing to be repaid in cash instead of participating in
the
18
January 31, 2018 Offering. As a result, all of the proceeds from the Offering were used to satisfy the Companys payment obligations pursuant to the Notes. The warrants will be
exercisable for a period of five years commencing on their issuance date, at an exercise price of $0.75 per share of common stock, subject to certain ownership limitations and adjustments as provided under the terms of the warrants. The number of
shares of common stock underlying the warrant issued to each investor was calculated as the difference between (x) the number of shares of common stock issued to each investor in the January 31, 2018 Offering in respect of the payment
obligations relating solely to principal amounts on the Notes and (y) the number of shares of common stock underlying certain warrants originally issued to such investor in the original Notes offering. The effect was to bring each investor from
50% warrant coverage in the original offering of Notes, assuming conversion of the principal amount thereof at an original conversion price of $0.75 per share, to 100% warrant coverage after the January 31, 2018 Offering, assuming reinvestment
of the principal amount on the Notes at $0.50 per share. In connection with this offering, the Company paid a cash commission of $164,425 to the placement agent.
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 and nine months ended
February 28, 2018 and 2017, the Company incurred an expense of approximately $30,200 and $51,700 and $10,800 and $29,500, 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. Carl C. 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.
On November 8, 2017, in connection with a private equity offering, a limited liability company in which Anthony D. Caracciolo, Executive
Chairman of the Company, holds a partial ownership interest purchased $100,000 of common stock and warrants on terms identical to those applicable to the other investors in the private equity offering.
On January 31, 2018, in connection with a registered direct offering, Mr. Caracciolo entered into a subscription agreement for the purchase of 2,093,972
shares of common stock and a warrant covering 1,333,334 shares of common stock. This investment was deemed to be full satisfaction of the Companys note payment obligation of $1,046,986 in aggregate principal and unpaid accrued interest. The
terms and conditions of the offering were identical to all other investors in the offering and his investment was approved by the Audit Committee of the Board of Directors.
On January 31, 2018, in connection with a registered direct offering, Mr. Naydenov entered into a subscription agreement for the purchase of 207,248 shares of
common stock and a warrant covering 133,334 shares of common stock. This investment was deemed to be full satisfaction of the Companys note payment obligation of $103,624 in aggregate principal and unpaid accrued interest. The terms and
conditions of the offering were identical to all other investors in the offering and his investment was approved by the Audit Committee of the Board of Directors.
On January 31, 2018, in connection with a registered direct offering, AVCP entered into a subscription agreement for the purchase of 103,586 shares of common
stock and a warrant covering 66,667 shares of common stock. As mentioned above, Carl C. Dockery, the principal of AVCP, is a director of the Company. This investment was deemed to be full satisfaction of the Companys note payment obligation of
$51,793 in aggregate principal and unpaid accrued interest. The terms and conditions of the offering were identical 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 March 15, 2018,
the Company issued 310,527 shares of common stock to executives for their accrued and unpaid bonuses awarded May 31, 2017. The stock had a grant date fair value of $0.57 per share, as determined on date of grant, by the Companys
Compensation Committee. Out of the total 310,527 shares of common stock issued, 159,011 were tendered for payment of income taxes and will be recorded as treasury stock.
On March 23, 2018, the Company completed its Warrant Tender Offer, as fully described in Note 5, expired. Upon completion of the Warrant Tender Offer, 77
Original Warrants to purchase up to 3,027,263 shares of common stock had been validly tendered and not withdrawn in the Warrant Tender Offer, for gross cash proceeds to the Company of approximately $1.5 million. In connection with the Offer,
the Company paid a cash fee of approximately $73,000 to the soliciting agent.
19