NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 31, 2018
(UNAUDITED)
Note 1 Organization
CytoDyn Inc. (the Company, we or us) 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 (GvHD). In addition, we are expanding the clinical focus of 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
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, 2018 and 2017 and notes thereto in the Companys Annual Report on Form
10-K
and Form
10-K/A
for the fiscal year ended May 31, 2018, filed with the Securities and Exchange Commission on July 27, 2018 and September 28, 2018, respectively. Operating results for the three months
ended August 31, 2018 are not necessarily indicative of the results that may be expected for the entire year. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair
statement of (a) the results of operations for the three months ended August 31, 2018 and August 31, 2017, (b) the financial position at August 31, 2018 and (c) cash flows for the three months ended August 31, 2018
and August 31, 2017.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Advanced Genetic Technologies, Inc.
(AGTI) and CytoDyn Veterinary Medicine LLC (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 loss per share.
Going Concern
The consolidated accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of $14,413,569 for the three months ended
August 31, 2018 and has an accumulated deficit of $187,552,964 as of August 31, 2018. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to obtain additional operating capital, complete development of its product candidates, obtain
U.S. Food & Drug Administration (FDA) approval, outsource manufacturing of the product candidates, and ultimately achieve initial revenues and attain profitability. The Company is currently engaging in significant research and
development activities related to these product candidates, and expects to incur significant research and development expenses in the future primarily related to its clinical trials. These research and development activities are subject to
significant risks and uncertainties. The Company intends to finance its future development activities and its working capital needs largely from the sale of equity and debt securities, combined with additional funding from other traditional sources.
There can be no assurance, however, that the Company will be successful in these endeavors.
6
Use of Estimates
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash
Cash is
maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. Balances in excess of federally insured limits at
August 31, 2018 and May 31, 2018 approximated $4.7 million and $1.1 million, respectively.
Identified Intangible Assets
The Company follows the provisions of Financial Accounting Standards Board (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, 2018 and 2017. The value of the Companys patents
would be significantly impaired by any adverse developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Notes 7 and 9.
Research and Development
Research and development costs
are expensed as incurred. Clinical trial costs incurred through third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development collaboration arrangements or
other contractual agreements, the milestone payment obligations are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable.
Pre-launch
Inventory
The Company may
scale-up
and make commercial quantities of its product candidate prior to the date it anticipates that
such product will receive final FDA approval. The
scale-up
and commercial production of
pre-launch
inventories involves the risk that such products may not be approved
for marketing by the FDA on a timely basis, or ever. This risk notwithstanding, the Company may
scale-up
and build
pre-launch
inventories of product that have not yet
received final governmental approval when the Company believes that such action is appropriate in relation to the commercial value of the product launch opportunity. The determination to capitalize is made once the Company (or its third party
development partners) has filed a Biologics License Application (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 requirements will be satisfied. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the drug product being considered. As of August 31,
2018 and May 31, 2018, the Company did not have
pre-launch
inventory that qualified for capitalization pursuant to U.S. GAAP ASC 330 Inventory.
Fair Value of Financial Instruments
At August 31,
2018 and May 31, 2018, the carrying value of the Companys cash, accounts payable and accrued liabilities approximate their fair value due to the short-term maturity of the instruments. The Company carries derivative financial instruments
at fair value as required by U.S. GAAP.
Derivative financial instruments consist of financial instruments that contain a notional amount and one or more
underlying variables (e.g., interest rate, security price, variable conversion rate or other variables), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other
financial instruments. The Company follows the provisions of FASB ASC 815 Derivatives and Hedging (ASC 815), as their instruments are recorded as a derivative liability, at fair value, and FASB ASC 480 Distinguishing
Liabilities from Equity (ASC 480), as it relates to warrant liability, with changes in fair value reflected in income.
7
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with
insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the
full term of the assets or liabilities. Level 2 inputs also include
non-binding
market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted
for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology are significant to the measurement of the fair value
of assets or liabilities. These Level 3 inputs also include
non-binding
market consensus prices or
non-binding
broker quotes that the Company was unable to
corroborate with observable market data.
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of
August 31, 2018 and May 31, 2018 is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
Fair Value Measurement at
|
|
|
|
August 31, 2018
(1)
|
|
|
May 31, 2018
(1)
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|
|
|
Using
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Level 3
|
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|
Total
|
|
|
Level 3
|
|
|
Total
|
|
Liability:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
2,071,199
|
|
|
$
|
2,071,199
|
|
|
$
|
1,323,732
|
|
|
$
|
1,323,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability
|
|
$
|
2,071,199
|
|
|
$
|
2,071,199
|
|
|
$
|
1,323,732
|
|
|
$
|
1,323,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(1)
|
The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair
value hierarchy as of August 31, 2018 and May 31, 2018.
|
A financial instruments level within the fair value hierarchy
is based on the lowest level of any input that is significant to the fair value measurements. These instruments are not quoted on an active market, so the Company uses a Binomial Lattice Model to estimate the value of the derivative liability. A
Binomial Lattice Model was used because management believes it reflects all the assumptions that market participants would likely consider in negotiating the transfer of the warrant. The Companys derivative liability is classified within
Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation model. The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) during the three months ended August 31, 2018 and the year ended May 31, 2018:
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|
|
|
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Investor warrants issued with registered direct equity offering
|
|
$
|
4,360,000
|
|
Placement agent warrants issued with registered direct equity offering
|
|
|
819,200
|
|
Fair value adjustments
|
|
|
(3,855,468
|
)
|
|
|
|
|
|
Balance at May 31, 2018
|
|
|
1,323,732
|
|
Fair value adjustments
|
|
|
747,467
|
|
|
|
|
|
|
Balance at August 31, 2018
|
|
$
|
2,071,199
|
|
|
|
|
|
|
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
8
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 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. Subsequent to each stockholders meeting, an amendment to the Companys Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware to give effect to each authorized share increase.
On November 1, 2017, the Company held a special meeting of stockholders, at
which the stockholders approved a proposal to effect a reverse stock split at a ratio of any whole number between
one-for-two
and
one-for-fifteen,
as determined by the board of directors, and a simultaneous reduction in the total number of authorized shares of common stock to 200,000,000 at any time before August 24, 2018, if and
as determined by the board of directors. The Company did not effect a reverse stock split prior to the August 24, 2018 expiration date, therefore the board of directors no longer has the authorization or ability to effect a reverse stock split.
Preferred Stock
The Companys Board of
Directors is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of August 31, 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 three months ended
August 31, 2018 and the year ended May 31, 2018, the Company incurred approximately $0.6 million and $1.5 million of debt discount related to the issuance of convertible notes, as described in Note 4. The discount is amortized
over the life of the convertible promissory notes. During the three months ended August 31, 2018, and August 31, 2017 the Company recorded approximately $65,000 and $444,000, respectively, of related amortization.
Debt Issuance Cost
During the three months ended
August 31, 2018 and the year ended May 31, 2018, the Company incurred direct costs associated with the issuance of a convertible notes, as described in Note 4, and recorded approximately $0.1 million and $0.4 million,
respectively of debt issuance costs. In connection with the debt issuance costs, the Company recognized approximately $9,000 and $114,000 of related amortization for the three months ended August 31, 2018 and August 31, 2017, respectively.
Offering Costs
The Company incurred direct
incremental costs associated with the sale of equity securities, as described in Notes 10 and 11. The costs were approximately $3.5 million for the year ended May 31, 2018, and approximately $1.0 million and $-0- for the three months
ended August 31, 2018 and August 31, 2017, respectively. The offering costs were recorded as a component of equity upon receipt of proceeds.
Stock for Services
The Company periodically issues
warrants to consultants for various services. The Black-Scholes option pricing model, as described more fully above, is utilized to measure the fair value of the equity instruments on the date of issuance. The Company recognizes the compensation
expense associated with the equity instruments over the requisite service or vesting period.
Loss per Common Share
Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss
per share would include the weighted average number of shares of common stock outstanding and potentially dilutive common stock equivalents. Because of the net losses for all periods presented, the basic and diluted weighted average shares
outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share. For this reason, common stock options and warrants to purchase 145,856,851 and 80,582,715 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, 2018 and August 31, 2017, respectively. Additionally, as of August 31, 2018, shares
of Series B convertible preferred stock in the aggregate of 92,100 shares can potentially convert into 921,000 shares of common stock.
9
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.
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, 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
August 31, 2018 and 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 FASB (including its EITF), the AICPA and the SEC did not or are not believed by management to have a material effect on the Companys present or future financial statements.
In March 2018, FASB issued Accounting Standards Update (ASU)
No. 2018-05,
Income Taxes (Topic
740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.
118
. The amendments in this Update add various Securities and Exchange Commission (SEC) paragraphs pursuant to the issuance of SEC
Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(Act) (SAB 118). The SEC issued SAB 118 to address concerns about reporting entities ability to timely comply with
the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the
financial statements and if possible to provide a reasonable estimate. The Company has provided a reasonable estimate in the notes to the consolidated financial statements.
In July 2017, FASB issued Accounting Standards Update (ASU)
No. 2017-11,
Earnings Per Share (Topic
260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).
The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with
down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted
for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with
Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion
options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20,
DebtDebt with Conversion and Other Options), including
related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those
amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption
is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
Management is currently assessing the impact the adoption of ASU
2017-11
will have on the Companys Consolidated Financial Statements.
In May 2017, the FASB issued ASU
2017-09,
Compensation-Stock Compensation (Topic 718), Scope of Modification
Accounting.
The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this Update are effective
for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods
for which financial statements have not yet been issued. Management is currently assessing the impact the adoption of ASU
2017-09
will have on the Companys Consolidated Financial Statements.
10
Note 4 Convertible Instruments
Series B Convertible Preferred Stock
During fiscal 2010,
the Company issued 400,000 shares of Series B, $0.001 par value Convertible Preferred Stock (Series B) at $5.00 per share for cash proceeds totaling $2,009,000, of which 92,100 shares remain outstanding at August 31, 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 August 31, 2018 and May 31, 2018, the undeclared, accrued dividends were approximately $199,200 and $199,000, respectively, or 398,400 and 387,000 shares of common stock, respectively.
Short-term Convertible Notes
During the year ended
May 31, 2018, the Company issued approximately $4.89 million in aggregate principal of short-term Convertible Notes, with a maturity date of January 31, 2018, and related warrants to investors for cash. The principal amount of the
short-term Convertible 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
short-term Convertible Notes bore simple interest at the annual rate of 7%. Principal and accrued interest, to the extent not previously paid or converted, is due and payable on the maturity date. At the commitment date, the Company determined that
the conversion feature related to these short-term Convertible 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 short-term Convertible Notes for the fair value of the related warrants.
In connection with the sale of the short-term Convertible Notes, detachable common stock warrants to purchase a total of 4,025,656 common shares, with an
exercise price of $1.00 per share and a five-year term were issued to the investors. The Company determined the fair value of the warrants at issuance using the Black-Scholes option pricing model utilizing certain weighted average assumptions, such
as expected stock price volatility, expected term of the warrants, risk-free interest rates and expected dividend yield at the grant date.
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2018
|
Expected dividend yield
|
|
0%
|
Stock price volatility
|
|
69.80%
|
Expected term
|
|
5 year
|
Risk-free interest rate
|
|
1.77 - 1.93%
|
Grant-date fair value
|
|
$0.30 - $0.39
|
The fair value of the warrants, coupled with the beneficial conversion features, were recorded as a debt discount to the
short-term Convertible Notes and a corresponding increase to additional
paid-in
capital was amortized over the term of the short-term Convertible Notes. The Company incurred debt discount of approximately
$1.5 million related to the beneficial conversion feature and detachable warrants issued with the short-term Convertible Notes during the year ended May 31, 2018. Accordingly, the Company recognized approximately
$-0-
and $0.4 million of
non-cash
debt discount during the three months ended August 31, 2018 and August 31, 2017. In
connection with the short-term Convertible 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 short-term Convertible
Notes and accordingly, the Company recognized approximately
$-0-
and $114,000 of debt issuance costs during the three months ended August 31, 2018 and
August 31, 2017, respectively.
11
On January 31, 2018, in connection with a registered direct equity offering, as fully described in Note 11,
the short-term Convertible 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 short-term Convertible 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 short-term Convertible Note, including accrued interest in the aggregate of approximately $259,000. During the three months ended August 31, 2018 and August 31, 2017, the Company recognized approximately
$-0-
and $75,000, of interest expense related to the short-term Convertible Notes.
Activity related to the short-term Convertible Notes was as follows:
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|
|
August 31, 2018
|
|
|
May 31, 2018
|
|
Face amount of short-term Convertible Notes
|
|
$
|
|
|
|
$
|
6,038,500
|
|
|
|
|
|
|
|
|
|
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Unamortized discount
|
|
|
|
|
|
|
|
|
Registered direct equity offering
|
|
|
|
|
|
|
(5,788,500
|
)
|
Note repayment
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
Carrying value of short-term Convertible Notes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Convertible Note
On June 26, 2018, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory note (the
Note) with a
two-year
term to an institutional accredited investor in the initial principal amount of $5.7 million. The investor gave consideration of $5.0 million to the Company. The
Note bears interest of 10% and is convertible into common stock, at $0.55 per share. The Note is convertible in total, or in part, of the outstanding balance, 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 Note. The Investor may redeem any portion of the 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 securities purchase agreement requires the Company to reserve shares for future conversions or redemptions by dividing the outstanding principal balance plus accrued interest by the conversion price of $0.55 per
share times 1.5.
In connection with the Note, the Company recorded debt discount of $0.6 million and debt issuance costs of $0.1 million. The
discount and issuance costs will be amortized over the life of the Note, and accordingly, the Company recognized approximately $10,000 and
$-0-
amortization of debt
issuance costs for the three months ended August 31, 2018 and August 31, 2017, respectively and approximately $65,000 and
$-0-
of amortization of debt discount
for the three months ended August 31, 2018 and August 31, 2017, respectively. During the three months ended August 31, 2018 and August 31, 2017, the Company recognized approximately $104,000 and
$-0-,
of interest expense related to the Note.
Activity related to the Note was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
|
|
|
|
|
Short term
|
|
|
Long term
|
|
|
Total
|
|
|
May 31, 2018
|
|
Face amount of Note
|
|
$
|
2,100,000
|
|
|
$
|
3,600,000
|
|
|
$
|
5,700,000
|
|
|
$
|
|
|
Monthly redemption
|
|
|
700,000
|
|
|
|
(700,000
|
)
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
(344,614
|
)
|
|
|
(281,628
|
)
|
|
|
(626,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of Note
|
|
$
|
2,455,386
|
|
|
$
|
2,618,372
|
|
|
$
|
5,073,758
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Derivative Liability
The investor warrants issued with the September 2016 registered direct equity offering, and the placement agent warrants issued in conjunction with the
offering, as fully described in Note 11, contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer or share exchange). If
a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a successor entity, then the warrantholder has the option to receive cash equal to the fair value of the remaining unexercised portion of the
warrant. Due to this contingent cash settlement provision, the investor and placement agent warrants require liability classification as derivatives in accordance with ASC 480 and ASC 815 and are recorded at fair value.
12
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, 2018 and August 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
Shares Indexed
|
|
|
Derivative Liability
|
|
Inception date September 15, 2016
|
|
|
7,733,334
|
|
|
$
|
5,179,200
|
|
Balance May 31, 2018
|
|
|
7,733,334
|
|
|
|
1,323,732
|
|
Balance August 31, 2018
|
|
|
7,733,334
|
|
|
$
|
2,071,199
|
|
The Company recognized approximately $747,000 and $363,000 of
non-cash
loss, due to
the changes in the fair value of the liability associated with such classified warrants during the three months ended August 31, 2018 and August 31, 2017, respectively.
ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial
recognition. Fair values for the warrants were determined using a Binomial Lattice (Lattice) valuation model.
The Company estimated the fair
value of the warrant derivative liability as of inception date September 15, 2016, May 31, 2018 and August 31, 2018, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15,
2016
|
|
|
May 31,
2018
|
|
|
August 31,
2018
|
|
Fair value of underlying stock
|
|
$
|
0.78
|
|
|
$
|
0.49
|
|
|
$
|
0.69
|
|
Risk free rate
|
|
|
1.20%
|
|
|
|
2.63%
|
|
|
|
2.72%
|
|
Expected term (in years)
|
|
|
5
|
|
|
|
3.3
|
|
|
|
3.04
|
|
Stock price volatility
|
|
|
106%
|
|
|
|
64%
|
|
|
|
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 provision contained in the warrants, which could provide for early redemption of the
warrants, the model also considered subjective assumptions related to the fundamental transaction provision. The fair value of the warrants will be significantly influenced by the fair value of the Companys stock price, stock price volatility,
changes in interest and managements assumptions related to the fundamental transaction provisions.
Note 6 Stock Options and Warrants
The Company has one active stock-based equity plan at August 31, 2018, the CytoDyn Inc. 2012 Equity Incentive Plan, as amended (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 August 31, 2018, the Company had 2,403,048 shares
available for future stock-based grants under the 2012 Plan.
Stock Options
During the three months ended August 31, 2018, the Company granted annual stock option awards to directors to purchase a total of 680,822 shares of common
stock. The exercise price of the stock option awards is $0.49 per share, except for one stock option award covering 80,822 shares of common stock, which has an exercise price of $0.47 per share. These stock option awards vest quarterly over one year
and have a
ten-year
term. The grant date fair value related to these stock options was $0.31 per share, except the stock option award covering 80,822 shares of common stock, which was $0.30 per share. 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.
During the three months ended August 31, 2018, the Company granted a stock option award covering 950,000 shares of common stock with an exercise price of
$0.49 per share, to its Executive Chairman. This stock option award vests ratably over 24 months, has a
ten-year
term and a grant date fair value of $0.41 per share.
13
During the three months ended August 31, 2018, the Company granted stock options, covering an aggregate of
875,000 shares of common stock, to executive management and employees with exercise prices of $0.49 per share. The stock option awards vest annually over three years, with a
ten-year
term and grant date fair
values of $0.31 per share.
Warrants
On
June 15, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering 1,970,000 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 the registered direct offering, the Company also issued warrants covering 133,600 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.
During the three months ended August 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 7,514,300 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 1,422,860 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.50 per share.
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 2012 convertible promissory notes and had an amended 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.
Compensation expense related to stock options and compensatory warrants for the three months ended August 31, 2018 and August 31, 2017 was
approximately $283,000 and $255,000, respectively. The grant date fair value of options and compensatory warrants vested during the three month periods ended August 31, 2018 and August 31, 2017 was approximately $692,000 and $447,000,
respectively. As of August 31, 2018, there was approximately $1.1million of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 1.6 years.
The following table represents stock option and warrant activity as of and for the three months ended August 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Options and warrants outstandingMay 31, 2018
|
|
|
132,385,269
|
|
|
$
|
0.80
|
|
|
|
3.78
|
|
|
$
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
13,546,582
|
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(75,000
|
)
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstandingAugust 31, 2018
|
|
|
145,856,851
|
|
|
|
0.79
|
|
|
|
3.74
|
|
|
|
1,710,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisableAugust 31, 2018
|
|
|
141,382,362
|
|
|
$
|
0.79
|
|
|
|
3.58
|
|
|
$
|
1,200,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Acquisition of Patents
As discussed in Note 9 below, the Company consummated an asset purchase on October 16, 2012, and paid $3,500,000 for certain assets, including
intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the PRO 140 drug substance. The Company followed the guidance in Financial Accounting Standards Topic 805 to determine if the Company acquired a
business. Based on the prescribed accounting, the Company acquired assets and not a business. As of August 31, 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.
14
The following presents intangible assets activity:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
|
May 31, 2018
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(2,056,365
|
)
|
|
|
(1,968,846
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
1,443,635
|
|
|
|
1,531,154
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
1,479,624
|
|
|
$
|
1,567,143
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to acquired patents was approximately $87,500 for the three months ended August 31, 2018 and
2017, respectively. The estimated aggregate future amortization expense related to the Companys intangible assets with finite lives is estimated at approximately $350,000 per year for approximately the next four 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 0.75% to 2% of net sales, depending upon who serves as the manufacturer, when the Company commences their first
commercial sale, which will continue as long as the license agreement is maintained.
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 3.5% 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 clinical research organization (CRO) and related laboratory vendors. Under the terms of these agreements, the Company incurs execution fees for direct services costs, which are recorded as a current asset. In the event
the Company were to terminate any trial, it may incur certain financial penalties which would become payable to the CRO. Conditioned upon the form of termination of any one trial, the financial penalties may range from an approximate low of
$0.1 million to an approximate high of $1.4 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 $2.3 million. During the year ended May 31, 2017, the Company entered into agreements with contract
15
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 August 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 $1.7 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 10 Private Securities Offerings
During the
three months ended August 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 rate of 50%. Pursuant to the offering, the Company
sold a total of 15,028,600 shares of common stock, $0.001 par value, for aggregate gross proceeds of approximately $7.5 million and issued to the investors five-year warrants covering 7,514,300 shares of common stock with an exercise price of
$0.75 per share. The Company received net proceeds from the offering of approximately $6.6 million. In addition, the placement agent received warrants covering 1,422,860 shares of common stock (or 10% of total shares sold to investors) with a
per share exercise price of $0.50, a five-year term. The placement agent warrants include a cashless exercise provision.
Note 11 Registered
Direct Equity Offerings
In September 2016, the Company entered into securities purchase agreements with certain institutional investors for the sale
of 13,333,334 shares of common stock at a purchase price of $0.75 per share in a registered direct equity offering (the Registered Offering), pursuant to a registration statement on Form
S-3.
The
investors in this Registered Offering also received warrants to purchase 6,666,667 shares of common stock with an exercise price of $1.00 per share and a five-year term. The Company received net proceeds from the Registered Offering of approximately
$9.0 million after placement fees of 8% of the gross proceeds and various expenses. In addition, the placement agent received warrants covering 1,066,667 shares (or 8% of total shares sold to investors) with a per share exercise price of $0.825
and a five-year term.
A summary of the cash proceeds of the Registered Offering is shown below:
|
|
|
|
|
Gross proceeds from sale of common stock
|
|
$
|
10,000,000
|
|
Placement agent fees and expenses
|
|
|
1,010,000
|
|
|
|
|
|
|
Total net proceeds
|
|
$
|
8,990,000
|
|
|
|
|
|
|
As fully described in Note 5 above, the investor warrants and the placement agent warrants issued in conjunction with the
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
Registered Offering is as follows:
|
|
|
|
|
Allocated to common stock and additional paid in capital
|
|
$
|
6,334,417
|
|
Allocated to warrant liabilities
|
|
|
2,655,583
|
|
|
|
|
|
|
Total net proceeds
|
|
$
|
8,990,000
|
|
|
|
|
|
|
Closing costs included 1,066,667 warrants valued at $819,200 for placement agent fees. Based upon the estimated fair value of
the stock and warrants in the units, the Company allocated $241,986 to financing expense and $577,214 as stock issuance costs.
On January 31, 2018,
the Company entered into subscription agreements with certain investors who owned convertible promissory notes of the Company (the Notes) for the sale by the Company of 12,062,728 shares of common stock in a registered direct offering
(the January 31 Offering). The investors in the January 31 Offering also received warrants to purchase 7,718,010 shares of common stock. The securities were sold at a combined purchase price of $0.50 per share of common stock and
related warrants, for aggregate gross proceeds to the Company of approximately $6.0 million. The Notes matured on January 31, 2018, upon which date the Company became obligated to pay the principal amount of approximately $6.0 million
on the Notes, plus accrued but unpaid interest of approximately $0.3 million, for aggregate payment obligations at maturity of approximately $6.3 million. The common stock and warrants were issued in full satisfaction of approximately
$6.0 million of such payment obligations, with one holder of an aggregate principal amount and accrued unpaid interest of approximately $0.3 million electing to be repaid in cash instead of participating in the January 31, 2018
Offering. As a result, all of the proceeds from the January 31 Offering were used to satisfy the Companys payment obligations pursuant to the Notes. The warrants will be exercisable for a period of five years commencing on their issuance
date, at an exercise price of $0.75 per share of common stock, subject to certain ownership limitations and adjustments as provided under the terms of the warrants. The number of shares of common stock underlying the warrant issued to each investor
was calculated as the difference between (x) the number of shares of common stock issued to each investor in the January 31, 2018 Offering in respect of the payment obligations relating solely to principal amounts on the Notes and
(y) the number of shares of common stock underlying certain
16
warrants originally issued to such investor in the original Notes offering. The effect was to bring each investor from 50% warrant coverage in the original offering of Notes, assuming conversion
of the principal amount thereof at an original conversion price of $0.75 per share, to 100% warrant coverage after the January 31 Offering, assuming reinvestment of the principal amount on the Notes at $0.50 per share. The warrants in the
January 31 Offering, had an original exercise price of $1.00 per share, therefore, due to the reduction of exercise price to $0.75 per share, the Company recognized a
non-cash
inducement interest expense
of approximately $2.4 million due to the modification. In connection with this January 31 Offering, the Company paid a commission of $164,425 to the placement agent.
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.
Note 12
Employee Benefit Plan
The Company has an employee savings plan (the Plan) pursuant to Section 401(k) of the Internal Revenue
Code (the Code), covering all of its employees. The Company makes a qualified
non-elective
contribution of 3%, which consequently vests immediately. In addition, participants in the Plan may
contribute a percentage of their compensation, but not in excess of the maximum allowed under the Code. During the three months ended August 31, 2018 and 2017, the Company incurred an expense of approximately $15,800 and $10,800, respectively,
for qualified
non-elective
contributions.
Note 13 Related Party Transactions
On July 26, 2017, Jordan G. Naydenov, a director with the Company, participated in the private placement of convertible promissory notes, as fully
described in Note 4. Mr. Naydenov purchased a convertible promissory note, bearing interest of 7%, for $100,000 in aggregate principal and received a warrant covering 66,666 shares of common stock at an exercise price of $1.00. The terms and
conditions of Mr. Naydenovs investment were identical to those offered to all other investors in the offering and his investment was approved by the Audit Committee of the Board of Directors.
On July 28, 2017, Alpha Venture Capital Partners, LP (AVCP), participated in the private placement of convertible promissory notes, as fully
described in Note 4. Carl C. Dockery, the principal of AVCP, is a director of the Company. AVCP purchased a convertible 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 convertible promissory 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.
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 determined 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.
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Note 14 Subsequent Events
Between September 4, 2018 and October 4, 2018, the Company conducted a private equity offering, in which accredited investors purchased common stock
at $0.50 per share with warrant coverage ratio of 50%. Pursuant to the offering, the Company sold a total of 22,661,570 shares of common stock, $0.001 par value, for aggregate gross proceeds of approximately $11.3 million and issued to the investors
five-year warrants covering 11,330,785 shares of common stock with an exercise price of $0.75 per share. In connection with the equity offering, the Company paid an aggregate cash fee of approximately $1.3 million to the placement agent and issued
warrants covering an aggregate of 2,174,157 shares of common stock to the placement agent as additional compensation. The placement agent warrants have a five-year term and an exercise price of $0.50 per share. The Company also paid a
one-time
non-accountable
expense fee of $25,000 to the placement agent for its services in connection with the offering.
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