NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 31, 2016
(UNAUDITED)
Note 1 Organization
CytoDyn Inc. (the
Company) was originally incorporated under the laws of Colorado on May 2, 2002 under the name RexRay Corporation (its previous name) and, effective August 27, 2015, reincorporated under the laws of Delaware. We are a
clinical-stage biotechnology company focused on the clinical development and potential commercialization of humanized monoclonal antibodies to treat Human Immunodeficiency Virus (HIV) infection. Our lead product candidate, PRO 140,
belongs to a class of HIV therapies known as entry inhibitors. These therapies block HIV from entering into and infecting certain cells.
The Company is
developing a class of therapeutic monoclonal antibodies to address unmet medical needs in the areas of HIV and graft versus host disease.
Note 2
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results for these periods. The consolidated financial statements and notes
thereto are presented as prescribed by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements for the fiscal years ended May 31, 2016 and 2015 and notes thereto in the Companys Annual Report on Form
10-K for the fiscal year ended May 31, 2016, filed with the Securities and Exchange Commission on July 19, 2016. Operating results for the three months ended August 31, 2016 are not necessarily indicative of the results that may be
expected for the entire year. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three month periods ended
August 31, 2016 and August 31, 2015, (b) the financial position at August 31, 2016 and (c) cash flows for the three month periods ended August 31, 2016 and August 31, 2015.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, AGTI and CVM, both of which are dormant entities. All intercompany transactions and balances are eliminated in consolidation.
Reclassifications
Certain prior year amounts shown in
the accompanying consolidated financial statements have been reclassified to conform to the 2016 presentation. These reclassifications did not have any effect on total current assets, total assets, total current liabilities, total liabilities, total
stockholders equity, net loss or earnings per share.
Going Concern
The consolidated accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of $5,354,385 for the three months ended
August 31, 2016 and has an accumulated deficit of $102,580,299 as of August 31, 2016. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.
6
The consolidated financial statements do not include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to obtain additional operating capital, complete
development of its product candidates, obtain U.S. Food & Drug Administration (FDA) approval, outsource manufacturing of the product candidates, and ultimately achieve initial revenues and attain profitability. The Company is
currently engaging in significant research and development activities related to these product candidates, and expects to incur significant research and development expenses in the future primarily related to its clinical trials. These research and
development activities are subject to significant risks and uncertainties. The Company intends to finance our future development activities and our working capital needs largely from the sale of equity and debt securities, combined with additional
funding from other traditional sources. There can be no assurance, however, that the Company will be successful in these endeavors.
Use of Estimates
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
Cash is maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced
any losses related to these balances. Balances in excess of federally insured limits at August 31, 2016 and May 31, 2016 approximated $4.2 million and $9.4 million, respectively.
Identified Intangible Assets
The Company follows the
provisions of FASB ASC Topic 350 Intangibles-Goodwill and Other, which establishes accounting standards for the impairment of long-lived assets such as intangible assets subject to amortization. The Company reviews long-lived assets to be held and
used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset
group is less than its carrying value, the asset is considered impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. There were no impairment charges for the three
months ended August 31, 2016 and 2015. The value of the Companys patents would be significantly impaired by any adverse developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Notes 7 and 9.
Research and Development
Research and development
costs are expensed as incurred. Clinical trial costs incurred through third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development collaboration
arrangements or other contractual agreements, the milestone payment obligations are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable.
Pre-launch Inventory
The Company may scale-up and make
commercial quantities of its product candidate prior to the date it anticipates that such product will receive final FDA approval. The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be
approved for marketing by the FDA on a timely basis, or ever. This risk notwithstanding, the Company may scale-up and build pre-launch inventories of product that have not yet received final governmental approval when the Company believes that such
action is appropriate in relation to the commercial value of the product launch opportunity. The determination to capitalize is made once the Company (or its third party development partners) has filed a Biologics License Application that has been
acknowledged by the FDA as containing sufficient information to allow the FDA to conduct its review in an efficient and timely manner and management is reasonably certain that all regulatory and legal hurdles will be cleared. This determination is
based on the particular facts and circumstances relating to the expected FDA approval of the drug product being considered. As of August 31, 2016 and May 31, 2016 the Company did not have pre-launch inventory that qualified for
capitalization pursuant to U.S. GAAP ASC 330 Inventory.
7
Fair Value of Financial Instruments
At August 31, 2016 and May 31, 2016 the carrying value of the Companys cash, accounts payable and accrued liabilities approximate their fair
value due to the short-term maturity of the instruments. The Company carries derivative financial instruments at fair value as required by U.S. GAAP.
Derivative financial instruments consist of financial instruments that contain a notional amount and one or more underlying variables (e.g., interest rate,
security price, variable conversion rate or other variables), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. The Company follows the
provisions of FASB ASC 815 Derivatives and Hedging (ASC 815), as their instruments are recorded as a derivative liability, at fair value, with changes in fair value reflected in income.
Fair Value Hierarchy
The three levels of inputs that may
be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient
volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the
assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology are significant to the measurement of the fair value of assets or liabilities. These Level 3 inputs
also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
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.
Preferred Stock
T
he Companys Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of
August 31, 2016, the Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock, of which 95,100 shares are outstanding. The remaining preferred shares authorized have no specified rights.
8
Debt Issuance Costs
During the year ended May 31, 2015, the Company incurred direct costs associated with the issuance of short-term convertible notes, as described in Note
4, and recorded approximately $709,000 of debt issuance costs and approximately $ -0- and $350,000 of related amortization for the three months ended August 31, 2016 and 2015, respectively.
Offering Costs
During the three months ended
August 31, 2016 and August 31, 2015, the Company incurred approximately $61,000 and $1.0 million in direct incremental costs associated with the sale of the equity securities, as described in Note 10. The offering costs were recorded as a
component of equity when the proceeds were received.
Stock for Services
The Company periodically issues warrants to consultants for various services. The Black-Scholes option pricing model, as described more fully above, is
utilized to measure the fair value of the equity instruments on the date of issuance. The Company recognizes the compensation expense associated with the equity instruments over the requisite service or vesting period.
Loss per Common Share
Basic loss per share is computed
by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share would include the weighted average number of shares of common stock outstanding and potentially dilutive common
stock equivalents. Because of the net losses for all periods presented, the basic and diluted weighted average shares outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share. For this
reason, common stock options and warrants to purchase 62,588,165 and 40,003,836 shares of common stock were not included in the computation of basic and diluted weighted average number of shares of common stock outstanding for the three months ended
August 31, 2016 and August 31, 2015, respectively. Additionally, as of August 31, 2016, shares of Series B convertible preferred stock in the aggregate of 95,100 shares can potentially convert into 951,000 shares of common stock.
Income Taxes
Deferred taxes are provided on the asset
and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating loss carry forwards are recognized to the extent that realization of these benefits is considered more
likely than not. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC 740-10). A reconciliation of the beginning and
ending amount of unrecognized tax benefits has not been provided since there are no unrecognized benefits for all periods presented. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If
there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefit in interest expense and penalties in operating expenses and penalties in operating expenses.
Note 3 Recent Accounting Pronouncements
Recent
accounting pronouncements, other than below, issued by the FASB (including its EITF), the AICPA and the SEC did not or are not believed by management to have a material effect on the Companys present or future financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02),
Leases (Topic 842)
effective for annual periods beginning
after December 15, 2018, and interim periods within those annual periods. The ASU is to be applied using a modified retrospective approach with optional practical expedients and other special transition provisions. Early adoption is
permitted.)The ASU supersedes FASB ASC 840,
Leases,
and adds FASB ASC 842. It also amends and supersedes a number of other paragraphs throughout the FASB ASC. Management is currently assessing the impact the adoption of ASU 2016-02 will
have on the Companys Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09),
CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application
is permitted for reporting periods where financial statements have not yet been made available for issuance. The ASU requires different transition methods and disclosures based on the type of amendment included in the ASU.). Management is currently
assessing the impact the adoption of ASU 2016-09 will have on the Companys Consolidated Financial Statements.
9
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial
StatementsGoing Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 is intended to define managements responsibility to
evaluate whether there is substantial doubt about an organizations ability to continue as a going concern and to provide related footnote disclosures. The amendments in ASU 2014-15 are effective for reporting periods beginning after
December 15, 2016, with early adoption permitted. Management is currently assessing the impact the adoption of ASU 2014-15 will have on our 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 95,100 shares remain outstanding at August 31, 2016. Each share of the Series B is convertible into ten shares of the Companys $0.001 par common
stock including any accrued dividends, with an effective fixed conversion price of $.50 per share. The holders of the Series B can only convert their shares to common shares provided the Company has sufficient authorized common shares at the time of
conversion. Accordingly, the conversion option was contingent upon the Company increasing its authorized common shares, which occurred in April 2010, when the Companys stockholders approved an increase in the authorized shares of common stock
to 100,000,000. At the commitment date, which occurred upon such stockholder approval, the conversion option related to the Series B was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive
dividend to the Series B holders of approximately $6,000,000. The constructive dividend increased and decreased additional paid-in capital by identical amounts. The Series B has liquidation preferences over the common shares at $5.00 per share plus
any accrued dividends. Dividends are payable to the Series B holders when declared by the board of directors at the rate of $.25 per share per annum. Such dividends are cumulative and accrue whether or not declared and whether or not there are any
profits, surplus or other funds or assets of the Company legally available. The Series B holders have no voting rights.
2013 Convertible Notes
During the year ended May 31, 2013, the Company issued $6,588,250 in aggregate original principal amount of unsecured convertible notes (the
2013 Convertible Notes) to investors for cash. Each outstanding 2013 Convertible Note is convertible at the election of the holder at any time into common shares at a fixed conversion price. At issuance, total principal of $6,208,250 was
convertible at $0.75 per share, and $380,000 was convertible at $0.65 per share. The 2013 Convertible Notes were payable in full between November 30, 2013 and March 6, 2016, and bore interest at rates ranging from 5% to 10% per
year, payable in cash semi-annually in arrears beginning on April 1, 2013. At August 31, 2016 and May 31, 2016, there were no convertible notes outstanding.
In connection with the initial sale of the 2013 Convertible Notes, detachable common stock warrants with a two-year term to purchase a total of 8,527,984
common shares at exercise prices ranging from $0.75 to $2.00 per share were issued to the investors. The Company determined the fair value of the warrants at issuance using the Black-Scholes option pricing model utilizing certain weighted average
assumptions such as expected stock price volatility, term of the warrants, risk-free interest rates, and expected dividend yield at the grant date.
Additionally, at the commitment date, the Company determined that the conversion feature related to the 2013 Convertible Notes was beneficial to the
investors. As a result, the Company determined the intrinsic value of the conversion feature utilizing the fair value of the underlying common stock at the commitment date and the effective conversion price after discounting the 2013 Convertible
Notes for the fair value of the warrants. The fair value of the warrants and the intrinsic value of the beneficial conversion feature were recorded as a debt discount to the 2013 Convertible Notes, with a corresponding increase to additional paid-in
capital. The debt discount is amortized over the life of the 2013 Convertible Notes. During the three months ended August 31, 2016 and 2015, the Company recognized approximately $ -0- and $4,100, respectively, as interest expense related to
amortization of the debt discount. The unamortized discount was fully amortized upon any conversion of the 2013 Convertible Notes before maturity. Activity related to the 2013 Convertible Notes for the three months ended August 31, 2016 and
fiscal year ended May 31, 2016 was as follows:
10
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August 31, 2016
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|
May 31, 2016
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|
Face amount of Notes
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$
|
|
|
|
$
|
50,000
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|
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|
|
|
|
|
|
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|
Unamortized discount
|
|
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|
|
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Conversions
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|
|
|
|
|
|
(50,000
|
)
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|
|
|
|
|
|
|
|
Total carrying value of Notes
|
|
$
|
|
|
|
$
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|
|
|
|
|
|
|
|
|
|
|
AVCP Convertible Notes
During the year ended May 31, 2015, the Company issued a three-month unsecured convertible promissory note (the AVCP Bridge Note and together
with the AVCP Two-Year Note, the AVCP Convertible Notes) in the aggregate principal amount of $1,500,000 to Alpha Venture Capital Partners, L.P. (AVCP), an affiliate of one of the Companys directors. As described in
greater detail below, the AVCP Bridge Note, along with the AVCP Two-Year Note, were subsequently converted in a transaction occurring during the year ended May 31, 2016. The principal amount of the AVCP Bridge Note plus unpaid accrued interest
was convertible at the election of the holder into shares of the Companys common stock at any time prior to maturity at an initial conversion price of $1.00 per share. The AVCP Bridge Note bore simple interest of 1.2% per month, payable
at maturity on May 5, 2015, and monthly thereafter, upon the Companys election to exercise a one-time option to extend the maturity by an additional three months, which the Company exercised on April 1, 2015 (extending the maturity
date to August 5, 2015). Prepayment was permitted without penalty subject to the Companys obligation to pay at least three months interest on the principal amount. The conversion price was subject to (i) adjustment for stock
splits and similar corporate events and (ii) reduction to a price per share that is 10% below the lowest sale price that is below $.9444 per share, for shares of common stock sold or deemed sold in future securities offerings, including sales
to AVCP and its designees subject to certain exempt transactions. Without AVCPs prior written consent, the Company was not permitted to incur additional indebtedness for borrowed money, other than up to an additional $6.0 million in
convertible promissory notes that may be issued to AVCP or related parties, unless such indebtedness was subordinated in right of payment to the Companys obligations under the AVCP Bridge Note and any additional notes issued to AVCP or related
parties.
During the year ended May 31, 2015, the Company issued an additional two-year term unsecured convertible promissory note (the AVCP
Two-Year Note) in the aggregate principal amount of $2,000,000 to AVCP, an affiliate of one of the Companys directors as described under Note 9 below. As described in greater detail below, along with the AVCP Bridge Note, the AVCP
Two-Year Note has subsequently been converted in a transaction occurring during the year ended May 31, 2016. The AVCP Two-Year Note bore simple interest at the annual rate of 5%, payable quarterly. The principal balance of the AVCP Two-Year
Note was due and payable in full on September 26, 2016, subject to acceleration of payment in the event of default. Prepayment was permitted without penalty. The AVCP Two-Year Note included events of default for nonpayment of principal or
interest when due or other breaches of the AVCP Two-Year Note, as well as for breach of any term of the AVCP Two-Year Note and related warrant agreement. The principal amount of the AVCP Two-Year Note plus unpaid accrued interest was convertible at
the election of the holder into shares of the Companys common stock at any time prior to maturity at an initial conversion price of $1.00 per share. The conversion price was subject to adjustment on the same terms, and contained similar
consent rights to the issuance of additional indebtedness, as the AVCP Bridge Note above.
As a result of the private placement of approximately $4
million in convertible notes during the fourth quarter of fiscal year ended May 31, 2015, as described below, the conversion price of the AVCP Convertible Notes was reduced to $0.675 per share of common stock, which was 90% of the
weighted-average price of the deemed issued shares of $0.75 related to the approximately $4 million offering of 2015 Convertible Notes described below. The decrease in the conversion price caused the number of shares of common stock issuable
upon conversion of the AVCP Convertible Notes to increase from 3,500,000 to 5,185,185 shares of common stock.
The Company accounted for the AVCP
Convertible Notes and related warrants, fully described below, as a financing transaction, wherein proceeds were allocated to the financial instruments issued. Prior to making the accounting allocation, the AVCP Convertible Notes and warrants were
evaluated for proper classification under FASB ASC 480 Distinguishing Liabilities from Equity and ASC 815. The debt discounts associated with the notes were amortized over the term of the notes and the Company recognized
approximately $ -0- and $94,000 in non-cash amortization expense for the three months ended August 31, 2016 and August 31, 2015, respectively.
11
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
September 26, 2014
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Warrants issued on
February 6, 2015
|
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Risk free interest rate
|
|
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1.82
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%
|
|
|
1.48
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%
|
Expected life
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
136
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%
|
|
|
119
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%
|
Dividend yield
|
|
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0.00
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%
|
|
|
0.00
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%
|
Based on the previous conclusions, the Company allocated the cash proceeds first to the derivative liability at its fair value
and then to the warrants at their relative fair value, with the residual allocated to the host AVCP Convertible Notes as presented below.
On
June 23, 2015, the Company, Alpha Venture Capital Management, LLC and AVCP entered into a Debt Conversion and Termination Agreement pursuant to which (i) AVCP agreed to convert the $3,535,627 in aggregate indebtedness as of June 23,
2015 under the AVCP Convertible Notes in exchange for 5,237,966 shares of the Companys common stock; (ii) subject to the conversion of the two AVCP Convertible Notes, the Company agreed to issue AVCP an additional five-year warrant
covering 1,000,000 shares of common stock at an exercise price of $0.675 per share and (iii) subject to the AVCPs receipt of the common shares and warrant, the parties agreed to (a) terminate the subscription agreements; and
(b) release and discharge each other party from all claims and obligations arising under the two AVCP Convertible Notes and subscription agreements. As a result of the debt conversion, during the three months ended August 31, 2015, the
Company recognized a loss on extinguishment of the AVCP Convertible Notes of approximately $584,000, a non-cash gain on the change in the fair value of the derivative liability of approximately $647,000 and non-cash inducement interest expense of
approximately $758,000 arising from the aforementioned warrant.
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Year Ended May 31, 2016
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May 31, 2015
|
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Debt Discount
|
|
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Fair Value
|
|
|
Conversion
|
|
|
May 31, 2016
|
|
AVCP Convertible notes payable
|
|
$
|
2,637,618
|
|
|
$
|
94,344
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|
|
$
|
|
|
|
$
|
(2,731,962
|
)
|
|
$
|
|
|
Compound embedded derivative
|
|
|
2,008,907
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|
|
|
|
|
|
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(646,505
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)
|
|
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(1,362,402
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)
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Warrants (equity allocation)
|
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215,732
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Accrued interest on notes payable
|
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(35,627
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)
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Fair Value of Common Stock Issued
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4,714,168
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Loss on conversion
|
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(584,177
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)
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$
|
4,862,257
|
|
|
$
|
94,344
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|
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$
|
(646,505
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)
|
|
$
|
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|
$
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Short-Term Convertible Notes
During the year ended May 31, 2015, the Company issued approximately $4.0 million of six-month unsecured convertible promissory notes (the
Short-Term Convertible Notes) and related warrants to investors for cash, of which approximately $1.3 million in aggregate original principal amount remains outstanding, following the consummation of the tender offer transaction on
September 21, 2015, as described below. Each Short-Term Convertible Note was originally convertible, at the election of the holder, at any time into common shares at a $0.75 per share. The Short-Term Convertible Notes bore interest of
7% per annum, payable in cash upon maturity. In connection with the issuance of the Short-Term Convertible Notes, the Company also issued warrants with a five-year term to purchase a total of 1,061,586 shares of $.001 par value 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.
12
The Company utilized the following weighted-average assumptions to value the above investor warrants:
|
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|
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|
|
2015
|
|
Expected dividend yield
|
|
|
0
|
%
|
Stock price volatility
|
|
|
88.79
|
%
|
Expected term
|
|
|
5 years
|
|
Risk-free interest rate
|
|
|
1.46% - 1.58
|
%
|
Grant-date fair value
|
|
|
$0.52 - $0.76
|
|
Additionally, at the commitment date, the Company determined that the conversion feature related to the Short-Term Convertible
Notes was beneficial to the investors. As a result, the Company determined the intrinsic value of the beneficial conversion feature utilizing the fair value of the underlying common stock at the commitment date and the effective conversion price
after discounting the Short-Term Convertible Notes for the fair value of the warrants. The fair value of the warrants and the intrinsic value of the conversion feature were recorded as a debt discounts to the Short-Term Convertible Notes, and a
corresponding increase to additional paid-in capital. The debt discounts are amortized over the life of the Short-Term Convertible Notes. The Company recognized approximately $ -0- and $1,007,000 as interest expense related to the amortization of
the debt during the three months ended August 31, 2016 and 2015, respectively. There were no Short-Term Convertible Notes outstanding at May 31, 2016. The unamortized discounts were fully amortized upon any conversion of the Short-Term
Convertible Notes before maturity.
During the year ended May 31, 2016, the Company tendered an offer to settle the balances of the Short-Term
Convertible Notes. The Company offered to exchange the Short-Term Convertible Notes for (i) the issuance of restricted shares of common stock, for the settlement of the balance of the Short-Term Convertible Notes, principal and accrued but
unpaid interest as of September 21, 2015, which was the commitment date, at a conversion price of $0.675 per share, and (ii) the amendment of the related warrants to reduce the exercise price to $0.675 per share. The offer represented a
10.0% discount to $0.75, which was the current conversion price of the Short-Term Convertible Notes and current exercise price of the related warrants. On September 21, 2015, the offering period and withdrawal rights for the exchange offer
expired, and the Company completed the exchange offer for approximately $2.7 million in aggregate original principal amount of Short-Term Convertible Notes.
Following the consummation of the exchange offer described above, an aggregate principal amount of $525,000 and accrued but unpaid interest of $17,830
converted into 723,773 shares of common stock. The principal and interest for Short-Term Convertible Notes that were not exchanged in the exchange offer, or that are not otherwise converted pursuant to their terms, became due and payable between
October 30, 2015 and November 15, 2015, six months from their issuance. The Company repaid the remaining aggregate principal and interest on such Convertible Notes of approximately $789,000 Short-Term Convertible Notes on their respective
maturity dates. Related to the tender offer conversions, the Company recognized approximately $330,000 in non-cash interest expense and approximately $108,000 commission expense to assist the Company in conversion of the debt at the commitment date.
Activity related to the Short-Term Convertible Notes for the three months ended August 31, 2016, and fiscal year ended May 31, 2016 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016
|
|
|
May 31, 2016
|
|
Face amount of Notes
|
|
$
|
|
|
|
$
|
3,981,050
|
|
Unamortized discounts
|
|
|
|
|
|
|
|
|
Tender offer conversions
|
|
|
|
|
|
|
(2,693,800
|
)
|
Conversions
|
|
|
|
|
|
|
(525,000
|
)
|
Payments upon maturity
|
|
|
|
|
|
|
(762,250
|
)
|
|
|
|
|
|
|
|
|
|
Total carrying value of Notes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Derivative Liability:
The following tables summarize the fair value of the derivative liability and linked common shares as of the derivative liability inception dates (September
26, 2014 and February 6, 2015) and fiscal year end May 31, 2016:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2014
|
|
|
February 6,
2015
|
|
|
May 31,
2015
|
|
|
May 31,
2016
|
|
Total derivative liability
|
|
$
|
767,038
|
|
|
$
|
403,266
|
|
|
$
|
2,008,907
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares indexed to derivative liability
|
|
|
2,000,000
|
|
|
|
1,500,000
|
|
|
|
5,185,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the fair value of the derivative liability, carried at fair value, are reported as Change in fair value of
derivative liability in the Consolidated Statements of Operations. During the three months ended August 31, 2015, the Company recognized a non-cash gain of approximately $647,000, due to the change in derivative liability related to the
embedded derivative in the AVCP Notes.
ASC 815 does not permit an issuer to account separately for individual derivative terms and features embedded in
hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be combined together and fair valued as a single, compound embedded derivative. The Company
selected a Binomial Lattice Model to value the compound embedded derivative because it believes this technique is reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of this
convertible note. Such assumptions include, among other inputs, stock price volatility, risk-free rates, credit risk assumptions, early redemption and conversion assumptions, and the potential for future adjustment of the conversion price due to a
future dilutive financing.
Significant inputs and assumptions used in the Binomial Lattice Model for the derivative liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2014
|
|
|
February 6,
2015
|
|
|
May 31,
2015
|
|
|
June 23,
2015
|
|
Quoted market price on valuation date
|
|
$
|
0.79
|
|
|
$
|
0.96
|
|
|
$
|
0.99
|
|
|
$
|
0.90
|
|
Contractual conversion rate
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Adjusted conversion price (a)
|
|
$
|
0.9759
|
|
|
$
|
1.0000
|
|
|
$
|
0.675
|
|
|
$
|
0.675
|
|
Contractual term to maturity (years)
|
|
|
2.00
|
|
|
|
0.49
|
|
|
|
0.18-1.33
|
|
|
|
0.12
|
|
Expected volatility
|
|
|
123
|
%
|
|
|
124
|
%
|
|
|
90%-114
|
%
|
|
|
48
|
%
|
Contractual interest rate
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
1.5%-5.0
|
%
|
|
|
1.2
|
%
|
Risk-free rate
|
|
|
0.59
|
%
|
|
|
0.045
|
%
|
|
|
0.041% - 0.48
|
%
|
|
|
0.001
|
%
|
Risk adjusted rate
|
|
|
2.69
|
%
|
|
|
2.78
|
%
|
|
|
2.80
|
%
|
|
|
2.80
|
%
|
Probability of event of default
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
(a)
|
The adjusted conversion price input used in the Binomial Lattice Model considers both (i) the reduction of the conversion price to $0.675 on April 30, 2015, as result of a private placement offering in which
Common Stock was sold for a weighted average price of $0.75 and (ii) potential adjustment to the stated conversion price due to a future dilutive issuance. This input was calculated using a probability-weighted approach which considered the
likelihood of various scenarios occurring including (i) potential success or failure of various phases for PRO 140, (ii) the probability the Company will enter into a future financing and (iii) and the potential price of a future
financing.
|
The fair value of the derivative liability is significantly influenced by the Companys trading market price, stock price
volatility, changes in interest, assumptions regarding the adjusted conversion price and early redemption or conversion of the AVCP Notes.
Note 6
Stock Options and Warrants
The Company has one active stock-based equity plan at August 31, 2016, the CytoDyn Inc. 2012 Equity Incentive
Plan (the 2012 Plan) and one stock-based equity plan that is no longer active, but under which certain prior awards remain outstanding, the CytoDyn Inc. 2004 Stock Incentive Plan (the 2004 Plan and, together with the 2012
Plan, the Incentive Plans). The 2012 Plan was approved by 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. As of August 31, 2016, the Company
had 650,930 shares available for future stock-based grants under the 2012 Plan.
Stock Options
During the three months ended August 31, 2016, the Company granted annual stock option awards to directors to purchase a total of 300,000 shares of common
stock to directors 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.
14
During the three months ended August 31, 2016, the Company granted options, covering an aggregate of
1,050,000 shares of common stock, to executive management and 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 three months
ended August 31, 2016, in connection with private equity offerings, 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 three months ended August 31, 2016, 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 122,362 shares with an exercise price of $0.75 per share were exercised pursuant to a cashless exercise provision.
Compensation expense related to stock options and warrants was approximately $335,000 and $352,000 for the three months ended August 31, 2016 and
August 31, 2015, respectively. The grant date fair value of options and warrants vested during the three month periods ended August 31, 2016 and August 31, 2015 was approximately $252,000 and $337,000, respectively. As of
August 31, 2016, there was approximately $1,404,000 of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 1.87 years.
The following table represents stock option and warrant activity as of and for the three-months ended August 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options and warrants outstanding May 31, 2016
|
|
|
63,307,150
|
|
|
$
|
0.83
|
|
|
|
3.20
|
|
|
$
|
9,863,492
|
|
Granted
|
|
|
1,532,375
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(896,459
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(1,354,901
|
)
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding August 31, 2016
|
|
|
62,588,165
|
|
|
|
0.83
|
|
|
|
3.73
|
|
|
|
14,738,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable August 31, 2016
|
|
|
59,097,832
|
|
|
$
|
0.82
|
|
|
|
3.47
|
|
|
$
|
14,427,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Acquisition of Patents
As discussed in Note 8 below, the Company consummated an asset purchase on October 16, 2012, and paid $3,500,000 for certain assets, including
intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the PRO 140 drug substance. The Company followed the guidance in Financial Accounting Standards Topic 805 to determine if the Company acquired a
business. Based on the prescribed accounting, the Company acquired assets and not a business. As of August 31, 2016, the Company has recorded and is amortizing $3,500,000 of intangible assets in the form of patents. The Company estimates the
acquired patents have an estimated life of ten years. Subsequent to the acquisition date, the Company has continued to expand, amend and file new patents central to its current trial strategies, which, in turn, have extended the protection period
for certain methods of using PRO 140 and formulations comprising PRO 140 out through at least 2026 and 2031, respectively, in various countries.
15
The following presents intangible assets activity:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016
|
|
|
May 31, 2016
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(1,356,250
|
)
|
|
|
(1,268,750
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
2,143,750
|
|
|
|
2,231,250
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
2,179,739
|
|
|
$
|
2,267,239
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to patents was approximately $87,500 for the three months ended August 31, 2016 and 2015.
The estimated aggregate future amortization expense related to the Companys intangible assets with finite lives is estimated at approximately $350,000 per year for the next five years.
Note 8 License Agreements
During the year ended
May 31, 2016, the Company executed a license agreement with a third-party licensor covering the licensors system know-how technology with respect to the Companys use of proprietary cell lines to manufacture new PRO 140
material. In connection with this license agreement, the Company became the primary obligor of an additional £600,000 (approximately US$807,000 utilizing current exchange rates), which was timely paid by June 30, 2016. During the year
ended May 31, 2016, the Company accrued an additional expense of £600,000 (approximately US$870,000) in connection with the June 30, 2016 obligation. Future annual license fees and royalty rate will vary depending on whether we
manufacture PRO 140 ourselves, utilize the third-party licensor as a contract manufacturer, or utilize an independent party as a contract manufacturer. The licensor does not charge an annual license fee of £300,000 (approximately US$432,000)
when it serves as the manufacturer.
Note 9 Commitment and Contingencies
Under the Asset Purchase Agreement, dated July 25, 2012, between the Company and Progenics Pharmaceuticals, Inc. (Progenics) (the Asset
Purchase Agreement), the Company acquired from Progenics its rights to the HIV viral-entry inhibitor drug candidate PRO 140 (PRO 140), a humanized anti-CCR5 monoclonal antibody, as well as certain other related assets, including
the existing inventory of bulk PRO 140 drug product, intellectual property, certain related licenses and sublicenses, and U.S. Food and Drug administration (FDA) regulatory filings. On October 16, 2012, the Company paid to Progenics
$3,500,000 in cash to close the transaction. The Company is also required to pay Progenics the following milestone payments and royalties: (i) $1,500,000 at the time of the first dosing in a U.S. Phase 3 trial or non-US equivalent, which was
paid during the year ended May 31, 2016; (ii) $5,000,000 at the time of the first U.S. new drug application approval by the FDA or other non-U.S. approval for the sale of PRO 140; and (iii) royalty payments of up to 5% on net sales
during the period beginning on the date of the first commercial sale of PRO 140 until the later of (a) the expiration of the last to expire patent included in the acquired assets, and (b) 10 years, in each case determined on a country-by
country basis. During the year ended May 31, 2016 the Company paid $1.5 million of such milestones owed to Progenics as a result of the first dosing in a U.S. Phase 3 trial. To the extent that such milestone payments and royalties are not
timely made, under the terms of the Asset Purchase Agreement, Progenics has certain repurchase rights relating to the assets sold to the Company thereunder.
Payments to the third-party licenser and to Progenics are in addition to payments due under a Development and License Agreement, dated April 30, 1999
(the PDL License), between Protein Design Labs (now AbbVie Inc.) (PDL) and Progenics, which was assigned to the Company in the Asset Purchase Agreement, pursuant to which the Company has an exclusive worldwide license to
develop, make, have made, import, use, sell, offer to sell or have sold products that incorporate the humanized form of the PRO 140 antibody developed by PDL under the agreement and must pay additional milestone payments and royalties as follows:
(i) $1,000,000 upon initiation of a Phase 3 clinical trial, which was paid during the year ended May 31, 2016; (ii) $500,000 upon filing a Biologic License Application with the FDA or non-U.S. equivalent regulatory body;
(iii) $500,000 upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iv) royalties of up to 7.5% of net sales for the longer of 10 years and the date of expiration of the last to expire licensed patent.
Additionally, the PDL License provides for an annual maintenance fee of $150,000 until royalties paid exceed that amount. During the year ended May 31, 2016 the Company paid $1 million of such milestones. To the extent that such milestone
payments and royalties are not timely made, under the terms of the PDL License, AbbVie Inc. has certain termination rights relating to the Companys license of PRO 140 thereunder. Pursuant to the foregoing Asset Purchase Agreement and PDL
License, the Company accrued an expense of $2,500,000 as of May 31, 2015 in connection with the anticipated milestone payments related to the first patient dosing in a Phase 3 clinical trial, all of which was paid during the year ended
May 31, 2016, as described above.
16
The Company has entered into project work orders for each of its clinical trials with its clinical research
organization (CRO) and related laboratory vendors. Under the terms of these agreements, the Company has paid approximately $3.0 million towards execution fees for direct services costs. The fees are reflected as a current asset and have
an unamortized balance of approximately $2.4 million at August 31, 2016. In connection with the Companys clinical trials, it has entered into separate project work orders for each trial with its CRO. In the event the Company were to
terminate any trial, it may incur certain financial penalties which would become payable to the CRO. Conditioned upon the form of termination of any one trial, the financial penalties may range from an approximate low of $0.1 million to an
approximate high of $0.4 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties may range from an approximate low of $0.5 million to an approximate high of $1.6 million.
Note 10 Private Securities Offering
During the
year ended May 31, 2016, the Company conducted private equity offerings (the Equity Offerings), in which accredited investors purchased unregistered common stock at either $0.75 or $1.00 per share with warrant coverage of 50% or
25%, respectively, based on the number of shares of common stock purchased. Pursuant to the Equity Offerings, the Company sold a total of 48,659,338 shares of common stock, $0.001 par value, for aggregate gross proceeds of approximately $37.6
million and issued five-year warrants covering 23,254,230 shares of common stock. In conjunction with the Equity Offerings, the Company paid an aggregate cash fee of approximately $3.9 million to the placement agent and issued warrants covering an
aggregate of 4,960,314 shares of common stock to the placement agent as additional compensation. The placement agent warrants had aggregate Black-Scholes valuations of approximately $2.7 million at issuance.
During the three months ended August 31, 2016, the Company conducted a private equity offering (the Offering), in which accredited investors
purchased unregistered common stock at $1.00 per share with warrant coverage of 25%, based on the number of shares of common stock purchased. Pursuant to the Offering, the Company sold a total of 729,500 shares of common stock, $0.001 par value, for
aggregate gross proceeds of $729,500 and issued to the investors five-year warrants covering 182,375 shares of common stock with an exercise price of $1.35 per share.
N
ote 11 Employee Benefit Plan
The Company
has an employee savings plan (the Plan) pursuant to Section 401(k) of the Internal Revenue Code (the Code), covering all of its employees. The Company makes a qualified non-elective contribution of 3%, which consequently
vests immediately. In addition, participants in the Plan may contribute a percentage of their compensation, but not in excess of the maximum allowed under the Code. During the three months ended August 31, 2016 and 2015, the Company incurred an
expense of approximately $8,800 and $5,700, respectively, for qualified non-elective contributions.
Note 12 Related Party Transactions
On January 19, 2016, the Company entered into an amendment to its existing Consulting Agreement with Denis R. Burger, Ph.D., dated February 21, 2014,
as previously amended November 3, 2014 (the Consulting Agreement). The Amendment names Dr. Burger, who is currently a member of the Board of Directors, to the non-executive position of Chief Science Officer and increases
Dr. Burgers advisory responsibilities in that capacity. The Amendment also increases the compensation payable to Dr. Burger under the Consulting Agreement to $20,000 per month, which is in addition to any fees that Dr. Burger
currently earns as a director. The Amendment was approved by the Audit Committee of the Board of Directors.
On May 10, 2016, Jordan G. Naydenov, a
director with the Company, participated in the private equity offerings, as fully described in Note 9 above. Mr. Naydenov invested $1 million and received 1 million shares of common stock and a warrant covering 250,000 shares of common
stock at an exercise price of $1.35. The terms and conditions of Mr. Naydenovs investment were identical to those offered to all other investors in the offering.
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 13 Subsequent Events
On September 12,
2016, the Company entered into Securities Purchase Agreements with certain institutional investors for the sale of 13,333,334 shares of $0.001 par value common stock at a purchase price of $0.75 per share in a registered direct offering pursuant to
a registration statement on Form S-3. The investors in this offering also received warrants to purchase 6,666,667 shares of common stock with an exercise price of $1.00 per share and a five-year term. The Company received net proceeds from the
offering of approximately $9 million after placement fees of 8% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 1,066,667 shares (or 8% of total shares sold to investors) with a per share
exercise price of $0.825 and a five-year term.
17