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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM 10-Q
 
 
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2020
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1933
For the transition period from
    
    
    
    
to
    
    
    
    
Commission File Number: 000-49908
 
 
CYTODYN INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
83-1887078
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer or
Identification No.)
1111 Main Street, Suite 660
Vancouver, Washington
 
98660
(Address of principal executive offices)
 
(Zip Code)
(Registrant’s telephone number, including area code)
(360980-8524
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Trading
Symbol(s)
 
Name of Each Exchange
on Which Registered
None.
 
None.
 
None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes
  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
 
☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large Accelerated Filer      Accelerated Filer  
Non-accelerated
Filer
     Smaller Reporting Company  
     Emerging Growth Company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act):    Yes  ☐    No  
On September 30, 2020, there were 570,751,049 shares outstanding of the registrant’s $0.001 par value common stock.
 
 
 

Table of Contents
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2

Table of Contents
PART I
Item 1. Financial Statements.
CytoDyn Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
 
     August 31, 2020
(unaudited)
    May 31, 2020
(audited)
 
Assets
    
Current assets:
    
Cash
   $ 18,200     $ 14,282  
Restricted cash
     13       10  
Inventories
     58,474       19,147  
Prepaid expenses
     828       498  
Prepaid service fees
     2,361       2,890  
  
 
 
   
 
 
 
Total current assets
     79,876       36,827  
Operating lease
s
right-of-use
assets
     420       176  
Property and equipment, net
     107       55  
Intangibles, net
     12,959       13,456  
  
 
 
   
 
 
 
Total assets
   $ 93,362     $ 50,514  
  
 
 
   
 
 
 
Liabilities and Stockholders’ (Deficit) Equity
    
Current liabilities:
    
Accounts payable
   $ 21,351     $ 29,479  
Accrued liabilities and compensation
     34,419       6,866  
Accrued license fees
     148       13  
Accrued interest on convertible notes
     858       292  
Accrued dividends on convertible preferred stock
     1,401       981  
Current portion of operating leases payable
     110       115  
Current portion of long-term convertible notes payable
     18,124       6,745  
Warrant
exercise
 proceeds held in trust
     13       10  
  
 
 
   
 
 
 
Total current liabilities
     76,424       44,501  
  
 
 
   
 
 
 
Long-term liabilities:
    
Convertible notes payable, net
     13,856       8,431  
Operating lease
s
liability
     314       63  
  
 
 
   
 
 
 
Total long-term liabilities
     14,170       8,494  
  
 
 
   
 
 
 
Total liabilities
     90,594       52,995  
  
 
 
   
 
 
 
Commitments and Contingencies (
Note
 10)
Stockholders’ (Deficit) 
Equity
    
Preferred
s
tock, $0.001 par value; 5,000 shares authorized
    
Series D convertible preferred stock, $0.001 par value; 12 authorized; 9 issued and outstanding at
August 31,
 
2020 and May 31, 2020, respectively
            
Series C convertible preferred stock, $0.001 par value; 8 authorized; 8 issued and outstanding at August 31,
 
2020
and May 31, 2020, respectively
            
Series B convertible preferred stock, $0.001 par value; 400 shares authorized, 87 and 92 shares issued and outstanding at August 31, 2020 and May 31, 2020, respectively
            
Common stock, $0.001 par value; 800,000 shares authorized, 570,325 and 519,261 issued and 569,883 and
518,976 outstanding at August 31, 2020 and May 31, 2020, respectively
     570       519  
Additional paid-in capital
     388,404       351,711  
Accumulated (deficit)
     (386,206     (354,711
Less: treasury stock, $
0.001
 
par value (442 and 286 shares at August 31, 2020 and May 31, 2020, respectively)
            
  
 
 
   
 
 
 
Total stockholders’ (deficit) equity
     2,768       (2,481
  
 
 
   
 
 
 
Total liabilities and stockholders’ (deficit) equity
   $ 93,362     $ 50,514  
  
 
 
   
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
3

Table of Contents
CytoDyn Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
 
     Three Months Ended  
     August 31, 2020     August 31, 2019  
Operating expenses:
    
General and administrative
   $ 9,875     $ 3,046  
Research and development
     15,188       9,055  
Amortization and depreciation
     505       531  
  
 
 
   
 
 
 
Total operating expenses
     25,568       12,632  
  
 
 
   
 
 
 
Operating loss
     (25,568     (12,632
Change in fair value of derivative liabilities
           625  
Interest expense:
    
Finance charges
     (10     (8
Amortization of discount on convertible notes
     (1,339     (1,030
Amortization of debt issuance costs
     (4     (284
Inducement interest - warrant exercises and debt
 conversion
     (3,345     (2,431
Interest on convertible note
s
payable
     (566     (404
  
 
 
   
 
 
 
Total interest expense
     (5,264     (4,157
  
 
 
   
 
 
 
Loss before income taxes
     (30,832     (16,164
Income tax benefit
           —    
  
 
 
   
 
 
 
Net loss
   $ (30,832   $ (16,164
  
 
 
   
 
 
 
Basic and diluted loss per share
   $ (0.06   $ (0.04
  
 
 
   
 
 
 
Basic and diluted weighted average common shares outstanding
     555,531       364,639  
  
 
 
   
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
4

Table of Contents
CytoDyn Inc.
Consolidated Statement of Changes in Stockholders’ (Deficit)/ Equity
(Unaudited)
(In thousands, expect per share data)
 
     Preferred Stock      Common Stock      Treasury Stock  
     Shares     Amount      Shares      Amount      Shares      Amount  
Balance May 31, 2020
     109     $        519,261      $ 519        286      $  
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
First Quarter Fiscal Year Ended May 31, 2021
                
Issuance of stock for convertible note conversions
                  2,119        2                
Issuance of legal settlement shares
                  4,000        4                
Exercise of stock options
                  100                       
Stock issued for incentive compensation and tendered for income tax
                  323               156         
Conversion of Series B
convertible preferred share
s to common stock
     (5            50                       
Private warrant exchange
                  16,544        17                
Exercise of warrants
                  19,134        19                
Cashless exercise of warrants
                  8,794        9                
Inducement interest expense related to private warrant exchange
                                        
Offering costs related to private warrant exchange
                                        
Dividend declared and paid on Series B
p
referred shares ($0.25/share)
                                        
Dividends on Series C
p
referred shares
                                        
Dividends on Series D
p
referred shares
                                        
Stock-based compensation
                                        
Net
l
oss August 31, 2020
                                        
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Balance August 31, 2020
     104     $
       570,325      $ 570        442      $  
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
     Preferred Stock      Common Stock      Treasury Stock  
     Shares      Amount      Shares      Amount      Shares      Amount  
Balance May 31, 2019
     95      $        329,554      $ 330        159      $  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
First Quarter Fiscal Year Ended May 31, 2020
                 
Issuance of stock for note payable redemption
     —          —          3,014        3        —          —    
Proceeds from registered direct offering ($0.50/share)
     —          —          5,640        6        —          —    
Offering costs related to registered direct offering
     —          —          —          —          —          —    
Proceeds from public warrant tender offers
     —          —          45,376        45        —          —    
Offering costs related to public warrant tender offers
     —          —                
Inducement interest expense — public warrant tender offers
     —          —          —          —          —          —    
Proceeds from Series C
p
referred offering
     2        —                
Offering costs related to Series C
p
refe
r
red offering
     —          —          —          —          —          —    
Dividends on Series C
p
referred shares
     —          —          —          —          —          —    
Legal fees in connection with equity offerings
     —          —          —          —          —          —    
Stock-based compensation
     —          —          —          —          —          —    
Net
l
oss August 31, 2019
     —          —          —          —          —          —    
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Balance August 31, 2019
     97      $        383,584      $ 384        159      $  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
5

Table of Contents
CytoDyn Inc.
Consolidated Statement of Changes in Stockholders’ (Deficit)/ Equity
(Unaudited)
(In thousands, except per share data)
 
     Additional
Paid-In Capital
    Accumulated
Deficit
    Total  
Balance May 31, 2020
   $ 351,711     $ (354,711   $ (2,481
  
 
 
   
 
 
   
 
 
 
First Quarter Fiscal Year Ended May 31, 2021
      
Issuance of stock for convertible note conversions
     9,535             9,537  
Issuance of legal settlement shares
     (4            
Exercise of stock options
     39             39  
Stock issued for incentive compensation and tendered for income tax
     828             828  
Conversion of Series B
c
onvertible
p
referred
s
hares
 to
c
ommon
s
tock
                  
Private warrant exchange
     7,787             7,804  
Exercise of warrants
     13,450                     13,469  
Cashless exercise of warrants
     (9            
Inducement interest expense related to private warrant exchange
     3,345             3,345  
Offering costs related to private warrant exchange
     (364           (364
Dividend declared and paid on Series B
p
referred shares ($0.25
/
share)
           (243     (243
Dividends on Series C
p
referred shares
           (207     (207
Dividends on Series D
p
referred shares
           (213     (213
Stock-based compensation
     2,086             2,086  
Net
l
oss August 31, 2020
           (30,832     (30,832
  
 
 
   
 
 
   
 
 
 
Balance August 31, 2020
   $ 388,404     $        (386,206   $ 2,768  
 
 
 
 
 
 
 
 
 
 
 
 
     Additional
Paid-In
Capital
    Accumulated
Deficit
    Total  
Balance May 31, 2019
   $ 220,120     $ (229,364   $ (8,914
  
 
 
   
 
 
   
 
 
 
First Quarter Fiscal Year Ended May 31, 2020
        
Issuance of stock for note payable redemption
     1,002       —         1,005  
Proceeds from registered direct offering ($0.50/share)
     2,250       —         2,256  
Offering costs related to registered direct offering
     (260     —         (260
Proceeds from public warrant tender offers
     11,855       —         11,900  
Offering costs related to public warrant tender offers
     (1,059     —         (1,059
Inducement interest expense—public warrant tender offers
     2,431       —         2,431  
Proceeds from
s
eries C
p
referred offering
     1,754       —         1,754  
Offering costs related to Series C
p
r
ef
er
red offering
     (198     —         (198
Dividends on
s
eries C
p
referred shares
     —         (110     (110
Legal fees in connection with equity offerings
     (16     —         (16
Stock-based compensation
     581       —         581  
Net
l
oss August 31, 2019
     —         (16,164     (16,164
  
 
 
   
 
 
   
 
 
 
Balance August 31, 2019
   $ 238,460     $ (245,638   $ (6,794
  
 
 
   
 
 
   
 
 
 
 
See accompanying notes to unaudited consolidated financial statements
 
6

Table of Contents
CytoDyn Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
     Three Months Ended  
     August 31, 2020     August 31, 2019  
Cash flows from operating activities:
    
Net loss
   $ (30,832   $ (16,164
Adjustments to reconcile net loss to net cash used
i
n
 operating activities:
    
Amortization and depreciation
     505       531  
Amortization of debt issuance costs
     4       284  
Amortization of discount on convertible notes
     1,339       1,030  
Inducement interest - warrant exercises and debt conversion
     3,345       2,431  
Interest expense associated with accretion of convertible notes payable
     —         266  
Change in fair value of derivative liabilities
     —         (625
Stock-based compensation
     3,692       581  
Changes in current assets and liabilities:
    
(Increase) in inventories
     (39,327     —    
Decrease in prepaid expenses
     199       499  
Increase (decrease) in accounts payable and accrued expenses
     20,127       (4,023
  
 
 
   
 
 
 
Net cash used in operating activities
     (40,948     (15,190
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Furniture and equipment purchases
     (59     (5
  
 
 
   
 
 
 
Net cash used in investing activities
     (59     (5
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Proceeds from private warrant exchange, net of offering costs
     7,441       2,256  
Proceeds from exercise of warrants
     13,469       1,754  
Proceeds from warrant tender offers
     —         11,900  
Release of funds held in trust for warrant tender offer
     —         (854
Proceeds from exercise of stock options
     39       —    
Payment of payroll witholdings related to tender of common stock for income tax withholding
     (778     —    
Proceeds from convertible notes payable, net
 of 
discount and issuance costs
     25,000       —    
Payment of offering costs
           (1,532
Dividend declared and paid on Series
B
p
referred shares
     (243     —    
  
 
 
   
 
 
 
Net cash provided by financing activities
     44,928       13,524  
  
 
 
   
 
 
 
Net change in cash
     3,921       (1,671
Cash, beginning of period
     14,292       3,467  
  
 
 
   
 
 
 
Cash, end of period
   $ 18,213     $ 1,796  
  
 
 
   
 
 
 
Supplemental disclosure of cash flow information:
    
 
Cash paid during the period for interest
   $ 11     $ 10  
  
 
 
   
 
 
 
Non-cash
investing and financing transactions:
    
Issuance of stock for note payable redemption and conversions
   $ 9,537     $ 1,005  
  
 
 
   
 
 
 
Accrued dividends on Series C
c
onvertible
p
referred stock
   $ 207     $ 110  
  
 
 
   
 
 
 
Accrued dividends on Series D
c
onvertible
p
referred stock
   $ 213     $ —    
  
 
 
   
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
7

Table of Contents
CYTODYN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 31, 2020
(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. The Company is a late-stage biotechnology company developing innovative treatments for multiple therapeutic indications based on leronlimab, a novel humanized monoclonal antibody targeting the CCR5 receptor. Leronlimab is in a class of therapeutic monoclonal antibodies designed to address unmet medical needs in the areas of Human Immunodeficiency Virus (“HIV”), Cancer, Immunology, and
COVID-19.
With respect to HIV, the CCR5 receptor appears to play a key role in the ability of HIV to enter and infect healthy
T-cells.
The Company’s lead product candidate, leronlimab, belongs to a class of HIV therapies known as entry inhibitors. These therapies block HIV from entering into and infecting certain cells.
With respect to Cancer and Immunology, the CCR5 receptor also appears to be implicated in human metastasis and in immune-mediated illnesses such as triple-negative breast cancer, other metastatic solid tumor cancers,
graft-vs-host
disease (“GvHD”), and
Non-Alcoholic
Steatohepatitis (“NASH”).
More recently, the Company is expanding the clinical focus with leronlimab to include evaluating its effectiveness in multiple other autoimmune indications where CCR antagonism has shown initial promise, as well as the novel coronavirus disease
(“COVID-19”).
The Company targets leronlimab treatment as a therapy for patients who experience respiratory complications as a result of contracting
COVID-19.
The Company believes leronlimab provides therapeutic benefit by enhancing the immune response while mitigating the “cytokine storm” that leads to morbidity and mortality in patients experiencing this syndrome.
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, 2020 and 2019 and notes thereto in the Company’s Annual Report on
Form 10-K for
the fiscal year ended May 31, 2020, filed with the Securities and Exchange Commission on August 14, 2020. Operating results for the three months ended August 31, 2020 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, 2020 and August 31, 2019, (b) the financial position at August 31, 2020 and (c) cash flows for the three month periods ended August 31, 2020 and August 31, 2019.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, CytoDyn Operations Inc., Advanced Genetic Technologies, Inc. (“AGTI”) and CytoDyn Veterinary Medicine LLC (“CVM”), 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 2021 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 $30.8 million for the three months ended August 31, 2020 and has an accumulated deficit of $386.2 million as of August 31, 2020. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
 
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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 Company’s continuation as a going concern is dependent upon its ability to obtain additional operating capital, complete development of its product candidate, obtain U.S. Food & Drug Administration (“FDA”) approval, outsource manufacturing of the product candidate, and ultimately achieve initial revenues and attain profitability. The Company is currently engaging in significant research and development activities related to its product candidate for multiple indications, and expects to incur significant research and development expenses in the future primarily related to its clinical trials. These research and development activities are subject to significant risks and uncertainties. The Company intends to finance its future development activities and its working capital needs largely from the sale of equity and debt securities, combined with additional funding from other traditional sources. There can be no assurance, however, that the Company will be successful in these endeavors.
Use of Estimates
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
Cash is maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. Balances in excess of federally insured limits at August 31, 2020 and May 31, 2020 approximated $18.0 million and $14.0 million, respectively.
Identified Intangible Assets
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, 2020 and 2019. The value of the Company’s patents would be significantly impaired by any adverse developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Note 8.
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.
Inventory
The Company values inventory at the lower of cost or net realizable value using the average cost method. Inventories consist of specialized and common raw materials to be used for commercial production of the Company’s biologic, leronlimab, which is awaiting regulatory approval. The consumption of these materials during production is classified as
work-in-progress.
Inventory is classified as finished goods once it is determined to be in saleable condition. Inventory purchased in preparation for product launches is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory, in light of the status of the product within the regulatory approval process.
The Company evaluates its inventory levels on a quarterly basis and writes down inventory that has become obsolete, or has a cost in excess of its expected net realizable value, and inventory quantities in excess of expected requirements. In assessing the lower of cost or net realizable value to
pre-launch
inventory, the Company relies on independent analysis provided by a third party knowledgeable of the range of likely commercial prices comparable to current comparable commercial product.
 
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Inventories Procured or Produced in Preparation for Product Launches
The Company capitalizes inventories procured or produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when the results of clinical trials have reached a status sufficient to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and the Company has determined it is probable that these capitalized costs will provide some future economic benefit in excess of capitalized costs. The material factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive Phase
3
clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the compilation of the regulatory application. The Company closely monitors the status of the product within the regulatory review and approval process, including all relevant communication with regulatory authorities. If the Company is aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory may no longer qualify for capitalization.
For inventories capitalized in preparation for product launch, anticipated future sales, shelf lives, and expected approval date are taken into account when evaluating realizability. The shelf
 
life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize
pre-launch
inventory, the Company considers the product stability data of all of the
pre-approval
inventory procured or produced to date to determine whether there is adequate shelf life.
Fair Value of Financial Instruments
At August 31, 2020, the carrying value of the Company’s cash, accounts payable, and accrued liabilities approximate their fair value due to the short-term maturity of the instrument
s
.
During the fiscal year ending May 31, 2020, the Company carried derivative financial instruments at fair value as required by U.S. GAAP. Derivative financial instruments consist of financial instruments that contain a notional amount and one or more underlying variables (e.g., interest rate, security price, variable conversion rate or other variables), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. The Company follows the provisions of ASC 815,
Derivatives and Hedging,
as their instruments are recorded as a derivative liability, at fair value, and ASC 480,
Distinguishing Liabilities from Equity,
as it relates to warrant liability, with changes in fair value reflected in the Consolidated Statement of Operations.
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.
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, 2020 and May 31, 2020. As of August 31, 2020, there were no assets or liabilities measured at fair value using Level 3 inputs; previous outstanding derivative warrants and related convertible debt had been converted prior to May 31, 2020 according to the terms of the agreements.
A financial instrument’s 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. During the 2020 fiscal year, the Company used a Binomial Lattice Model to estimate the value of the warrant derivative liability and a Monte Carlo Simulation to value the derivative liability of the redemption provision within a convertible promissory note. These valuation models were used because management believes they reflect all the assumptions that market participants would likely consider in negotiating the transfer of the instruments.
 
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Table of Contents
The Company’s derivative liabilities were classified within Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation models.
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) from inception to the year ended May 31, 2020 (in thousands):
 
Investor warrants issued with registered direct equity offering
   $ 4,360  
Placement agent warrants issued with registered direct equity offering
     819  
Fair value adjustments
     (3,855
  
 
 
 
Balance at May 31, 2018
     1,324  
Inception date value of redemption provisions
     2,750  
Fair value adjustments—convertible notes
     (745
Fair value adjustments—warrants
     (922
  
 
 
 
Balance at May 31, 2019
     2,407  
Fair value adjustments—convertible notes
     (2,005
Fair value adjustments—warrants
     11,547  
Exercise of derivative warrants
     (11,949
  
 
 
 
Balance at May 31, 2020
   $
  
 
 
 
Operating Leases
Operating leases are included in operating lease
right-of-use
(“ROU”) assets, other current liabilities, and operating lease liabilities on its consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms do not include options to extend or terminate the lease as it is not reasonably certain that it will exercise these options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and
non-lease
components, which are generally accounted for separately.
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 Company’s 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. Periodically, the Company will issue restricted common stock to executives or third parties as compensation for services rendered. Such stock awards are valued at fair market value on the effective date of the Company’s obligation.
Common Stock
Under the Company’s Certificate of Incorporation, as amended, the Company is authorized to issue up to 800,000,000 shares of common stock. As of August 31, 2020, the Company had 569,882,808 shares of common stock outstanding.
Preferred Stock
The Company’s Board is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of August 31, 2020, the Company had 400,000 shares authorized and 87,100 shares outstanding of Series B convertible preferred stock, 8,203 shares authorized and outstanding of Series C convertible preferred stock, and 11,737 shares authorized and 8,452 shares outstanding of Series D convertible preferred stock. The remaining authorized preferred shares have no specified rights.
 
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Table of Contents
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. As of August 31, 2020, the Company holds 442,578 shares of $0.001 par value common stock as treasury stock.
Debt Discount
During the three months ended August 31, 2020, the Company incurred approximately $3.4 million of debt discount related to the issuance of the July 2020 Note, as described in Note 5. The discount is amortized over the life of the convertible promissory note. During the three months ended August 31, 2020 and August 31, 2019, the Company recorded approximately $1.3 million and $1.0 million of related amortization, respectively.
Debt Issuance Cost
During the three months ended August 31, 2020, the Company incurred $0.1 million of direct costs associated with the issuance of the July 2020 Note, as described in Note 5. During the three months ended August 31, 2020 and August 31, 2019, the Company recognized related amortization of approximately $4,000 and $284,000, respectively.
Offering Costs
During the three months ended August 31, 2020 and the year ended May 31, 2020, the Company incurred approximately $0.4 million and $2.3 million respectively, in direct incremental costs associated with the sale of equity securities as fully described in Note 11. The costs were recorded as a component of equity upon receipt of the proceeds.
Stock
-
Based Compensation for Services
The Company periodically issues stock options or warrants to consultants for various services. The Black-Scholes option pricing model, as described more fully above, is utilized to measure the fair value of the equity instruments on the date of issuance. The Company recognizes the compensation expense associated with the equity instruments over the requisite service or vesting period.
Loss per Common Share
Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share would include the weighted average common shares outstanding and potentially dilutive common 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 approximately 87 million and 155 million 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, 2020 and August 31, 2019, respectively. As of August 31, 2020 and August 31, 2019 the Company had convertible notes outstanding,
for which the
C
ompany has reserved
9.8 million and 11.6 million common shares, respectively; and shares of Series D, Series C and Series B convertible preferred stock, including undeclared dividends, that could potentially convert in the aggregate into approximately 30.3 million and 11.7 million common shares, respectively.
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 basis. Future tax benefits for net operating loss carryforwards 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.
 
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Table of Contents
The Company follows the provisions of FASB ASC
740-10,
Uncertainty in Income Taxes
. 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.
In accordance with Section 15 of the Internal Revenue Code, the Company utilized a federal statutory rate of 21% for the three months ended August 31, 2020 and August 31, 2019. The net tax expense for the three months ended August 31, 2020 and
2019
,
 is zero. The Company has a full valuation allowance as of August 31, 2020 and May 31, 2020, 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 Company’s present or future
 
consolidated
financial statements.
In December 2019, the FASB issued ASU
No. 2019-12,
Simplifying the Accounting for Income Taxes (Topic 740)
. The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC 740 and clarifying existing guidance to facilitate consistent application. The standard will become effective for the Company beginning on January 1, 2021. The Company is currently evaluating the new standard to determine the potential impact on its financial condition, results of operations, cash flows, and financial statement disclosures.
In August 2020, the FASB issued ASU
No. 2020-06,
Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40)
which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update
No. 2020-06
is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential
 impact
,
if any,
on its
 consolidated
financial statements.
Note 4 –
Inventories
The Company’s inventory as of August 31, 2020 and May 31, 2020 was $58.5 million and $19.1 million , respectively. Inventory as of August 31, 2020 consisted of raw materials purchased and work
-
in
-
progress
inventory
related to
 the commercial
 production
of pre-launch inventories
of leronlimab to support the Company’s expected approval of the product as a combination therapy for HIV patients in the United States. The Company believes that material uncertainties related to the ultimate regulatory approval of leronlimab for commercial sale have been significantly reduced based on positive data from
 the
Phase 3 clinical trial results, and information gathered
from pre-filing meetings
with the FDA for the BLA. The BLA was initially submitted with the FDA in April 2020 and the BLA submission was completed on May 11, 2020. In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA filing requesting additional information, and the Company requested a Type A meeting to discuss the FDA’s request for additional information
.
 
The FDA did not schedule a Type A meeting, but requested the Company submit all questions regarding the filing in writing. In September 2020, the Company submitted its questions to the FDA, received written responses, and held a telephonic meeting with the FDA to obtain further clarity on what additional information was required with respect to the BLA filing. The Company is working to provide the information required by the FDA in order to resubmit the BLA, which it anticipates will occur by the end of the calendar year 2020.
Inventories as of August 31, 2020 and May 31, 2020 are presented below (in thousands):
 
    
August 31, 2020
    
May 31, 2020
 
Raw materials
   $ 20,263      $ 19,147  
Work
-
in
-
pro
gress
     38,211         
Total
   $ 58,474      $ 19,147  
  
 
 
    
 
 
 
 
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Note 5 – Convertible Instruments
Series D Convertible Preferred
Stock
On January 28, 2020, the Company filed a certificate of designation (the “Series D Certificate of Designation”) to authorize 11,737 shares of Series D Convertible Preferred Stock, $0.001 par value per share (“Series D Preferred Stock”), and on January 31, 2020 issued 7,570 shares of Series D Convertible Preferred Stock, at $1,000.00 per share for cash proceeds totaling $7,565,000, net of offering costs of $5,000. On March 13, 2020, the Company issued an additional 882 shares of Series D Preferred Stock at $1,000.00 per share resulting in net proceeds of $882,000. As of August 31, 2020, 8,452 shares remain outstanding. The Series D Certificate of Designation provides, among other things, that holders of Series D Preferred Stock shall be entitled to receive cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series D Preferred Stock, to be paid, at the option of the holder, in cash or in shares of common stock at the rate of $0.50 per share. Any dividends paid by the Company will first be paid to the holders of Series D Preferred Stock prior and in preference to any payment or distribution to holders of common stock. Dividends on the Series D Preferred Stock shall be cumulative and there are no sinking fund provisions applicable to the Series D Preferred Stock. The Series D Dividends are to be paid annually in arrears on the last day of December each year. The Series D Preferred Stock does not have redemption rights. The stated value per share for the Series D Preferred Stock is $1,000.00 (the “Series D Stated Value”). In the event of any liquidation, dissolution or winding up of the Company, the holders of Series D Preferred Stock will be entitled
 to
receive
, on a pari passu basis with the holders of the Series C Preferred Stock and in preference to any payment or distribution to any holders of the Series B Preferred Stock or common stock, an amount per share equal to the Series D Stated Value plus the amount of any accrued and unpaid dividends.. If, at any time while the Series D Preferred Stock is outstanding, the Company effects any reorganization, merger or sale of the Company or substantially all of its assets (each a “Fundamental Transaction”), a holder of the Series D Preferred Stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series D Preferred Stock immediately prior to the Fundamental Transaction. Each share of Series D Preferred Stock is convertible at any time at the holder’s option into that number of fully paid and nonassessable shares of common stock determined by dividing the Series D Stated Value by the conversion price of $0.80 (subject to adjustment as set forth in the certificate of designation for the Series D Preferred Stock). No fractional shares will be issued upon the conversion of the Series D Preferred Stock. Except as otherwise provided in the Series D Certificate of Designation or as otherwise required by law, the Series D Preferred Stock has no voting rights. As of August 31, 2020, the accrued dividends were approximately $0.5 million or 606,000 shares of common stock.
Series C Convertible Preferred Stock
On March 20, 2019, the Company filed a certificate of designation (the “Series C Certificate of Designation”) to authorize 5,000 shares and issued 3,246 shares of Series C Convertible Preferred Stock, $0.001 par value per share (“Series C Preferred Stock”), at $1,000.00 per share for cash proceeds totaling $3,083,700, net of offering costs of $162,300. On August 29, 2019, the Company issued the remaining 1,754 shares of Series C Preferred Stock at $1,000.00 per share for cash proceeds totaling $1,542,545, net of offering costs and legal fees totaling $211,455. On October 11, 2019, the Company amended its certificate of designation to authorize an increase in authorized Series C Preferred Stock from 5,000 shares to 20,000 shares. Between October 21, 2019 and November 8, 2019, the Company issued an additional 2,788 shares of Series C Convertible Preferred Stock, and on December 6, 2020 the Company issued 415 shares of Series C Convertible Preferred Stock. On January 28, 2020, the Company further amended its Series C Certificate of Designation to reduce the number of authorized shares of Series C Preferred Stock from 20,000 shares to 8,203 shares, all of which remain outstanding as of August 31, 2020. The Series C Certificate of Designation provides, among other things, that holders of Series C Preferred Stock shall be entitled to receive, out of any assets at the time legally available therefor, cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series C Preferred Stock, to be paid per share of Series C Preferred Stock, which dividends shall accrue whether or not declared. Any dividends paid by the Company will first be paid to the holders of Series C Preferred Stock prior and in preference to any payment or distribution to holders of common stock. Dividends on the Series C Preferred Stock are mandatory and cumulative and there are no sinking fund provisions applicable to the Series C Preferred Stock. The Series C Dividends are to be paid annually in arrears on the last day of December each year. The Series C Preferred Stock does not have redemption rights. The stated value per share for the Series C Preferred Stock is $1,000 (the “Series C Stated Value”). In the event of any liquidation, dissolution or winding up of the Company, the Series C Preferred Stock will be
 
e
n
titled to receive
, on a pari passu basis with the holders of the Series D preferred Stock and prior and in preference to any payment or distribution on any shares of common stock, currently outstanding series of preferred stock, or subsequent series of preferred stock, an amount per share equal to the Series C Stated Value and the amount of any accrued and unpaid dividends. If, at any time while the Series C Preferred Stock is outstanding, the Company effects any Fundamental Transaction, a holder of the Series C Preferred Stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series C Preferred Stock immediately prior to the Fundamental Transaction. Each share of Series C Preferred Stock is convertible at any time at the holder’s option into that number of fully paid and nonassessable shares of the Company’s common stock determined by dividing the Series C Stated Value by the conversion price of $0.50 per share (subject to adjustment as set forth in the Certificate of Designation). No fractional shares will be issued upon the conversion of the Series C Preferred Stock. Except as otherwise provided in the Certificate of Designation or as otherwise required by law, the Series C Preferred Stock has no voting rights. As of August 31, 2020, and August 31, 2019, the accrued dividends were approximately $0.9 million or 1,832,000 shares of common stock, and approximately $0.1 million or 296,000 of shares of common stock, respectively.
 
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Table of Contents
Series B Convertible Preferred Stock
During fiscal year 2010, the Company issued 400,000 shares of Series B Convertible Preferred Stock, $0.001 par value per share (“Series B Preferred Stock”) at $5.00 per share for cash proceeds totaling $2,009,000, of which 87,100 shares remained outstanding at August 31, 2020. Each share of the Series B Preferred Stock is convertible into ten shares of the Company’s common stock. At the option of the Company, dividends on the Series B Preferred Stock may be paid in cash or shares of the Company’s common stock, valued at
 
$0.50
per share. The holders of the Series B Preferred Stock can only convert their shares to shares of common stock provided the Company has sufficient authorized shares of common stock 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 Company’s 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 Preferred Stock was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive dividend to the Series B Preferred Stock holders of approximately
$6 million.
The constructive dividend increased and decreased additional paid-in capital by identical amounts. The Series B Preferred Stock has liquidation preferences over the common shares at
$5.00
per share, plus any accrued and unpaid dividends. Dividends are payable to the Series B Preferred Stock 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. Except as provided by law, the Series B holders have no voting rights. On July 30, 2020, the Board declared a dividend and elected to pay such dividend in the form of cash in the aggregate amount of approximately
$0.2 million
to all Series B Convertible Preferred stockholders. The dividend was payable on July 30, 2020, to Series B Convertible Preferred stockholders as of July 30, 2020. As of August 31, 2020, and August 31, 2019, the undeclared dividends were approximately
$2,000 or
 
4,000
 
shares of common stock, and approximately
 
$0.2 million, or 432,000
shares of common stock, respectively.
2019 Short-term Convertible Notes
During the year ended May 31, 2019, the Company issued approximately $5.5 million of nine-month unsecured Convertible Notes (the “2019 Short-term Convertible Notes”) and related warrants to investors for cash. Beginning on September 30, 2019 and through November 14, 2019, principal and interest totaling approximately $5.9 million came due. Holders of notes totaling approximately $1.1 million in principal and accrued interest agreed to extend their notes for another three months, and holders of notes totaling approximately $4.1 million in principal and accrued interest agreed to extend their notes for another six months. One note-holder with principal and accrued interest totaling approximately $0.2 million converted to shares of common stock of the Company. During the quarter ended November 30, 2019, a total of approximately $0.7 million of principal and accrued interest was repaid in cash. In addition, detachable stock warrants to purchase a total of 4,750,000 warrants with a five-year term and an exercise price of $0.30 per share were issued to investors who extended their notes. One investor received 200,000 warrants with a five-year term and an exercise price of $0.45 per share for converting the entire principal and accrued interest on its note. In connection with the Note extensions and conversion, the Company recorded a
non-cash
inducement interest expense of approximately $0.3 million during the quarter ended November 30, 2019. The new principal amount of the 2019 Short-term Convertible Notes, including any accrued but unpaid interest thereon, is convertible at the election of the holder at any time into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. The 2019 Short-term Convertible Notes
incurrs
 simple interest at the annual rate of 10%. Principal and accrued interest, to the extent not previously paid or converted, is due and payable on the maturity date. At the new commitment dates, the Company determined that there was a decrease in the fair value of the embedded conversion option resulting from the modification, the value of which is not required to be recognized under U.S. GAAP.
During the fiscal year ended May 31, 2020, holders of the 2019 Short-term Convertible Note in the aggregate principal amount of
$5,177,980,
including accrued but unpaid interest, tendered a notices of conversion at the stated conversion rate of
 
$0.50 per share. The Company issued 10,357,034
shares of common stock in satisfaction of the conversion notices. The Company recognized approximately
$0.1
 
million of interest expense for the three months ended August 31, 2019.
Long-term Convertible Note—June 2018 Note
On June 26, 2018, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory 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 “June 2018 Note”). The June 2018 Note incurred interest of
10%
and
w
as
 convertible into common stock, at a conversion rate of $0.55 per share. The June 2018 Note provided for conversion in total, or in part, of the outstanding balance, into common stock of the Company 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 June 2018 Note, and allowed for redemption, at any time after six months from the issue date upon five trading days’ notice, subject to maximum monthly redemption amount of $350,000. The securities purchase agreement required 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. As a result of the entry into the January 2019 Note (as defined below), the Company’s obligations under the June 2018 Note were secured by all of the assets of the Company, excluding the Company’s intellectual property.
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Table of Contents
Effective November 15, 2018, the June 2018 Note was amended to allow the investor to redeem the monthly redemption amount of $350,000 in cash or stock, at the lesser of (i) $0.55, or (ii) the lowest closing bid price of the Company’s common stock during the 20
d
ays prior to the conversion, multiplied by a conversion factor of 85%. The variable rate redemption provision meets the definition of a derivative instrument and subsequent to the amendment, it no longer meets the criteria to be considered indexed to the Company’s own stock. As of November 15, 2018, the redemption provision require
d
 bifurcation as a derivative liability at fair value under the guidance in ASC Topic 815,
Derivatives and Hedging
.
The amendment of the June 2018 Note was also evaluated under ASC Topic
470-50-40,
Debt Modifications and Extinguishments
. Based on the guidance, the instruments were determined to be substantially different, and debt extinguishment accounting was applied. The Company recorded approximately $1.5 million as an extinguishment loss, which was the difference in the net carrying value of the June 2018 Note prior to the amendment of approximately $5.4 million, and the fair value of the June 2018 Note and embedded derivatives after the amendment of approximately $6.9 million. The extinguishment loss includes a
write-off
of unamortized debt issuance costs and the debt discount associated with the original the June 2018 Note.
During the year ended May 31, 2020, the Company received a redemption notice requesting an aggregate redemption of $4,476,000 settling the remaining outstanding balance in full, including accrued but unpaid interest. In satisfaction of the redemption notice, the Company issued shares of common stock totaling 8,512,622 and paid cash totaling $525,000 to the June 2018 Note holder in accordance with the terms of the June 2018 Note. Following the redemptions, the June 2018 Note
was
 fully satisfied and there is no outstanding balance.
During the three months ended August 31, 2019, the Company recognized approximately $0.1 million, of interest expense related to the June 2018 Note, respectively.
Long-term Convertible Note—January 2019 Note
On January 30, 2019, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory note with a
two-year
term to the holder of the June 2018 Note in the initial principal amount of $5.7 million
 
(the “January 2019 Note”).
In connection with the issuance of the January 2019 Note, the Company granted a lien against all of the assets of the Company, excluding the Company’s intellectual property, to secure all obligations owed to the investor by the Company (including those under both the January 2019 Note and the June 2018 Note). The investor gave consideration of $5.0 million to the Company, reflecting original issue discount of $0.6 million and issuance costs of $0.1 million. The January 2019 Note
incurred
 interest of 10% and
was
 convertible into common stock, at $0.50 per share. The January 2019 Note
 
provided for conversion
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 Company analyzed the conversion option for derivative accounting treatment under ASC 815 and determined that the embedded conversion option did not qualify for derivative accounting.
The
 
January 2019 Note provided the
investor
with the right to
 redeem any portion of the January 2019 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 monthly redemption amount may be paid in cash or stock, at the Company’s election, at the lesser of (i) $0.50, or (ii) the lowest closing bid price of the Company’s common stock during the 20 days prior to the conversion, multiplied by a conversion factor of 85%. The redemption provision met the definition of a derivative instrument and did not meet the criteria to be considered indexed to the Company’s own stock. Therefore, the redemption provision require
d
 bifurcation as a derivative liability at fair value under the guidance in ASC Topic 815. The securities purchase agreement require
d
 the Company to reserve 20,000,000 shares for future conversions or redemptions.
In conjunction with the January 2019 Note, the investor received a warrant to purchase 5,000,000 shares of common stock with an exercise price of $0.30 which is exercisable until the
5-year
anniversary of the date of issuance. All the warrants were exercised during the fiscal year ending May 31, 2020. The warrant achieved equity classification at inception. The net proceeds of $5.0 million were allocated first to the redemption provision at its fair value, then to the warrants at their relative fair value and the beneficial conversion feature at its intrinsic value as follows (in thousands):
 
    
January 30, 2019
 
Fair value of redemption provision
   $ 1,465  
Relative fair value of equity classified warrants
     858  
Beneficial conversion feature
     2,677  
  
 
 
 
Net proceeds of January 2019 Note
   $ 5,000  
  
 
 
 

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Table of Contents
Under the guidance of ASC 815, after allocation of proceeds to the redemption provision, relative fair value of equity classified warrants and the beneficial conversion feature, there were no proceeds remaining to allocate to convertible note payable. Therefore, principal, accrued interest, debt discount and offering costs will be recognized as interest expense, which represents the accretion of the convertible note payable and related debt discount and issuance costs. During the three months ended August 31, 2019, the Company recognized approximately $0.1 million, of interest expense related to the January 2019 Note. During the year ended May 31, 2020, the Company received a redemption notice from the holder of the Company’s January 2019 Note, requesting an aggregate redemption of approximately
 
$
6,271,000
settling the remaining outstanding balance in full, including accrued interest. In satisfaction of the redemption notice, the Company issued shares of common stock totaling
 
10,842,255
and paid cash totaling
$
850,000
to the January 2019 Note holder in accordance with the terms of the January 2019 Note. Following the redemption, the January 2019 Note has been fully satisfied and there is no outstanding balance.
Long-term Convertible Note—March 2020 Note
On March 31, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a secured convertible promissory note with a
two-year
maturity to an accredited investor in the initial principal amount of $17.1 million
 
(the “March 2020 Note”).
The Company received consideration of $15.0 million, reflecting an original issue discount of $2.1 million. The
March 31 Note 
is secured by all of the assets of the Company, excluding the Company’s intellectual property (including those under 
both the March
2020
Note and the July
2020
Note
, discussed below
).
Interest accrues on the outstanding balance of the
 
March 2020
Note at 10% per annum. Upon the occurrence of an
e
vent of
d
efault, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. In addition, upon any Event of Default, the
i
nvestor may accelerate the outstanding balance payable under the Note, which will increase automatically upon such acceleration by 15%, 10% or 5%, depending on the nature of the Event of Default.
 
Events of default
 
as referenced herein and not otherwise defined shall have the same meaning as set forth in the
March 2020
 Note
transaction documents filed as an exhibit to the Company’s current report on Form 8-K filed on April 6, 2020.
The investor may convert all or any part the outstanding balance of the March 2020 Note into shares of common stock at an initial conversion price of
$4.50
per share upon five trading days’ notice, subject to certain adjustments and volume and ownership limitations specified in the March 2020 Note. On April 3, 2020, the Company amended the March 2020 Note limiting monthly issuances of common stock resulting from conversions to
1,000,000
shares in any calendar month during the first six months and further amended the March 2020 Note to remove this conversion limitation in July 2020. In addition to standard anti-dilution adjustments, the conversion price of the March 2020 Note is subject to full-ratchet anti-dilution protection, pursuant to which the conversion price will be automatically reduced to equal the effective price per share in any new offering by the Company of equity securities that have registration rights, are registered or become registered under the Securities Act of 1933, as amended. The March 2020 Note provides for liquidated damages upon failure to deliver common stock within specified
timeframes, and requires the Company to maintain a share reservation of 3,800,000 shares of common stock.
The
i
nvestor may redeem any portion of the
 
March 2020
Note, at any time after six months from the issue date, upon three trading days’ notice, subject to a Maximum Monthly Redemption Amount of $950,000. The
 
March 2020
Note require
d
the Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the
 March 2020
 Note, in part or in full, at a 15% premium to par value, at any time upon fifteen trading days’ notice.
Pursuant to the terms of the
 
Securitie
s Purchase
 Agreement and the
 March 2020
Note, the Company must obtain the
i
nvestor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $15 million. Upon any such approval, the outstanding principal balance of the
March 2020 Note
 shall increase automatically by 5% upon the issuance of such additional debt.
On July 24, 2020, the Company entered into an amendment to the March 2020 Note to eliminate the 1,000,000 shares per calendar month volume limitation on sales of Conversion Shares.
 
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Table of Contents
The Company
filed an Amendment No. 1 to
 Registration Statement on Form
S-
3
(Registration No. 333-236198)
with the SEC by April 30, 2020 registering a number of shares of common stock sufficient to convert the entire
o
utstanding
b
alance of the
 
March 2020
Note plus, 2,500,000
 
shares of common 
stock
issued in connection with the
exercise of
warrants
, which S-3 was declared effective on May 11, 2020.
The embedded conversion feature in the
 March
 2020
Note was analyzed under ASC 815,
Derivatives and Hedging
, to determine if it achieved equity classification or required bifurcation as a derivative instrument. The embedded conversion feature was considered indexed to the Company’s own stock and met the conditions for equity classification. Accordingly, the embedded conversion feature does not require bifurcation from the host instrument. The Company determined there was no beneficial conversion feature since the effective conversion rate was greater than the market value of the Company’s stock upon issuance.
Certain default put provisions were not considered to be clearly and closely related to the host instrument, but the Company concluded that the value of these default put provisions was
 de minimis
. The Company reconsiders the value of the default put provisions each reporting period to determine if the value becomes material to the financial statements.
The original issue discount of $2.1 million related to the March 2020 Note has been recorded as a discount on the March 2020 Note and the discount has been amortized over the term of the March 2020 Note. Amortization of debt discounts during the three months ended August 31, 2020 and May 31, 2020 amounted to approximately $0.3 million and $0.2 million, respectively, and are recorded as interest expense in the accompanying consolidated statements of operations. The unamortized discount balance for the March 2020 Note of approximately
 
$1.7 million as of August 31, 2020, is being amortized over the term of the
March 2020
Note. From June 26, 2020 to July 27, 2020, the 
investor
converted in aggregate $9,537,500 of combined principal and accrued interest into 2,119,444 shares of common stock at the $4.50 per share conversion price. In connection with these conversions the Company recorded amortization of the debt discount of approximately $917,000.
Long-term Convertible Note—July 2020 Note
On July 29, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a secured convertible promissory note with a
two-year
maturity to an institutional accredited investor in the initial principal amount of $28.5 
million (the “July 2020 Note”). The Company received consideration of
 $25.0 million, reflecting an original issue discount of $3.4 million and issuance costs of $0.1 
million. The July 2020 Note is secured by all of the assets of the Company, excluding the Company’s intellectual property (including those under both the March 
2020
Note and the July 
2020
Note).
Interest
accrues on the outstanding balance of the July 2020 Note at
 
10%
per annum. Upon the occurrence of an event of default, interest accrues at the lesser of
 
22%
per annum or the maximum rate permitted by applicable law. In addition, upon any event of default, the investor may accelerate the outstanding balance payable under the July 2020 Note, which will increase automatically upon such acceleration by
15%, 10% or 5%,
depending on the nature of the event of default. Events of default as referenced herein and not otherwise defined shall have the same meaning as set forth in the July 2020 Note Transaction documents filed as an exhibit to the Company’s current report on Form 8-K filed July 31, 2020.
The investor may convert all or any part the outstanding balance of the July 2020 Note into shares of common stock at an initial conversion price of
$10.00 per share upon five trading days
notice, subject to certain adjustments and volume and ownership limitations specified in the July 2020 Note. In addition to standard anti-dilution adjustments, the conversion price of the July 2020 Note is subject to full-ratchet anti-dilution protection, pursuant to which the conversion price will be automatically reduced to equal the effective price per share in any new offering by the Company of equity securities that have registration rights, are registered or become registered under the Securities Act of 1933, as amended. The July 2020 Note provides for liquidated damages upon failure to deliver common stock within specified timeframes
, and requires the Company to maintain a share reservation of 6,000,000 shares of common stock.
The investor may redeem any portion of the July 2020 Note, at
 
any time after six months from the issue date, upon three trading days’ notice, subject to a Maximum Monthly Redemption Amount of $1,600,000. The
July 2020
Note requires the Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the
July 2020
 
Note, in part or in full, at a 15% premium to par value, at any time upon fifteen trading days’ notice.
Pursuant to the terms of the Agreement and the
July 2020
 
Note, the Company must obtain the
 
i
nvestor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $25 million. Upon any such approval, the outstanding principal balance of the
July 2020
 
Note shall increase automatically by 5% upon the issuance of such additional debt.
 
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Table of Contents
The Company agreed to use commercially reasonable efforts to file a Registration Statement on Form
S-3
with the SEC by September 15, 2020 registering a number of shares of common stock sufficient to convert the entire Outstanding Balance of the July 2020 Note, which
S-3
(Registration
No. 333-248823)
was declared effective on September 25, 2020.
The embedded conversion feature in the July 2020 Note was analyzed under ASC 815,
Derivatives and Hedging
to determine if it achieved equity classification or required bifurcation as a derivative instrument. The embedded conversion feature was considered indexed to the Company’s own stock and met the conditions for equity classification. Accordingly, the embedded conversion feature does not require bifurcation from the host instrument. The Company determined there was no beneficial conversion feature since the effective conversion rate was greater than the market value of the Company’s stock upon issuance.
Certain default put provisions were not considered to be clearly and closely related to the host instrument, but the Company concluded that the value of these default put provisions was
 de minimis
. The Company reconsiders the value of the default put provisions each reporting period to determine if the value becomes material to the financial statements.
The original issue discount of $3.4 million and issuance cost of $0.1 million related to
July 2020 Note
has been recorded as a discount on the
July 2020 Note
and the discount is being amortized over the term of the
July 2020 Note
. Amortization of debt discounts and issuance costs during the three months ended August 31, 2020 amounted to approximately $0.1 million, and are recorded as interest expense in the accompanying consolidated statements of operations. The unamortized discount and issuance costs balance for the
July 2020 Note
of approximately $3.3 million as of August 31, 2020, is being amortized over the term of the
July 2020 Note
.
Note 6 – Derivative Liabilities
The investor and placement agent warrants, issued in connection with a registered direct offering in September 2016, contained 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, whereby such other Person or group acquires more than
50%
of the outstanding common stock). If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a successor entity, then the warrant holder 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,
Distinguishing Liabilities from Equity
, and ASC 815,
Derivatives and Hedging,
and are recorded at fair value. All of the investors and placement agent warrants were exercised during the fiscal year ending May 31, 2020.
The following tables summarize the fair value of the warrant derivative liability and related common shares as of inception date September 15, 2016, prior fiscal year end date May 31, 2020 and current reporting date August 31, 2020 (in thousands):
 
    
Shares

Indexed
    
Derivative

Liability
 
Inception to date September 15, 2016
     7,733     $ 5,179  
Change in fair value of derivative liability
     —         (4,777
  
 
 
   
 
 
 
Balance May 31, 2019
     7,733       402  
Change in fair value of derivative liability
     —         11,547  
Fair value of warrants exercised
     7,733       (11,949
  
 
 
   
 
 
 
Balance May 31, 2020
            
Change in fair value of derivative liability
            
Balance August 31, 2020
         $  
  
 
 
   
 
 
 
Changes in the fair value of the derivative liability are reported as “Change in fair value of derivative liability” in the Consolidated Statements of Operations. The Company recognized approximately $0.1
million
of
non-cash
gain
, due to the changes in the fair value of the liability associated with such classified warrants during the three months ended August 31, 2019.
ASC 820,
Fair Value Measurement
, 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 valuation model.
 
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Table of Contents
The Company estimated the fair value of the warrant derivative liability as of inception date September 15, 2016, May 31, 2019 and August 31, 2019, using the following assumptions:
 
     September 15,
2016
    May 31,
2019
    August 31,
2019
 
Fair value of underlying stock
   $ 0.78     $ 0.39     $ 0.40  
Risk free rate
     1.20     1.94     1.50
Expected term (in years)
     5       2.29       2.04  
Stock price volatility
     106     61     60
Expected dividend yield
                           
Probability of
f
undamental
t
ransaction
     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 Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the fundamental transaction provisions.
As described in Note 5 above, the redemption provision embedded in the June 2018 and January 2019 Notes required bifurcation and measurement at fair value as a derivative. The fair value of the Note redemption provision derivative liabilities was calculated using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the redemption factor. The Company estimated the fair value of the redemptive provision using the following assumptions on the closing date of November 15, 2018, January 30, 2019 and August 31, 2019:
 
                
August 31, 2019
 
 
  
November 15,
2018
 
 
January 30,
2019
   
June
Note
   
January
Note
 
Fair value of underlying stock
   $ 0.57     $ 0.49     $ 0.40     $ 0.40  
Risk free rate
     2.78     2.52     1.76     1.76
Expected term (in years)
     1.61       2       0.82       1.42  
Stock price volatility
     58.8     61     63.8     61.6
Expected dividend yield
                                    
Discount factor
     85     85     85     85
As discussed above, the June 2018 and January 2019 Notes were fully satisfied during the fiscal year ended May 31, 2020 and there is no outstanding balance as of August 31, 2020.
The following table summarizes the fair value of the convertible note redemption provision derivative liability as of inception dates November 15, 2018, January 30, 2019 and August 31, 2019 (in thousands):
 
     Net Proceeds      Derivative Liability  
     Inception date      August 31, 2019  
Inception date June 2018 Note, November 15, 2018
   $ 5,000      $ 1,285      $ 373  
Inception date January 2019 Note, January 30, 2019
     5,000        1,465        1,070  
        
 
 
 
         $  1,443  
        
 
 
 
The Company recognized approximately $0.6
million
of
non-cash
gain, due to the changes in the fair value of the liability associated with such classified redemption provision for the three months ended August 31, 2019.
 
There was no gain or loss for the three months ended August 31, 2020.
Note 7 – Stock Options and Warrants
The Company has one active stock-based equity plan at August 31, 2020, 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 Company’s 2012 annual meeting to replace the 2004 Plan, and was amended by stockholders in February 2015 to increase the number of shares available for issuance from
3,000,000 to 5,000,000
shares of common stock, in March 2016 to increase the number of shares available for issuance fro
m 5,000,000 to 7,000,000
shares of common stock, in August 2017 to increase the number of shares available for issuance from
7,000,000 to 15,000,000
shares of common stock, and in May 2019 to increase the number of shares available for issuance from
15,000,000 to 25,000,000
shares of common stock. As of August 31, 2020, the Company had
261,854
 shares available for future stock-based grants under the 2012 Plan, as amended.
 
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Table of Contents
As described in Note 15 below, on September 30, 2020 the stockholders approved amending and restating the 2012 Plan. As a result of this approval, the total number of shares of common stock available for grant under the 2012 Plan was increased from 25,000,000 shares to 50,000,000 shares, the number of shares available to be issued will be increased on the last day of each fiscal yea
r
in an amount equal to 1% of the total outstanding shares on the last day of the prior fiscal year, and the term of the 2012 plan was extended for an additional ten years to September 30, 2030.
Stock Options
On June 25, 2020, the Company granted directors a portion of their annual stock option awards to purchase an aggregate total of 225,000 shares of common stock. The exercise price of the stock option awards
was
 $6.15
per share, the closing price of
the Company’s common
 
stock on the date of grant. These stock option awards became fully vested effective August 31, 2020 and have a ten-year term. The grant date fair value of these stock options was
$4.46 per share.
During the three months ended August 31, 2020, the Company granted stock options, covering an aggregate of 1,165,000 shares of common stock, to employees
and advisors
with exercise prices ranging between $2.75 and $6.15 per share. These stock option awards vest annually over three years, with
a ten-year term
and grant date fair values ranging between $2.23 and $4.23 per share.
During the three months ended August 31, 2020, the Company issued 100,000 shares of common stock in connection with the exercise of stock options covering an aggregate of 100,000 shares. The stated exercise price of $0.39 per share resulted in aggregate gross
proceeds of approximately
$39,000.
 
 
Warrants
On June 16, 2020, the Company issued compensa
tory
 warrants covering an aggregate of 105,000 shares of common stock to consultants. The warrants have a five-year term and an exercise price of $3.07. The grant date fair value of these warrants was $2.11 per share.
During the quarter ended August 31, 2020, the Company issued 27,927,669 shares of common stock in connection with the exercise of 28,657,889 warrants. The stated exercise price ranged from $0.30 to $1.35 per share, which resulted in aggregate gross proceeds of approximately $13.5 million.
Compensation expense related to stock options
and
warrants for the three months ended August 31, 2020 and August 31, 2019 was approximately $2.0 million and $0.6 million, respectively. The grant date fair value of options, warrants, and common stock vested during the three months ended August 31, 2020 and 2019 was approximately $4.4 million and $0.5 million, respectively. As of August 31, 2020, there was approximately $4.8 million of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 0.97 years.
The following table represents stock option and warrant activity as of and for the three months ended August 31, 2020 (in thousands, except per share data):
 
     Number of
Shares
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Life in
 
Years
     Aggregate Intrinsic
Value
 
Options and warrants outstanding - May 31, 2020
     131,361      $ 0.65        5.79      $ 302,961  
Granted
     1,495      $ 4.10        —          —    
Exercised
     (45,301    $ 0.60        —          —    
Forfeited/expired/cancelled
     (333    $ 1.23        —          —    
  
 
 
          
Options and warrants outstanding - August 31, 2020
     87,222      $ 0.70        4.13      $ 232,949  
  
 
 
          
Outstanding exercisable - August 31, 2020
     84,375      $ 0.67        3.99      $ 227,520