NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2018
Note 1
Organization
CytoDyn Inc. (the Company) was originally incorporated under the laws of Colorado on May 2, 2002 under the name RexRay
Corporation (its previous name) and, effective August 27, 2015, reincorporated under the laws of Delaware. We are a clinical-stage biotechnology company focused on the clinical development and potential commercialization of humanized monoclonal
antibodies to treat Human Immunodeficiency Virus (HIV) infection. Our lead product candidate, PRO 140, belongs to a class of HIV therapies known as entry inhibitors. These therapies block HIV from entering into and infecting certain
cells.
The Company has developed a class of therapeutic monoclonal antibodies to address unmet medical needs in the areas of HIV and GvHD. In addition,
we are expanding the clinical focus with PRO 140 to include the evaluation in certain cancer and immunological indications where CCR antagonism has shown initial promise.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial
statements include the accounts of CytoDyn Inc. and its wholly owned subsidiaries, AGTI and CVM, both of which are dormant entities. All intercompany transactions and balances are eliminated in consolidation.
Reclassifications
Certain prior year amounts shown in
the accompanying consolidated financial statements have been reclassified to conform to the 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 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 $50,149,681, $25,763,801 and
$25,703,612 for the years ended May 31, 2018, May 31, 2017 and May 31, 2016, respectively, and has an accumulated deficit of $173,139,396 as of May 31, 2018. These factors, among several 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. 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.
Use of Estimates
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash
Cash is
maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. Balances in excess of federally insured limits at
May 31, 2018 and May 31, 2017 approximated $1.1 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
47
may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying value, the asset is
considered impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. There were no impairment charges for the years ended May 31, 2018, May 31, 2017 and
May 31, 2016. The value of the Companys patents would be significantly impaired by any adverse developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Notes 7 and 9.
Research and Development
Research and development costs
are expensed as incurred. Clinical trial costs incurred through third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development collaboration arrangements or
other contractual agreements, the milestone payment obligations are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable.
Pre-launch
Inventory
The Company may
scale-up
and make commercial quantities of its product candidate prior to the date it anticipates that
such product will receive final FDA approval. The
scale-up
and commercial production of
pre-launch
inventories involves the risk that such products may not be approved
for commercial use by the FDA on a timely basis, or ever. This risk notwithstanding, the Company may
scale-up
and build
pre-launch
inventories of product that have not
yet received final governmental approval when the Company believes that such action is appropriate in relation to the commercial value of the product launch opportunity. The determination to capitalize is made once the Company (or its third party
development partners) has filed a BLA, that has been acknowledged by the FDA as containing sufficient information to allow the FDA to conduct its review in an efficient and timely manner and management is reasonably certain that all regulatory and
legal hurdles will be cleared. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the drug product being considered. As of May 31, 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 May 31, 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 ASC 815, as their instruments are recorded as a derivative liability, at fair value, and ASC 480, as it relates to warrant liability, with changes in fair value reflected in income.
Fair Value Hierarchy
The three levels of inputs that may
be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with
insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the
full term of the assets or liabilities. Level 2 inputs also include
non-binding
market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted
for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology are significant to the measurement of the fair value
of assets or liabilities. These Level 3 inputs also include
non-binding
market consensus prices or
non-binding
broker quotes that the Company was unable to
corroborate with observable market data.
48
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of May 31,
2018 and May 31, 2017 is as follows:
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Fair Value Measurement at
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Fair Value Measurement at
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May 31, 2018 (1)
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May 31, 2017 (1)
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Using
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Using
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Level 3
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Total
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Level 3
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Total
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Liability:
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Derivative liability
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$
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1,323,732
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|
|
$
|
1,323,732
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|
|
$
|
3,014,667
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|
|
$
|
3,014,667
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|
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Total liability
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$
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1,323,732
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|
|
$
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1,323,732
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|
$
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3,014,667
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|
$
|
3,014,667
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(1)
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The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair value hierarchy as of May 31, 2018 and May 31, 2017.
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A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurements. These instruments are not quoted on an active market, so the Company uses a Binomial Lattice Model to estimate the value of the derivative liability. A Binomial Lattice Model was used because management believes it reflects all the
assumptions that market participants would likely consider in negotiating the transfer of the warrant. The Companys derivative liability is classified within Level 3 of the fair value hierarchy because certain unobservable inputs were
used in the valuation model.
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the year ended May 31, 2018 and May 31, 2017:
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Balance at May 31, 2016
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$
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Investor warrants issued with registered direct equity offering
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4,360,000
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Placement agent warrants issued with registered direct equity offering
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819,200
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Fair value adjustments
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|
(2,164,533
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)
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Balance at May 31, 2017
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3,014,667
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|
|
|
|
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Fair value adjustments
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|
|
(1,690,935
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)
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|
|
|
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Balance at May 31, 2018
|
|
$
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1,323,732
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|
Stock-Based Compensation
U.S. GAAP requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the
award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award (requisite service period) or when designated milestones have been achieved.
The Company accounts for stock-based awards established by the fair market value of the instrument using the Black-Scholes option pricing model utilizing
certain weighted average assumptions including stock price volatility, expected term and risk-free interest rates, as of the grant date. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term
of the stock-based award. The expected volatility is based on the historical volatility of the Companys common stock on monthly intervals. The computation of the expected option term is based on the simplified method, as the
Company issuances are considered plain vanilla options. For stock-based awards with defined vesting, the Company recognizes compensation expense over the requisite service period or when designated milestones have been achieved. The
Company estimates forfeitures at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Based on limited historical experience of forfeitures, the Company estimated future unvested
forfeitures at 0% for all periods presented.
Common Stock
On March 18, 2016, at a special meeting of stockholders, a proposal was approved to increase the total number of authorized shares of common stock of the
Company from 200,000,000 to 250,000,000. Subsequently, on August 24, 2016, at the Annual Meeting of Stockholders, a proposal was approved to increase the total number of authorized shares of common stock from 250,000,000 to 350,000,000. 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. On June 7, 2018, 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 375,000,000 to 450,000,000.
49
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 May 31, 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.
Treasury Stock
Treasury stock purchases are accounted
for under the par value method, whereby the cost of the acquired stock is recorded at par value. During the year ended May 31, 2018, the Company purchased 159,011 shares of $0.001 par value treasury stock for shares tendered in satisfaction of
income tax withholding, in connection with incentive compensation paid to certain officers in the form of common stock.
Debt Discount
During the years ended May 31, 2018, May 31, 2017 and May 31, 2016, the Company incurred approximately $ 1.5 million, $92,000 and
$-0-,
respectively, of debt discount related to the issuance of short-term convertible promissory notes issued with detachable warrants, as described in Note 4. The discount
was amortized over the life of the convertible promissory notes and the Company recognized approximately $1.6 million,
$-0-
and $1.9 million, of related
amortization expense for the years ended May 31, 2018, May 31, 2017 and May 31, 2016, respectively.
Debt Issuance Costs
During the year ended May 31, 2018, the Company incurred direct costs associated with the issuance of short-term convertible promissory notes, as
described in Note 4, and recorded approximately $0.4 million of debt issuance costs. The Company recognized approximately $0.4 million,
-0-
and
$0.6 million of related amortization expense for the year ended May 31, 2018, May 31, 2017 and May 31, 2016, respectively.
Offering Costs
During the years ended May 31, 2018,
May 31, 2017 and May 31, 2016, the Company incurred approximately $3.5 million, $1.8 million and $3.9 million respectively, in direct incremental costs associated with the sale of equity securities. The offering costs were
recorded as a component of equity upon receipt of the proceeds, as fully described in Notes 10 and 11.
Stock for Services
The Company periodically issues warrants to consultants for various services. The Black-Scholes option pricing model, as described more fully above, is
utilized to measure the fair value of the equity instruments on the date of issuance. The Company recognizes the compensation expense associated with the equity instruments over the requisite service or vesting period.
Loss per Common Share
Basic loss per share is computed
by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share would include the weighted average common shares outstanding and potentially dilutive common share equivalents. Because of
the net losses for all periods presented, the basic and diluted weighted average shares outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share. For this reason, common stock options
and warrants to purchase 132,385,269; 77,859,626 and 63,307,150 shares of common stock were not included in the computation of basic and diluted weighted average common shares outstanding for the years ended May 31, 2018, May 31, 2017 and
May 31, 2016, respectively. As of May 31, 2018 and May 31, 2017 shares of Series B convertible preferred stock in the aggregate of 92,100 shares can potentially convert into 921,000 shares of common stock.
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.
50
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S.
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 utilized a blended rate of 28.62% 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. For the fiscal year ended May 31, 2018 and May 31, 2017, we recorded provisional charges for the
re-measurement
of the deferred tax assets and reduced our deferred taxes before the valuation allowance by $17,497,051 to our income tax expense. The net tax expense for the year ended May 31, 2018, is zero, due to the reduction in the deferred tax
valuation allowance. The Company has a full valuation allowance as of May 31, 2018, as management does not consider it more than likely than not that the benefits from the deferred taxes will be realized.
Note 3 Recent Accounting Pronouncements
Recent
accounting pronouncements, other than below, issued by the Financial Accounting Standards Board( 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 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.
Note 4 Convertible Instruments
Series B Convertible Preferred Stock
During fiscal 2010,
the Company issued 400,000 shares of Series B, $0.001 par value Convertible Preferred Stock (Series B) at $5.00 per share for cash proceeds totaling $2,009,000, of which 92,100 shares remain outstanding at May 31, 2018. Each share
of the Series B is convertible into ten shares of the Companys $0.001 par value common stock, including any accrued dividends, with an effective fixed conversion price of $0.50 per share. The holders of the Series B can only convert their
shares to common shares provided the Company has sufficient authorized common shares at the time of conversion. Accordingly, the conversion option was contingent upon the Company increasing its authorized common shares, which occurred in April 2010,
when the Companys 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 $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. As of May 31, 2018 the undeclared, accrued dividends were approximately $199,000 or 387,000 shares of common stock.
51
AVCP Convertible Notes
During the year ended May 31, 2015, the Company issued a
two-year
term unsecured convertible promissory note (the
AVCP
Two-Year
Note) in the aggregate principal amount of $2,000,000 to Alpha Venture Capital Partners, L.P. (AVCP), an affiliate of one of the Companys directors as described
under Note 15 below. As described in greater detail below, along with the AVCP Bridge Note, the AVCP
Two-Year
Note has subsequently been converted in a transaction occurring during the year ended May 31,
2016. The AVCP
Two-year
Note bore simple interest at the annual rate of 5%, payable quarterly. The principal balance of the AVCP
Two-Year
Note was due and payable in
full on September 26, 2016. The principal amount of the AVCP
Two-Year
Note plus unpaid accrued interest was convertible at the election of the holder into shares of the Companys common stock at any
time prior to maturity at an initial conversion price of $1.00 per share. The conversion price was subject to adjustment on the same terms, and contained similar consent rights to the issuance of additional indebtedness, as the AVCP Bridge Note
below. During the year ended May 31, 2015, the Company issued a three-month unsecured convertible promissory note (the AVCP Bridge Note and together with the AVCP
Two-Year
Note, the AVCP
Convertible Notes) in the aggregate principal amount of $1,500,000 to AVCP. The AVCP Bridge Note, along with the AVCP
Two-Year
Note, were subsequently converted in a transaction occurring during the year
ended May 31, 2016. The principal amount of the AVCP Bridge Note plus unpaid accrued interest was convertible into shares of the Companys common stock prior to maturity at an initial conversion price of $1.00 per share. The AVCP Bridge
Note bore simple interest of 1.2% per month, payable at maturity on May 5, 2015, and monthly thereafter, upon the Companys election to exercise a
one-time
option to extend the maturity by an
additional three months, which the Company exercised on April 1, 2015 (extending the maturity date to August 5, 2015). The conversion price was subject to (i) adjustment for stock splits and similar corporate events and
(ii) reduction to a price per share that is 10% below the lowest sale price that is below $.9444 per share, for shares of common stock sold or deemed sold in future securities offerings, including sales to AVCP and its designees subject to
certain exempt transactions. Without AVCPs prior written consent, the Company was not permitted to incur additional indebtedness for borrowed money, other than up to an additional $6.0 million in convertible promissory notes that may be
issued to AVCP or related parties, unless such indebtedness was subordinated in right of payment to the Companys obligations under the AVCP Bridge Note and any additional notes issued to AVCP or related parties.
As a result of the private placement of approximately $4.0 million in convertible notes during the fourth quarter of fiscal year ended May 31, 2015,
as described below, the conversion price of the AVCP Convertible Notes was reduced to $0.675 per share of common stock, which was 90% of the weighted-average price of the deemed issued shares of $0.75 related to the approximately $4 million
offering of 2015 Short Term Convertible Notes described below. The decrease in the conversion price caused the number of shares of common stock issuable upon conversion of the AVCP Convertible Notes to increase from 3,500,000 to 5,185,185 shares of
common stock. The Company accounted for the AVCP Convertible Notes and related warrants, fully described below, as a financing transaction, wherein proceeds were allocated to the financial instruments issued. Prior to making the accounting
allocation, the AVCP Convertible Notes and warrants were evaluated for proper classification under ASC 480 and ASC 815. The debt discounts associated with the notes were amortized over the term of the notes and the Company recognized approximately
$94,000 in
non-cash
amortization expense for the period ended May 31, 2016. ASC 815 generally requires embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation
and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The embedded derivative features consisted of the conversion price being subject to
(i) adjustment for stock splits and similar corporate events and (ii) reduction to a conversion price per share that is 10% below the lowest sale price that is below $0.9444 per share for common stock sold or deemed sold in future
securities offerings, subject to certain exempt transactions. The note conversion round down (or anti-dilution) provision terms were not consistent with the definition for financial instruments indexed to the Companys stock. As such, the
conversion option and conversion reset price protection in the AVCP Convertible Notes required bifurcation as a derivative liability. In connection with the original issuance of the two AVCP Convertible Notes, the Company issued warrants to AVCP
covering 250,000 and 75,000 shares of the Companys common stock exercisable at a price of $0.50 per share on September 26, 2014 and February 6, 2015, respectively. The warrants are currently exercisable in full, include a cashless
exercise feature, and will expire on December 31, 2019 and February 29, 2020, respectively. The aforementioned warrants have a term of five years from inception and an exercise price of $0.50 per share and meet the conditions for equity
classification per ASC 815. The fair value of the warrants was determined using a Black-Scholes option model using the following assumptions:
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Warrants issued on
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Warrants issued on
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September 26, 2014
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February 6, 2015
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Risk free interest rate
|
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1.82
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%
|
|
|
1.48
|
%
|
Expected life
|
|
|
5 years
|
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|
|
5 years
|
|
Expected volatility
|
|
|
136
|
%
|
|
|
119
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%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
52
Based on the previous conclusions, the Company allocated the cash proceeds first to the derivative liability at
its fair value and then to the warrants at their relative fair value, with the residual allocated to the host AVCP Convertible Notes as presented below. On June 23, 2015, the Company, Alpha Venture Capital Management, LLC and AVCP entered into
a Debt Conversion and Termination Agreement pursuant to which (i) AVCP agreed to convert the $3,535,627 in aggregate indebtedness as of June 23, 2015 under the AVCP Convertible Notes in exchange for 5,237,966 shares of the Companys
common stock; (ii) subject to the conversion of the two AVCP Convertible Notes, the Company agreed to issue AVCP an additional five-year warrant covering 1,000,000 shares of common stock at an exercise price of $0.675 per share and
(iii) subject to the AVCPs receipt of the common shares and warrant, the parties agreed to (a) terminate the subscription agreements; and (b) release and discharge each other party from all claims and obligations arising under
the two AVCP Convertible Notes and subscription agreements. As a result of the debt conversion, the Company recognized a loss on extinguishment of the AVCP Convertible Notes of $584,177, a
non-cash
gain on the
change in the fair value of the derivative liability of approximately $647,000 and
non-cash
inducement interest expense of approximately $758,000 arising from the aforementioned warrant.
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Year Ended May 31, 2016
|
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|
May 31, 2015
|
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Debt Discount
|
|
|
Fair Value
|
|
|
Conversion
|
|
|
May 31, 2016
|
|
AVCP Convertible notes payable
|
|
$
|
2,637,618
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|
|
$
|
94,344
|
|
|
$
|
|
|
|
$
|
(2,731,962
|
)
|
|
$
|
|
|
Compound embedded derivative
|
|
|
2,008,907
|
|
|
|
|
|
|
|
(646,505
|
)
|
|
|
(1,362,402
|
)
|
|
|
|
|
Warrants (equity allocation)
|
|
|
215,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,627
|
)
|
|
|
|
|
Fair Value of Common Stock Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,714,168
|
|
|
|
|
|
Loss on Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(584,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,862,257
|
|
|
$
|
94,344
|
|
|
$
|
(646,505
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Short-Term Convertible Notes
During the year ended May 31, 2015, the Company issued approximately $4.0 million of
six-month
unsecured
convertible promissory notes (the 2015 Notes) and related warrants to investors for cash. Each 2015 Note was originally convertible, at the election of the holder, at any time into common shares at a $0.75 per share. The 2015 Notes bore
interest of 7% per annum, payable in cash upon maturity. In connection with the issuance of the 2015 Notes, the Company also issued warrants with a five-year term to purchase a total of 1,061,586 shares of common stock at an exercise price of $0.75.
The Company determined the fair value of the warrants using the Black-Scholes option pricing model utilizing certain weighted-average assumptions, such as expected stock price volatility, term of the warrants, risk-free interest rate and expected
dividend yield at the commitment date.
The Company utilized the following weighted-average assumptions to value the above investor warrants:
|
|
|
|
|
2015
|
Expected dividend yield
|
|
0%
|
Stock price volatility
|
|
88.79%
|
Expected term
|
|
5 year
|
Risk-free interest rate
|
|
1.46%-1.58%
|
Grant-date fair value
|
|
$0.52-$0.76
|
Additionally, at the commitment date, the Company determined that the conversion feature related to the 2015 Notes was
beneficial to the investors. As a result, the Company determined the intrinsic value of the beneficial conversion feature utilizing the fair value of the underlying common stock at the commitment date and the effective conversion price after
discounting the 215 Notes for the fair value of the warrants. The fair value of the warrants and the intrinsic value of the conversion feature were recorded as a debt discounts to the 2015 Notes, and a corresponding increase to additional
paid-in
capital. The debt discounts were amortized over the life of the 2015 Notes. The Company recognized approximately $ 1,784,000 as interest expense related to the amortization of the debt during the year ended
May 31, 2016. There were no 2015 Notes outstanding at May 31, 2016. The unamortized discounts were fully amortized upon conversion of the 2015 Notes before maturity. During the year ended May 31, 2016, the Company tendered an offer to
settle the balances of the 2015 Notes. The Company offered to exchange the 2015 Notes for (i) the issuance of restricted shares of common stock, for the settlement of the balance of the 2015 Notes, principal and accrued but unpaid interest as
of September 21, 2015, which was the commitment date, at a conversion price of $0.675 per share, and (ii) the amendment of the related warrants to reduce the exercise price to $0.675 per share. The offer represented a 10.0% discount to
$0.75, which was the current conversion price of the 2015 Notes and current exercise price of the related warrants. On September 21, 2015, the offering period and withdrawal rights
53
for the exchange offer expired, and the Company completed the exchange offer for approximately $2.7 million in aggregate original principal amount of 2015 Notes. Following the consummation
of the exchange offer described above, an aggregate principal amount of $525,000 and accrued but unpaid interest of $17,830 converted into 723,773 shares of common stock. The principal and interest for 2015 Notes that were not exchanged in the
exchange offer, or that are not otherwise converted pursuant to their terms, became due and payable between October 30, 2015 and November 15, 2015, six months from their issuance. The Company repaid the remaining aggregate principal and
interest of approximately $789,000 on the 2015 Notes on their respective maturity dates. Related to the tender offer conversions, the Company recognized approximately $330,000 in
non-cash
interest expense and
approximately $108,000 commission expense to assist the Company in conversion of the debt at the commitment date.
Activity related to the 2015 Notes for
fiscal year ended May 31, 2016 was as follows:
|
|
|
|
|
|
|
May 31, 2016
|
|
Face amount of Notes
|
|
$
|
3,981,050
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
Tender offer conversions
|
|
|
(2,693,800
|
)
|
Conversions
|
|
|
(525,000
|
)
|
Payments upon maturity
|
|
|
(762,250
|
)
|
|
|
|
|
|
Total carrying value of Notes
|
|
$
|
|
|
|
|
|
|
|
2017 Short-Term Convertible Notes
During the year ended May 31, 2017, the Company issued $1.15 million of unsecured convertible promissory notes (the 2017 Notes), with a
maturity date of January 31, 2018, and related warrants to investors for cash. The principal amount of the 2017 Notes, including any accrued but unpaid interest thereon, was convertible at the election of the holder at any time into shares of
common shares at any time prior to maturity at a conversion price of $0.75 per share. The 2017 Notes bore simple interest at the annual rate of 7%. Principal and accrued interest, to the extent not previously paid or converted, was due and payable
on the maturity date.
On June 14, 2017, the Companys Board of Directors approved a modification in the warrant terms issued in connection with
the 2017 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 2017 Note holders.
During the year May 31, 2018, the Company issued approximately $4.89 million in aggregate
principal of additional 2017 Notes and related warrants, as described above. At the commitment dates, the Company determined that the conversion feature related to these 2017 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 2017 Notes for the fair value of the related
warrants.
In connection with the sale of the 2017 Notes for the years ended May 31, 2018 and 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 2017 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.
|
|
|
|
|
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
0%
|
|
0%
|
Stock price volatility
|
|
69.8%
|
|
69%
|
Expected term
|
|
5 year
|
|
5 year
|
Risk-free interest rate
|
|
1.77-1.93%
|
|
1.75%
|
Grant-date fair value
|
|
$0.30-$0.39
|
|
$0.24
|
54
The fair value of the warrants, coupled with the beneficial conversion features, were recorded as a debt discount
to the 2017 Notes and a corresponding increase to additional
paid-in
capital was amortized over the term of the 2017 Notes. The Company incurred debt discount of approximately $1.5 million and $92,000
during the years ended May 31, 2018 and May 31, 2017, respectively, related to the beneficial conversion feature and detachable warrants issued with the 2017 Notes. Accordingly, the Company recognized approximately $1.6 million and
$-0-
of
non-cash
debt discount during the year ended May 31, 2018 and May 31, 2017, respectively. In connection with the 2017
Notes, the Company incurred direct issuance costs of approximately $0.4 million during the year ended May 31, 2018. The issuance costs were amortized over the term of the 2017 Notes and accordingly, the Company recognized approximately
$0.4 million of debt issuance costs during the year ended May 31, 2018.
On January 31, 2018, in connection with a registered direct equity
offering, as fully described in Note 11, the 2017 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. The 2017 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 2017 Note, including accrued interest in the aggregate of approximately $259,000.
Activity related to the 2017 Notes was as
follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Face amount of Notes
|
|
$
|
6,038,500
|
|
|
$
|
1,150,000
|
|
Unamortized discount
|
|
|
|
|
|
|
(92,000
|
)
|
Registered direct equity offering
|
|
|
(5,788,500
|
)
|
|
|
|
|
Note repayment
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of Notes, net
|
|
$
|
|
|
|
$
|
1,058,000
|
|
|
|
|
|
|
|
|
|
|
Note 5Derivative 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 May 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
Shares Indexed
|
|
|
Derivative Liability
|
|
Inception to date September 15, 2016
|
|
|
7,333,334
|
|
|
$
|
5,179,200
|
|
Balance May 31, 2017
|
|
|
7,733,334
|
|
|
|
3,014,667
|
|
Balance May 31, 2018
|
|
|
7,733,334
|
|
|
$
|
1,323,732
|
|
Changes in the fair value of the derivative liability are reported as Change in fair value of derivative liability
in the Consolidated Statements of Operations. During the years ended May 31, 2018 and May 31, 2017, the Company recognized a net,
non-cash
gain of approximately $1.7 million and
$2.2 million, respectively, due to the changes in the fair value of the liability associated with such classified warrants. In connection with the derivative liability, the Company recognized a
non-cash
interest expense of approximately $540,000 during the year ended May 31, 2017.
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 Model.
55
The Company estimated the fair value of the warrant derivative liability as of inception, May 31, 2017 and
May 31, 2018, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15,
2016
|
|
|
May 31,
2017
|
|
|
May 31,
2018
|
|
Fair value of underlying stock
|
|
$
|
0.78
|
|
|
$
|
0.60
|
|
|
$
|
0.49
|
|
Risk free rate
|
|
|
1.20
|
%
|
|
|
1.71
|
%
|
|
|
2.63
|
%
|
Expected term (in years)
|
|
|
5.00
|
|
|
|
4.29
|
|
|
|
3.30
|
|
Stock price volatility
|
|
|
106
|
%
|
|
|
94
|
%
|
|
|
64
|
%
|
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.
Note 6 Stock Options and Warrants
The Company has one active stock-based equity plan at May 31, 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 May 31, 2018, the Company had 4,858,870 shares available for future stock-based grants
under the 2012 Plan, as amended.
Stock Options
During the year ended May 31, 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 year ended May 31, 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 year ended May 31, 2018, the Company granted to its Chief Science Officer a stock option award covering 600,000 shares of common stock with an exercise price of $0.57 per share. 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 year ended May 31, 2018, the Company
granted, to executive management and employees, stock options covering an aggregate of 800,000 shares of common stock, 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 year ended May 31, 2018, the Company
issued replacement stock options, to executive management and directors, covering an aggregate of 1,050,000 shares of common stock. 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 the modification, the Company recognized
non-cash
stock based compensation of approximately $321,000.
During the year ended May 31, 2017, the Companys Compensation Committee of the Board of
Directors granted a time-based option covering 550,000 shares of common stock and a milestone-based option covering 450,000 shares of common stock to the Executive Chairman. The time-based option has an exercise price of $0.76 and a
ten-year
term. The option vests in equal monthly installments over the next two years and has a grant date fair value of $0.64 per share. The grant of the milestone-based option is conditioned on stockholder
approval of the increase in the number of shares authorized for issuance under the 2012 Plan, as discussed above. The milestone-based option will not be exercisable unless and until approval of the share increase, for the 2012 Plan, as discussed
above, is obtained from the stockholders. At that time the vesting will be contingent upon the achievement of certain strategic milestones specified in the option agreement.
56
During the year ended May 31, 2017, the Company granted annual stock option awards to directors to purchase
a total of 300,000 shares of common stock with an exercise price of $1.09 per share. These option awards vest quarterly over one year and have a
ten-year
term. The grant date fair value related to these
options was $0.78 per share. An additional stock option covering 100,000 shares of common stock was granted to a director. The option has an exercise price of $0.68 and vests 25% immediately with the remainder ratably over one year, has a
ten-year
term and grant date fair value of $0.53 per share. In April 2017, an option award was granted to the Companys newly appointed director, subject to stockholder approval of the increase in the number of
shares authorized for issuance under the 2012 Plan, in a
pro-rata
amount covering 7,123 shares of common stock with an exercise price of $0.61 per share. The option vested May 31, 2017 and has a
ten-year
term and grant date fair value of $0.36 per share.
During the year ended May 31, 2017, the Company
granted options covering an aggregate of 1,050,000 shares of common stock to executive management and certain employees with exercise prices of $1.09 and $1.10 per share. The options vest annually over three years, have a
ten-year
term and grant date fair values of $0.75 and $0.76 per share, respectively.
Warrants
During the year ended May 31, 2018, the Company granted, to a consultant, a warrant covering an aggregate of 200,000 shares of common stock, with an
exercise price of $0.64 per share. 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 year ended May 31, 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 year
ended May 31, 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 year ended May 31, 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, and include a cashless exercise provision.
During the year ended May 31, 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 2013 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
|
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, and include a cashless exercise provision.
57
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 warrants have a five-year term and an exercise price of $0.75 per share.
On May 22, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering 4,640,000
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 315,200 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, and include a cashless exercise provision.
On
May 31, 2017, in connection with the sale of the 2017 Notes, as fully described in Note 4, the Company issued common stock warrants covering 383,333 shares of common stock to note holders. The warrants have a five-year term and an exercise
price of $1.35 per share.
On June 14, 2017, the Companys Board of Directors approved a modification in the warrant terms issued in connection
with the 2017 Notes, as fully described in Note 4. The warrant coverage ratio 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 certain 2017 Note holders whose investment was completed on May 31, 2017.
During the
year ended May 31, 2018, in connection with the issuance of the 2017 Notes, as fully described in Note 4, and more fully described in Note 11 below, the Company issued common stock warrants, covering 3,258,990 shares of common stock to
additional 2017 Note holders. The warrants have a five-year term and an exercise price of $1.00 per share. In connection with the 2017 Notes, the Company issued warrants covering 350,766 to the placement agent. The placement agent warrants have a
five-year term and an exercise price of $0.825, and include a cashless exercise provision.
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 2017 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.
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, and
include a cashless provision. 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 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, and include a cashless exercise provision.
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. Upon expiration of the Offer, warrants to purchase up to 3,027,263 shares of common stock were accepted for gross cash proceeds to the
Company of approximately $1.5 million. Solicitation fees of approximately $73,000 were paid to the solicitating agent in the Offer. Pursuant to U.S. GAAP, the Company recognized
non-cash
inducement
expense of approximately $0.4 million, due to the reduction in warrant exercise price, related to this Offering.
On November 30, 2017, in
connection with a 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.
58
The placement agent warrants have a five-year term from September 8, 2017, and an exercise price of $0.715 per share, and include a cashless exercise provision.
In connection with a private equity offering completed in June 2016, as fully described in Note 10, the Company issued common stock warrants covering 182,375
shares of common stock to investors. The warrants have a five-year term and an exercise price of $1.35 per share.
During the year ended May 31,
2017, in connection with the December, January and February registered direct equity offerings, as fully described in Note 11, the Company issued common stock warrants covering 5,602,821 shares of common stock to investors. The investor warrants
have a five-year term and an exercise price of $1.00 per share. In connection with these offerings, the Company also issued common stock warrants covering 576,451 shares of common stock to the placement agent. The placement agent warrants have a
five-year term, an exercise price of $0.825 per share, and include a cashless exercise provision.
In January 2017, the Company determined to extend the
expiration dates of certain warrants (2013 Warrants) to May 31, 2017, covering an aggregate of 6,310,667 shares of common stock. The 2013 Warrants were originally issued in connection with the sale of 2013 convertible promissory
notes. The 2013 Warrants currently have an exercise price of $1.00 per share, and all but two warrants were exercisable through October 2016. One 2013 Warrant, for the purchase of 186,667 shares of common stock, was exercisable through December 2016
and one 2013 Warrant, for the purchase of 160,000 shares of common stock, was exercisable until January 15, 2017. The extension to May 31, 2017 was contingent upon the execution of a release of claims by each of the warrantholders, the
delivery of the form of exercise, and the receipt of the exercise proceeds to the Company. Pursuant to U.S. GAAP the Company recognized
non-cash
interest expense of approximately $72,000, which
represented the incremental increase in fair value of the extended warrants.
During the fiscal year ended May 31, 2016, the board of directors
approved a
one-year
extension of expiration dates of the 2013 Warrants, further extended, as mentioned above. The 2013 Warrants, which had an original term of two years, covering approximately 6.3 million
shares of common stock, with an exercise price of $1.00 per share. The first extension of expiration dates ranged from October 2015 through January 2016 and the second extension deferred the expiration dates to October 2016 through January 2017. The
extensions were effective upon the receipt of certain executed documentation from the warrantholders. Pursuant to U.S. GAAP, the Company recognized
non-cash
interest expense in fiscal year ended May 31,
2016 of approximately $867,000, in connection with these extensions, which represented the incremental increase in the fair value of the modified warrants
During the year ended May 31, 2017, holders of warrants covering 774,097 shares of common stock exercised the right to purchase such shares at either
$0.50 or $0.75 per share and the Company received proceeds of approximately $398,000. Additionally, warrants covering 138,864 shares with an exercise price of $0.75 per share were exercised pursuant to a cashless exercise provision.
In connection with a registered direct equity offering completed in September 2016, as fully described in Note 11, the Company issued common stock warrants
covering 6,666,667 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $1.00 per share. In connection with this offering, the Company also issued common stock warrants covering 1,066,667 shares
of common stock to the placement agent. The placement agent warrants have a five-year term, an exercise price of $0.825 per share, and include a cashless exercise provision.
Compensation expense related to stock options and warrants for the fiscal years ended May 31, 2018, May 31, 2017 and May 31, 2016 was
approximately $1.3 million, $1.2 million and $2.4 million, respectively. The grant date fair value of options and warrants vested during the fiscal years ended May 31, 2018, May 31, 2017 and May 31, 2016, was
approximately $1.4 million, $0.9 million and $1.7 million, respectively. As of May 31, 2018, there was approximately $0.6 million of unrecognized compensation expense related to share-based payments for unvested options,
with is expected to be recognized over a weighted-average period of approximately 1.13 years.
59
The following table represents stock option and warrant activity for the years ended May 31, 2018,
May 31, 2017 and May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
in Years
|
|
|
Intrinsic Value
|
|
Options and warrants outstandingMay 31, 2015
|
|
|
31,008,915
|
|
|
$
|
0.88
|
|
|
|
2.94
|
|
|
$
|
5,538,335
|
|
Granted
|
|
|
33,838,536
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,050,301
|
)
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(490,000
|
)
|
|
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstandingMay 31, 2016
|
|
|
63,307,150
|
|
|
$
|
0.83
|
|
|
|
3.20
|
|
|
$
|
9,863,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
16,935,437
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(912,961
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(1,470,000
|
)
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstandingMay 31, 2017
|
|
|
77,859,626
|
|
|
$
|
0.86
|
|
|
|
3.40
|
|
|
$
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
65,420,227
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,322,263
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(4,572,321
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstandingMay 31, 2018
|
|
|
132,385,269
|
|
|
|
0.80
|
|
|
|
3.78
|
|
|
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisableMay 31, 2018
|
|
|
128,872,852
|
|
|
$
|
0.80
|
|
|
|
3.66
|
|
|
$
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Acquisition of patents
As discussed in Note 9 below, the Company consummated an asset purchase on October 16, 2012, and paid $3,500,000 for certain assets, including
intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the PRO 140 drug substance. The Company followed the guidance in Financial Accounting Standards Topic 805 to determine if the Company acquired a
business. Based on the prescribed accounting, the Company acquired assets and not a business. As of May 31, 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:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(1,968,846
|
)
|
|
|
(1,618,770
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
1,531,154
|
|
|
|
1,881,230
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
1,567,143
|
|
|
$
|
1,917,219
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible patents was approximately $350,000 for each of the fiscal years ended May 31,
2018, May 31, 2017 and May 31, 2016. The estimated aggregate future amortization expense related to the Companys intangible assets with finite lives is estimated to be approximately $350,000 per year over the next four to five years.
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. The Company accrues an annual license fee of £300,000 (approximately US$400,000 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 when it serves as the manufacturer. In addition, the Company will incur royalties of up to 2% of net sales when the Company commences their first commercial sale, which will continue as long as the
license agreement is maintained.
60
Note 9 Commitments and Contingencies
Under the Progenics Purchase Agreement, the Company acquired rights to the HIV viral-entry inhibitor drug candidate 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 FDA regulatory filings. In connection with purchase, the Company
has two remaining milestone payments, (i) $0.5 million upon filing a BLA with the FDA or
non-U.S.
equivalent regulatory body and (ii) $5.0 million, which will become due 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. In addition, the Company will incur 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 a milestone obligation of
$1.5 million owed to Progenics as a result of the first dosing in a U.S. Phase 3 trial. To the extent that the remaining milestone payment and royalties are not timely made, under the terms of the Progenics 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 milestone 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 Progenics 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 the Company has paid various milestone obligations, with one remaining
milestone payment of $0.5 million, which will become due upon FDA approval or approval by another
non-U.S.
equivalent regulatory body. In addition, the Company will incur 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 or until annual royalties paid exceed that amount. To the extent the
remaining milestone payment 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. 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 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 $1.1 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties may range from an approximate low of $0.8 million to an
approximate high of $2.4 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 $0.7 million is reflected as a current asset, as of
May 31, 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 $3.2 million.
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 10Private Securities Offerings
During the
year ended May 31, 2016, the Company conducted private equity offerings (the Equity Offerings), in which accredited investors purchased unregistered common stock at $0.75 and $1.00 per share with warrant coverage of 50% and 25%,
respectively, based on the number of shares of common stock purchased. Pursuant to the Equity Offerings, the Company sold a total of 48,659,338 shares of common stock, $0.001 par value, for aggregate gross proceeds of approximately
$37.6 million and issued five-year warrants covering 23,254,230 shares of common stock. In conjunction with the Equity Offerings, the Company paid an aggregate cash fee of approximately $3.9 million to the placement agent and issued
warrants covering an aggregate of 4,960,314 shares of common stock to the placement agent as additional compensation. The placement agent warrants had aggregate Black-Scholes valuations of approximately $2.7 million at issuance.
61
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 ratio 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.
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 has also been
reduced to $0.75 from $1.00. In addition, warrants previously issued to the placement agent (or its designees) in respect of participating investors have also been 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.
During the year ended May 31, 2018, the Company conducted a private equity
offering, in which accredited investors purchased unregistered common stock at $0.50 per share with warrant coverage ratio 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 $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 a five-year term, an exercise price of $0.55 per share, and include a cashless exercise provision.
In connection with the November 24, 2017, Offer to amend and exercise certain eligible warrants at a reduced exercise price of $0.50 per share of common
stock, as fully described in Note 6 above, on March 23, 2018, the Company issued 2,470,585 shares of common stock to warrant holders who participated in the Offer, in exchange for their eligible warrants, in a private securities offering.
Note 11Registered 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 a
five-year term and an exercise price of $1.00 per share. 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 five-year term and an exercise price of $0.825 per share, and included a cashless exercise provision.
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
|
|
|
|
|
|
|
62
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 the 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 a five-year term and an exercise price of $1.00 per share. 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 five-year term and an exercise price of $0.825 per share, including a cashless exercise provision).
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 a five-year term and an exercise price of $1.00 per share
term. The Company received net proceeds from the February Offering of approximately $3.8 million after placement fees of 9% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 453,652 shares
(or 8% of total shares sold to investors) with a five-year term and an exercise price of $0.825 per share, including a cashless exercise provision.
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 a five-year term and an
exercise price of $1.00 per share. 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 five-year term and an exercise price of $0.825 per share, including a cashless exercise provision. 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 a five-year term and an exercise price of $0.75 per share. 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 five-year term and an exercise price of $0.715 per share, including a cashless exercise provision.
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 245,681shares of common stock (or 8% of total shares sold to investors) with a five-year term and an exercise price of $0.55 per share, including a
cashless exercise provision.
On January 31, 2018, the Company entered into subscription agreements with certain investors who owned the 2017 Notes,
more fully described in Note 4, 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 2017 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 2017 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 January 31, 2018 Offering. As a result, all of the proceeds from the Offering were used to satisfy the Companys payment
obligations
63
pursuant to the 2017 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 2017 Notes and (y) the number of shares of common stock underlying certain warrants
originally issued to such investor in the original 2017 Note 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 2017 Notes at $0.50 per share. The warrants in the January 31, 2018 Offering, had an original
exercise price of $1.00 per share, therefore, due to the reduction of exercise price to $0.75 per share, and the reduction in the conversion rate of the 2017 notes form $0.75 to $0.50 per share, the Company recognized a
non-cash
inducement interest expense of approximately $2.4 million due to these modifications. In connection with this offering, the Company paid a commission of $164,425 to the placement agent.
In connection with the November 24, 2017 Offer to amend and exercise certain eligible warrants at a reduced exercise price of $0.50 per share of common
stock, as fully described in Note 6 above, on March 23, 2018, the Company issued 556,678 shares of common stock to warrant holders who participated in the Offer, in exchange for their eligible warrants, pursuant to an effective registration
statement.
On May 22, 2018, the Company entered into subscription agreements with certain investors for the sale of 4,640,000 shares of common stock
at a purchase price of $0.50 per shares in a registered direct offering (the May 22 Offering), pursuant to a registration statement on Form
S-3.
The investors in the May 22 Offering also
received warrants to purchase 4,640,000 shares of common stock with a five-year term and an exercise price of $0.75 per share. The Company received net proceeds from the May 22
Offering of
approximately $2.1 million. In addition, the placement agent received warrants covering 315,200 shares of common stock (or 8% of total shares sold to investors, for which they introduced to the May 22 Offering) with a five-year term and an
exercise price of $0.55 per share, including a cashless exercise provision.
Note 12 Employee Benefit Plan
The Company has an employee savings plan (the Plan) pursuant to Section 401(k) of the Internal Revenue Code (the Code), covering
all of its employees. The Company makes a qualified
non-elective
contribution of 3%, which consequently vests immediately. In addition, participants in the Plan may contribute a percentage of their
compensation, but not in excess of the maximum allowed under the Code. During the year ended May 31, 2018, May 31, 2017 and May 31, 2016, the Company incurred an expense of approximately $61,000, $40,300 and $22,000, respectively, for
qualified
non-elective
contributions.
Note 13 Income Taxes
Deferred taxes are recorded for all existing temporary differences in the Companys assets and liabilities for income tax and financial reporting
purposes. Due to the valuation allowance for deferred tax assets, as noted below, there was no net deferred tax benefit or expense for the periods ended May 31, 2018, May 31, 2017 and May 31, 2016.
Reconciliation of the federal statutory blended income tax rate of 28.6% for the year ended May 31, 2018 and the federal statutory rate of 34% for the
years ended May 31, 2017 and May 31, 2016, to the effective income tax rate is as follows for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income tax provision at statutory rate:
|
|
|
28.6
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes net
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Change
|
|
|
(34.8
|
)
|
|
|
|
|
|
|
|
|
Loss on debt conversion
|
|
|
|
|
|
|
|
|
|
|
(0.8
|
)
|
Derivative gain/loss
|
|
|
1.00
|
|
|
|
2.80
|
|
|
|
0.9
|
|
Non-deductible
debt issuance costs
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Non-deductible
interest on conversion
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Inducement charge
|
|
|
(2.0
|
)
|
|
|
(1.00
|
)
|
|
|
(1.0
|
)
|
Other
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Miscellaneous
|
|
|
(0.1
|
)
|
|
|
(0.10
|
)
|
|
|
(0.5
|
)
|
Current year credits generated
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
Credit carry forward generated (recorded currently)
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
0.3
|
|
|
|
(35.7
|
)
|
|
|
(32.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax asset (liability)
non-current:
|
|
|
|
|
|
|
|
|
Net Operating Loss
|
|
$
|
29,230,279
|
|
|
$
|
32,530,436
|
|
Credits
|
|
|
4,260,470
|
|
|
|
|
|
ASC 718 Expense on NQOs
|
|
|
2,916,585
|
|
|
|
4,284,246
|
|
Charitable ContributionCarry forward
|
|
|
|
|
|
|
25,500
|
|
Accrued Expenses
|
|
|
117,880
|
|
|
|
216,645
|
|
Fixed Assets
|
|
|
174
|
|
|
|
1,300
|
|
Amortization
|
|
|
139,875
|
|
|
|
186,772
|
|
Capitalized Debt Issuance Costs
|
|
|
|
|
|
|
157,992
|
|
Debt Discount
|
|
|
|
|
|
|
(31,072
|
)
|
Valuation allowance
|
|
|
(36,665,263
|
)
|
|
|
(37,371,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
|
$
|
36,665,263
|
|
|
$
|
37,371,817
|
|
Valuation Allowance
|
|
|
(36,665,263
|
)
|
|
|
(37,371,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit for the period presented is offset by a valuation allowance established against deferred tax assets
arising from operating losses and other temporary differences, the realization of which could not be considered more likely than not. In future periods, tax benefits and related tax deferred assets will be recognized when management considers
realization of such amounts to be more likely than not.
At May 31, 2018, May 31, 2017 and May 31, 2016 the Company had available net
operating loss carry forwards of approximately $139.2 million, $95.6 million and $69.1 million, respectively, which expire beginning in 2023.
The Companys income tax returns remain subject to examination by all tax jurisdictions for tax years May 31, 2015 through 2017.
Note 14 Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
February 28,
|
|
|
May 31,
|
|
Year ended May 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
(9,807,001
|
)
|
|
$
|
(10,775,051
|
)
|
|
$
|
(14,140,507
|
)
|
|
$
|
(11,196,754
|
)
|
Other income (expense)
|
|
|
(361,879
|
)
|
|
|
830,022
|
|
|
|
(740,404
|
)
|
|
|
1,966,816
|
|
Interest expense
|
|
|
(1,459,393
|
)
|
|
|
(1,002,656
|
)
|
|
|
(3,069,189
|
)
|
|
|
(393,685
|
)
|
Net (loss)
|
|
|
(11,628,273
|
)
|
|
|
(10,947,685
|
)
|
|
|
(17,950,100
|
)
|
|
|
(9,623,623
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.04
|
)
|
Year ended May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
(5,358,120
|
)
|
|
$
|
(6,156,117
|
)
|
|
$
|
(8,016,917
|
)
|
|
$
|
(7,799,580
|
)
|
Other income (expense)
|
|
|
3,735
|
|
|
|
1,229,114
|
|
|
|
(23,078
|
)
|
|
|
969,929
|
|
Interest expense
|
|
|
|
|
|
|
(540,330
|
)
|
|
|
(72,437
|
)
|
|
|
|
|
Net (loss)
|
|
|
(5,354,385
|
)
|
|
|
(5,467,333
|
)
|
|
|
(8,112,432
|
)
|
|
|
(6,829,651
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
Year ended May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
(6,657,481
|
)
|
|
$
|
(2,893,779
|
)
|
|
$
|
(5,049,037
|
)
|
|
$
|
(6,575,214
|
)
|
Other income (expense)
|
|
|
62,686
|
|
|
|
211
|
|
|
|
2,202
|
|
|
|
78,045
|
|
Interest expense
|
|
|
(2,300,220
|
)
|
|
|
(2,371,025
|
)
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
(8,895,015
|
)
|
|
|
(5,264,593
|
)
|
|
|
(5,046,835
|
)
|
|
|
(6,497,169
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
65
Note 15 Related Party Transactions
On September 26, 2014, the Company entered into a $2.0 million convertible promissory note with AVCP, as more fully described in Note 4 above. In
October of 2014, Mr. Carl C. Dockery, the principal of AVCP, was appointed a director of the Company. On February 6, 2015, the Company entered into a second convertible promissory note in the aggregate principal amount of
$1.5 million, as more fully described in Note 4 above. On June 23, 2015, these notes and accrued but unpaid interest were converted into shares of common stock. In connection with the Debt Conversion and Termination Agreement dated
June 23, 2015, the Company issued to AVCP a warrant covering 1,000,000 shares of common stock, as more fully described in Note 4.
On May 31,
2017, Anthony D. Caracciolo, Executive Chairman of the Company, participated in the private placement of 2017 Notes, as fully described in Note 4 above. Mr. Caracciolo purchased a promissory note, bearing interest of 7%, for $1,000,000 and
received a warrant covering 333,333 shares of common stock at an exercise price of $1.35. The exercise price was subsequently reduced to $1.00 per share, as further described in Note 4 above. The terms and conditions of Mr. Caracciolos
investment was identical to those offered to all other investors in the offering and his investment was approved by the Audit Committee of the Board of Directors.
On July 26, 2017, Jordan G. Naydenov, a director with the Company, participated in the private placement of 2017 Notes, as fully described in Note 4
above. 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, AVCP, participated in the private placement of 2017 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 each of Mr. Caracciolo, Mr. Naydenov and AVCP participated with other investors in the offering of common stock and
warrants in satisfaction of the payment obligations relating to the 2017 Notes, as fully described in Note 11 above.
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 16 Subsequent Events
On June 7, 2018, 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 375,000,000 to 450,000,000.
On June 8, 2018, the Company issued to directors, in connection with their annual compensation, stock
options covering 600,000 shares of common stock. The stock options have an exercise price of $0.49, a
ten-year
term and vest quarterly over one year. These awards reflect an increase in the annual
non-employee
director stock option award from 75,000 to 100,000 shares per year effective for fiscal year 2019, which begins June 1, 2018. Additionally, in conjunction with annual incentive compensation, the
Company issued stock options covering 1,825,000 shares of common stock to management and employees. The stock options have an exercise price of $0.49, a
ten-year
term and 875,000 shares vest annually over
three years and 950,000 shares vest ratably over twenty four months.
On June 15, 2018, the Company entered into subscription agreements with certain
investors for the sale of 1,970,000 shares of common stock at a purchase price of $0.50 per shares in a registered direct offering, pursuant to a registration statement on Form
S-3.
The investors in the
offering also received warrants to purchase 1,970,000 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 offering of approximately $0.9 million. In addition, the
placement agent received warrants covering 133,600 shares of common stock (or 8% of total shares sold to investors) with a per share exercise price of $0.55, a five-year term and include a cashless exercise provision.
On June 26, 2018, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory note (the
2018 Note) with a
two-year
term to an institutional accredited investor in initial principal amount of $5.7 million. The investor gave consideration of $5.0 million, reflecting original
issue discount of $0.6 million and expenses payable by the Company of $0.1 million.
66
The 2018 Note is the general unsecured obligation of the Company and ranks pari passu with all other creditors of
the Company. Interest accrues on the outstanding balance of the 2018 Note at 10% per annum. Upon the occurrence of an event of default, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. The 2018 Note
contains customary default provisions, including provisions for potential acceleration. The investor may convert all or any part the outstanding balance of the 2018 Note into shares of common stock, par value $0.001 per share, of the Company at an
initial conversion price of $0.55 per share, at any time after six months from the issue date upon five trading days notice, subject to certain adjustments and ownership limitations specified in the 2018 Note. The investor may redeem any
portion of the 2018 Note, at any time after six months from the issue date upon five trading days notice, subject to a maximum monthly redemption amount of $350,000. The Company may prepay the outstanding balance of the 2018 Note, in part or
in full, at a 15% premium to par value, at any time upon five trading days notice.
On July 12, 2018, the Company announced certain leadership
changes in connection with the strategic expansion and entry into certain cancer and immunologic indications. In connection with such leadership changes and effective July 11, 2018 Denis R. Burger, Ph.D. and A. Bruce Montgomery, M.D. resigned
as members of the Companys Board of Directors and Dr. Burger has also resigned as Chief Science Officer of the Company, which is not an executive officer position.
In connection with the resignations of Dr. Burger and Dr. Montgomery, on July 10, 2018, the Companys Board of Directors approved a motion
to accelerate all outstanding unvested stock options held by Dr. Burger and Dr. Montgomery, to vest immediately upon the effectiveness of their resignations and to retain the stock options exercise period through their respective
expiration date. Stock options covering 500,000 shares held by Dr. Burger and stock options covering 100,000 shares held by Dr. Montgomery were subject to acceleration. The terms of the stock options remained otherwise unchanged.
Effective July 11, 2018, Anthony D. Caracciolo resigned as Executive Chairman of the Company, which is an executive officer position. Mr. Caracciolo
will continue to serve as a member and the
non-executive
Chairman of the Companys Board of Directors.
67