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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, 2021

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)

(360980-8524

(Registrant’s telephone number, including area code)

Not applicable

(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, 2021, there were 660,191,552 shares outstanding of the registrant’s $0.001 par value common stock.

Table of Contents

TABLE OF CONTENTS

PAGE

PART I

3

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

3

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

38

ITEM 4. CONTROLS AND PROCEDURES

38

PART II

40

ITEM 1. LEGAL PROCEEDINGS

40

ITEM 1A. RISK FACTORS

40

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

41

ITEM 4. MINE SAFETY DISCLOSURES

41

ITEM 5. OTHER INFORMATION

41

ITEM 6. EXHIBITS

43

2

Table of Contents

PART I. Financial Information

Item 1. Consolidated Financial Statements

CytoDyn Inc.

Consolidated Balance Sheets

(In thousands, except par value)

August 31, 2021

    

May 31, 2021

(unaudited)

(audited)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash

$

6,533

$

33,943

Restricted cash

 

9

 

Accounts receivable

41

Inventories, net

 

91,558

 

93,479

Prepaid expenses

 

3,381

 

616

Prepaid service fees

 

1,264

 

1,543

Total current assets

 

102,786

 

129,581

Operating leases right-of-use asset

 

665

 

712

Property and equipment, net

 

129

 

134

Intangibles, net

 

1,390

 

1,653

Total assets

$

104,970

$

132,080

Liabilities and Stockholders’ (Deficit) Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

65,938

$

65,897

Accrued liabilities and compensation

 

6,891

 

19,073

Accrued interest on convertible notes

 

2,244

 

2,007

Accrued dividends on convertible preferred stock

 

3,067

 

2,647

Operating leases liabilities

 

162

 

175

Convertible notes payable, net

 

51,333

 

62,747

Warrant exercise proceeds held in escrow

 

9

 

Total current liabilities

 

129,644

 

152,546

Long-term liabilities:

 

  

 

  

Operating leases liabilities

 

519

 

552

Total long-term liabilities

 

519

 

552

Total liabilities

 

130,163

 

153,098

Commitments and Contingencies (Note 9)

 

  

 

  

Stockholders’ (deficit) equity:

 

  

 

  

Preferred Stock, $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, 2021 and May 31, 2021, respectively

 

 

Series C convertible preferred stock, $0.001 par value; 8 authorized; 8 issued and outstanding at August 31, 2021 and May 31, 2021, respectively

 

 

Series B convertible preferred stock, $0.001 par value; 400 shares authorized, 79 shares issued and outstanding at August 31, 2021 and May 31, 2021, respectively

 

 

Common stock, $0.001 par value; 800,000 shares authorized, 644,120 and 626,123 issued and 643,677 and 625,680 outstanding at August 31, 2021 and May 31, 2021, respectively

 

644

 

626

Additional paid-in capital

 

516,816

 

489,650

Accumulated (deficit)

 

(542,653)

 

(511,294)

Treasury stock, $0.001 par value; 443 and 443 shares at August 31, 2021 and May 31, 2021, respectively

 

 

Total stockholders’ (deficit) equity

 

(25,193)

 

(21,018)

Total liabilities and stockholders' (deficit) equity

$

104,970

$

132,080

See accompanying notes to 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,

    

2021

    

2020

    

Revenues:

Product Revenue

$

41

$

Total Revenues

41

Cost of Goods Sold:

Cost of Goods Sold

1

Total Cost of Goods Sold

1

Gross Margin

40

Operating expenses:

 

  

 

  

 

General and administrative

7,617

9,875

Research and development

 

13,784

 

15,188

Amortization and depreciation

 

276

 

505

Total operating expenses

 

21,677

 

25,568

Operating loss

 

(21,637)

 

(25,568)

Other income (expense):

Loss on extinguishment of convertible notes

(4,651)

Legal settlement

(1,941)

Interest expense:

 

 

  

Finance charges

 

(35)

 

(10)

Amortization of discount on convertible notes

 

(952)

 

(1,339)

Amortization of debt issuance costs

 

(28)

 

(4)

Inducement interest expense

 

(9)

 

(3,345)

Interest on convertible notes payable

 

(1,686)

 

(566)

Total interest expense

 

(2,710)

 

(5,264)

Loss before income taxes

 

(30,939)

 

(30,832)

Income tax benefit

 

 

Net loss

$

(30,939)

$

(30,832)

Basic and diluted loss per share

$

(0.05)

$

(0.06)

Basic and diluted weighted average common shares outstanding

 

632,597

 

555,531

See accompanying notes to consolidated financial statements.

4

Table of Contents

CytoDyn Inc.

Consolidated Statement of Changes in Stockholders’ (Deficit) Equity

(Unaudited)

(In thousands)

Preferred stock

Common stock

Treasury stock

    

Additional

    

Accumulated

    

Total stockholders'

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

paid-in capital 

deficit

(deficit) equity

Balance May 31, 2021

96

$

626,123

$

626

443

$

$

489,650

$

(511,294)

$

(21,018)

First Quarter Fiscal Year Ended May 31, 2022

Issuance of stock for convertible note repayment

11,816

12

 

18,483

 

 

18,495

Exercise of stock options

300

 

189

 

 

189

Issuance of common stock upon vesting of stock-based compensation awards

1,014

1

 

(1)

 

 

Stock issued for private offering ($1.00 per share)

2,872

3

 

2,869

 

 

2,872

Private warrant exchange

1,327

1

 

774

 

 

775

Exercise of warrants

668

1

 

502

 

 

503

Inducement interest expense related to private warrant exchange

 

9

 

 

9

Dividends accrued on preferred stock

 

 

(420)

 

(420)

Stock-based compensation

 

2,597

 

 

2,597

Issuance of legal settlement warrants (see Note 6)

 

1,744

 

 

1,744

Net loss for August 31, 2021

 

 

(30,939)

 

(30,939)

Balance August 31, 2021

96

$

644,120

$

644

443

$

$

516,816

$

(542,653)

$

(25,193)

Preferred stock

Common stock

Treasury stock

    

Additional

    

Accumulated

    

Total stockholders'

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

paid-in capital 

deficit

(deficit) equity

Balance May 31, 2020

109

$

519,261

$

519

286

$

$

351,711

$

(354,711)

$

(2,481)

First Quarter Fiscal Year Ended May 31, 2021

Issuance of stock for convertible note repayment

2,119

2

 

9,535

 

 

9,537

Issuance of legal settlement shares

4,000

4

 

(4)

 

 

Exercise of stock options

100

 

39

 

 

39

Stock issued for incentive compensation and tendered for income tax

323

156

 

828

 

 

828

Conversion of Series B preferred stock to common stock

(5)

50

 

 

 

Private warrant exchange

16,544

17

 

7,787

 

 

7,804

Exercise of warrants

27,928

28

 

13,441

 

 

13,469

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 preferred stock ($0.25 per share)

 

 

(243)

 

(243)

Dividends accrued on preferred stock

 

 

(420)

 

(420)

Stock-based compensation

 

2,086

 

 

2,086

Net loss for August 31, 2020

 

 

(30,832)

 

(30,832)

Balance August 31, 2020

104

$

570,325

$

570

442

$

$

388,404

$

(386,206)

$

2,768

See accompanying notes to consolidated financial statements.

5

Table of Contents

CytoDyn Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Three months ended August 31,

    

2021

    

2020

    

Cash flows from operating activities:

 

  

 

  

 

Net loss

$

(30,939)

$

(30,832)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Amortization and depreciation

 

276

 

505

Amortization of debt issuance costs

 

28

 

4

Amortization of discount on convertible notes

 

952

 

1,339

Non-cash warrant issuance cost for legal settlement

1,744

Inventory reserve

1,131

Inducement interest expense

 

9

 

3,345

Stock-based compensation

 

2,597

 

3,692

Loss on extinguishment of convertible notes

 

4,651

 

Changes in operating assets and liabilities:

 

 

  

(Increase) in accounts receivable

(41)

Decrease (increase) in inventories, net

 

790

 

(39,327)

Decrease (increase) in prepaid expenses

(2,486)

199

(Decrease) increase in accounts payable and accrued expenses

 

(10,453)

 

20,127

Net cash used in operating activities

 

(31,741)

 

(40,948)

Cash flows from investing activities:

 

  

 

  

Furniture and equipment purchases

 

(8)

 

(59)

Net cash used in investing activities

 

(8)

 

(59)

Cash flows from financing activities:

 

  

 

  

Proceeds from warrant transactions, net of offering costs

775

7,441

Proceeds from sale of common stock and warrants

 

2,872

 

Proceeds from warrant exercises

 

503

 

13,456

Proceeds from warrant and stock options exercises held in escrow

 

9

 

13

Proceeds from stock option exercises

189

39

Payment of payroll withholdings related to tender of common stock for income tax withholding

(778)

Proceeds from convertible notes payable, net

 

 

25,000

Dividend declared and paid on Series B preferred stock

(243)

Net cash provided by financing activities

 

4,348

 

44,928

Net change in cash

 

(27,401)

 

3,921

Cash and restricted cash, beginning of period

 

33,943

 

14,292

Cash and restricted cash, end of period

$

6,542

$

18,213

Cash and restricted cash consisted of the following:

Cash

$

6,533

$

18,200

Restricted cash

9

13

Total cash and restricted cash

$

6,542

$

18,213

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for interest

$

35

$

11

Non-cash investing and financing transactions:

 

  

 

  

Issuance of common stock for principal and interest of convertible notes

$

14,950

$

9,537

Accrued dividends on convertible preferred stock

$

420

$

420

See accompanying notes to consolidated financial statements.

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CYTODYN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AUGUST 31, 2021

(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 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 for which the Company is focused on developing treatments in the areas of human immunodeficiency virus (“HIV”), cancer, immunology, and novel coronavirus disease (“COVID-19”).

Leronlimab belongs to a class of HIV therapies known as entry inhibitors which block HIV from entering and infecting specific cells. For 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, and non-alcoholic steatohepatitis (“NASH”). For COVID-19, the Company believes leronlimab may be shown to provide therapeutic benefit by enhancing the immune response and also 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 unaudited interim Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiary, CytoDyn Operations Inc., and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and should be read in conjunction with the financial statements, summary of significant accounting policies and footnotes included in the Annual Report on Form 10-K, as amended by Amendment No. 1 filed with the SEC on September 28, 2021, for the year ended May 31, 2021 (the “2021 Form 10-K”). Accordingly, certain disclosures required by U.S. GAAP and normally included in Annual Reports on Form 10-K have been condensed or omitted from this report; however, except as disclosed herein, there has been no material change in the information disclosed in the notes to Consolidated Financial Statements included in the 2021 Form 10-K. All intercompany transactions and balances have been eliminated.

It is the opinion of management that all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. The Company has no items of other comprehensive income or loss; therefore, its net income or loss is identical to its comprehensive income or loss. Operating results for the periods presented are not necessarily indicative of expected results for the full year.

Reclassifications

Certain prior year and prior quarter amounts shown in the accompanying Consolidated Financial Statements have been reclassified to conform to the current period presentation. These reclassifications did not have any effect on the Company’s financial position, results of operations, stockholders’ (deficit) equity, or net cash flows as previously reported.

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

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incurred a net loss of approximately $30.9 million for the three months ended August 31, 2021 and has an accumulated deficit of approximately $542.7 million as of August 31, 2021. These factors, among others, raise substantial doubt about the Company’s 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 Company’s continuation as a going concern is dependent upon its ability to obtain additional operating capital, complete development of its product candidate, leronlimab, obtain approval to commercialize leronlimab from regulatory agencies, continue to outsource manufacturing of leronlimab, and ultimately achieve initial revenues and attain profitability. The Company continues to engage in significant research and development activities related to leronlimab 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 judgments that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the recent coronavirus disease could have on our significant accounting estimates and assumptions. The Company’s estimates are based on historical experience and on various market and other relevant, appropriate assumptions. Significant estimates include, but are not limited to, those relating to stock-based compensation, revenue recognition, research and development expenses, determination of right of use assets under lease transactions and related lease obligations, commitments and contingencies, and the assumptions used to value warrants, warrant modifications and useful lives for property and equipment and related depreciation calculations. Actual results could differ from these 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 as of August 31, 2021 and May 31, 2021 approximated $6.3 million and $33.7 million, respectively.

Identified Intangible Assets

The Company follows the provisions of Accounting Standards Codification (“ASC”) 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 during the three months ended August 31, 2021 and 2020. 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 7.

Revenue Recognition

The Company accounts for and recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company’s revenue is generated solely through the sale of leronlimab. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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Contracts with customers are generally in the form of a written purchase order, that outlines the promised goods and the agreed upon price. Such orders are often accompanied by a master supply or distribution agreement that establishes the terms and conditions, rights of the parties, delivery terms, and pricing. The Company assesses collectability based on a number of factors, including creditworthiness of the customer.

For the Company’s sole contract to date, the customer submits purchase orders for the purchase of a specified quantity of leronlimab vials; therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation. The Company does not offer discounts or rebates.

The transaction price is determined based on the agreed upon rates per vial in the purchase order or master supply agreement applied to the quantity of leronlimab vials that was requested by the customer in the purchase order. As the Company’s contracts include only one performance obligation, the delivery of the product to the customer, all of the transaction price is allocated to the one performance obligation. Therefore, upon delivery of the product quantity equal to the quantity requested in the purchase order, there are no remaining performance obligations. The Company’s shipping and handling activities are considered a fulfillment cost. The Company has elected to exclude all sales and value added taxes from the measurement of the transaction price. The Company has not adjusted the transaction price for significant financing since the time period between the transfer of goods and payment is less than one year.

The Company recognizes revenue at a point in time when control of the products is transferred to the customer. Management applies judgment in evaluating when a customer obtains control of the promised good which is generally when the product is delivered to the customer. The Company’s customer contract includes a standard assurance warranty to guarantee that its products comply with agreed specifications. The Company grants a conditional right of return of product in the customer’s inventory upon an adverse regulatory ruling. The Company continually evaluates the probability of such occurrence and if necessary, will defer revenue recognized based on its estimate of the right of return, which takes into account the probability that an adverse ruling will occur and its estimate of product in the customer’s inventory.

Disaggregation of Revenue

The Company’s s revenues are derived solely from the sale of leronlimab vials. The Company believes the disaggregation of revenues, as seen on the consolidated statement of operations, is an appropriate level of detail for its primary activity.

Contract Assets and Liabilities

The Company’s performance obligations for its contracts with customers are satisfied at a point in time through the delivery of leronlimab vials to its customer. Accordingly, the Company did not have any contract assets or liabilities as of August 31, 2021. The Company did not have revenue during the three months ended August 31, 2020 and did not have any contract assets or liabilities as of that date. For all periods presented, the Company did not recognize revenue from amounts that were included in the contract liability balance at the beginning of each period. In addition, for all periods presented, there was no revenue recognized in a reporting period from performance obligations satisfied in previous periods.

Performance Obligations

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company’s contract, each unit of product delivered to the customer represents a separate performance obligation; therefore, future deliveries of the product are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

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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. Contingent milestone payments that are due to third parties under research and development collaboration arrangements or other contractual agreements are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable. See Notes 8 and 9.

Inventory

The Company values inventory at the lower of cost or net realizable value using the average cost method. Inventories consist of raw materials, bulk drug substance, and drug product in unlabeled vials to be used for commercialization of the Company’s biologic, leronlimab, which is in the regulatory approval process. The consumption of raw materials during production is classified as work-in-progress until saleable. Once it is determined to be in saleable condition, following regulatory approval, inventory is classified as finished goods. Inventory 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 for pre-launch inventory, the Company relies on independent analyses provided by third parties knowledgeable about the range of likely commercial prices comparable to current comparable commercial product.

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 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 status of the Company’s regulatory applications. The Company closely monitors the status of the product within the regulatory review and approval process, including all relevant communications 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.

Anticipated future sales, shelf lives, and expected approval date are considered when evaluating realizability of capitalized inventory. 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. As inventories approach their shelf-life expiration, the Company may perform additional stability testing to determine if the inventory is still viable, which can result in an extension of its shelf-life. Further, in addition to performing additional stability testing, certain raw materials inventory may be sold in its then current condition prior to reaching expiration.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued liabilities, short-term and long-term lease liabilities, and short-term and long-term debt. As of August 31, 2021, 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 instruments. Short-term and long-term debt are reported at amortized cost in the Consolidated Balance Sheets which approximate fair value. The remaining financial instruments are reported in the Consolidated Balance Sheets at amounts that approximate current fair values.

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From time to time, the Company may have derivative financial instruments which are recorded 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.

The fair value hierarchy specifies three levels of inputs that may be used to measure fair value 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 which 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 cannot be corroborated with observable market data.

The Company did not have any assets or liabilities measured at fair value using the fair value hierarchy as of August 31, 2021 and May 31, 2021.

Stock-Based Compensation

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. In accordance with U.S. GAAP, for stock-based awards with defined vesting, the Company recognizes compensation expense over the requisite service periods, when designated milestones have been achieved or when pre-defined performance conditions are met. The Company estimates forfeitures at the time of grant and will revise its estimates, if necessary, in subsequent periods if actual forfeitures differ from such 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.

The Company periodically issues stock options or warrants to consultants and advisors for various services. The Black-Scholes option pricing model, as described more fully above, is used 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.

Debt

The Company has historically issued promissory notes at a discount and has incurred direct debt issuance costs. Debt discount and issuance costs are netted against the debt and amortized over the life of the convertible promissory note in accordance with ASC 470-35, Debt Subsequent Measurement.

Offering Costs

The Company periodically incurs direct incremental costs associated with the sale of equity securities as fully described in Note 10. The costs are recorded as a component of equity upon receipt of the proceeds.

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Loss per Common Share

Basic loss per share is computed by dividing the net loss adjusted for preferred stock dividends 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.

The table below shows the number of shares of common stock issuable upon the exercise, vesting or conversion of outstanding options, warrants, unvested restricted stock including those subject to performance conditions, convertible preferred stock (including undeclared dividends), and convertible notes that 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, 2021 and August 31, 2020:

Three months ended August 31,

(in thousands)

    

2021

    

2020

Stock options, warrants & unvested restricted stock

60,141

86,704

Convertible notes payable

12,000

7,801

Convertible preferred stock

33,858

30,325

Income Taxes

The Company computes its quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to its year-to-date income, except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs.

The Company’s net tax expense for the three months ended August 31, 2021 and August 31, 2020, was zero. The Company’s effective tax rate of 0% differed from the statutory rate of 21% because the Company has a full valuation allowance as of August 31, 2021 and May 31, 2021, as management does not consider it more than likely than not that the benefits from the net deferred taxes will be realized.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The objective of the standard was to improve areas of U.S. GAAP by removing certain exceptions permitted by ASC 740 and clarifying existing guidance to facilitate consistent application. The Company adopted ASU 2019-12 on June 1, 2021. The adoption of ASU 2019-12 did not impact the Company’s statement of financial condition, results of operations, cash flows, or 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 that 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 adopted on June 1, 2021 ASU No. 2020-06 effective for the fiscal year beginning June 1, 2021. The adoption of ASU No. 2020-06 did not affect the Company’s statement of financial condition, results of operations, cash flows or financials statement disclosures.

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Note 3. Inventories

The Company’s pre-launch inventories consist of raw materials purchased for commercial production and work-in-progress inventory related to the substantially completed 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. Work-in-progress consists of bulk drug substance, which is the manufactured drug stored in bulk storage, and drug product, which is the manufactured drug in unlabeled vials.

Inventories as of August 31, 2021 and May 31, 2021 are presented below:

(in thousands)

August 31, 2021

May 31, 2021

Raw materials

$

26,034

$

28,085

Work-in-progress

 

65,524

 

65,394

Total

$

91,558

$

93,479

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 its Phase 3 clinical trial for leronlimab as a combination therapy with HAART for highly treatment-experienced HIV patients, as well as information gathered from meetings with the U.S. Food and Drug Administration (“FDA”) related to its Biologic License Application (“BLA”) for this indication. The Company submitted the last two portions of the BLA (clinical and manufacturing) with the FDA in April 2020 and May 2020. In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA submission requesting additional information. In August and September 2020, the FDA provided written responses to the Company’s questions and met telephonically with key Company personnel and its clinical research organization concerning its BLA to expedite the resubmission of its BLA.

The deficiencies cited by the FDA in its July 2020 Refusal to File letter consisted of administrative deficiencies, omissions, corrections to data presentation, and related analyses and clarifications of manufacturing processes.

The Company is working with new consultants to cure the BLA deficiencies and resubmit the BLA in order to enable the FDA to perform their substantive review. The Company commenced its resubmission of the BLA in July 2021 and currently expects it to be completed in the first calendar quarter of 2022. The Company anticipates that when the FDA completes their review, leronlimab will be approved and market acceptance of leronlimab as a treatment for HIV will be forthcoming, enabling us to realize the amount of pre-launch inventory on-hand prior to shelf-life expiration. Accordingly, management believes the Company will realize future economic benefit in excess of the carrying value of its pre-launch inventory.

The expiration of remaining shelf-life of the Company’s inventories consists of the following as of August 31, 2021 (in thousands):

Expiration period ending August 31,

Remaining shelf-life

Raw materials

Work-in-progress bulk drug product

Work-in-progress finished drug product in vials

Total inventories

2022

0 to 12 months

$

4,547

$

-

$

-

$

4,547

2023

12 or 24 months

17,457

-

-

17,457

2024

24 to 36 months

550

-

-

550

2025

36 to 48 months

1,626

-

45,236

46,862

2026

48 to 60 months

704

-

-

704

Thereafter

60 or more months

2,977

20,288

-

23,265

Total inventories

27,861

20,288

45,236

93,385

Inventories reserved

(1,827)

-

-

(1,827)

Total inventories, net

$

26,034

$

20,288

$

45,236

$

91,558

When the remaining shelf-life of drug product inventory is less than 12 months, it is likely that it will not be accepted by potential customers. However, as inventories approach their shelf-life expiration, the Company may perform

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additional stability testing to determine if the inventory is still viable, which can result in an extension of its shelf-life. Further, in addition to performing additional stability testing, certain raw materials inventory may be sold in its then current condition prior to reaching expiration. If the Company determines it is not likely shelf-life will be able to be extended or the inventory cannot be sold prior to expiration, the Company will write down the inventory to its net realizable value. For the three months ended August 31, 2021 and 2020, the Company recognized expense related to the write-down of obsolete inventory of $1.1 million and none, respectively.

Note 4. Accounts Payable and Accrued Liabilities

As of August 31, 2021 and May 31, 2021, the accounts payable balance was approximately $65.9 million at each period end. As of August 31, 2021 and May 31, 2021, two of the Company’s vendors accounted for approximately 72% and 15% and 72% and 14%, respectively, of the total balance of accounts payable.

The components of accrued liabilities were as follows as of August 31, 2021 and May 31, 2021:

    

As of

(in thousands)

August 31, 2021

May 31, 2021

Accrued compensation and related expense

$

956

$

4,005

Accrued legal settlement and fees

1,216

11,008

Accrued other liabilities

 

4,719

 

4,060

Total accrued liabilities

$

6,891

$

19,073

As of August 31, 2021, the approximately $1.2 million of accrued legal settlement and fees related entirely to accrued legal fees. As of May 31, 2021, the approximately $11.0 million of accrued legal settlement and fees was comprised of approximately $10.6 million related to legal settlements, and the remaining amount related to accrued legal fees.

Note 5. Convertible Instruments

Convertible Preferred Stock

Series D Convertible Preferred Stock

As of August 31, 2021, the Company had authorized 11,737 shares of Series D Convertible Preferred Stock, $0.001 par value per share (“Series D Preferred Stock”), of which 8,452 shares were outstanding. The Series D Certificate of Designation provides, among other things, that holders of Series D Preferred Stock shall be entitled to receive, when and as declared by the Company’s Board of Directors (the “Board”) and 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 D Preferred Stock, which is $1,000 per share (the “Series D Stated Value”). 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 are cumulative, and will accrue and be compounded annually, whether or not declared and whether or not there are any profits, surplus or other funds or assets of the Company legally available therefor. There are no sinking fund provisions applicable to the Series D Preferred Stock. The Series D Preferred Stock does not have redemption rights. Dividends, if declared by the Board, are payable to holders in arrears on December 31 of each year. Subject to the provisions of applicable Delaware law, the holder may elect to be paid in cash or in restricted shares of common stock at the rate of $0.50 per share. As of August 31, 2021 and May 31, 2021, the accrued dividends were approximately $1.3 million, or approximately 2.6 million shares of common stock, and approximately $1.1 million, or approximately 2.2 million shares of common stock, respectively.

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 Convertible Preferred Stock,

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$0.001 par value per share (“Series C Preferred Stock”), and in preference to any payment or distribution to any holders of the Series B Convertible Preferred Stock, $0.001 par value per share (“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 consolidation of the Company, sale of substantially all of its assets, or other specified transaction (each, as defined in the Series D Certificate of Designation, 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 Series D Certificate of Designation). 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.

Series C Convertible Preferred Stock

As of August 31, 2021, the Company had authorized 8,203 shares of Series C Convertible Preferred Stock, $0.001 par value per share (“Series C Preferred Stock”), of which 8,203 shares were outstanding. The Series C Certificate of Designation provides, among other things, that holders of Series C Preferred Stock shall be entitled to receive, when and as declared by the Board and 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, which is $1,000 per share (the “Series C Stated Value”). Any dividends paid by the Company will 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 cumulative, and will accrue and be compounded annually, whether or not declared and whether or not there are any profits, surplus or other funds or assets of the Company legally available therefor. There are no sinking fund provisions applicable to the Series C Preferred Stock. The Series C Preferred Stock does not have redemption rights. Dividends, if declared by the Board, are payable to holders in arrears on December 31 of each year. Subject to the provisions of applicable Delaware law, the holder may elect to be paid in cash or in restricted shares of common stock at the rate of $0.50 per share. As of August 31, 2021, and May 31, 2021, the accrued dividends were approximately $1.7 million or, approximately 3.4 million shares of common stock, and approximately $1.5 million, or approximately 3.0 million shares of common stock, respectively.

In the event of any liquidation, dissolution or winding up of the Company, the holders of Series C Preferred Stock will be entitled to receive, on a pari passu basis with the holders of the Series D 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 C Stated Value plus the amount of any accrued and unpaid dividends. If, at any time while the Series C Preferred Stock is outstanding, the Company effects a reorganization, merger or consolidation of the Company, sale of substantially all of its assets, or other specified transaction (each, as defined in the Series C Certificate of Designation, a “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 common stock determined by dividing the Series C Stated Value by the conversion price of $0.50 (subject to adjustment as set forth in the Series C Certificate of Designation). No fractional shares will be issued upon the conversion of the Series C Preferred Stock. Except as otherwise provided in the Series C Certificate of Designation or as otherwise required by law, the Series C Preferred Stock has no voting rights.

Series B Convertible Preferred Stock

As of August 31, 2021, the Company had authorized 400,000 shares of Series B Preferred Stock, of which 79,000 shares were outstanding. Each share of the Series B Preferred Stock is convertible into ten (10) shares of the Company’s common stock. Dividends are payable to the Series B Preferred stockholders when and as declared by the Board at the rate of $0.25 per share per annum. Such dividends are cumulative and accrue whether or not declared and

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whether or not there are any profits, surplus or other funds or assets of the Company legally available therefor. 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 if the Company has sufficient authorized shares of common stock at the time of conversion. The Series B Preferred Stock has liquidation preferences over the common shares at $5.00 per share, plus any accrued and unpaid dividends. Except as provided by law, the Series B holders have no voting rights. As of August 31, 2021, and May 31, 2021, the undeclared dividends were approximately $22,700, or 45,500 shares of common stock, and approximately $17,800, or approximately 35,500 shares of common stock, respectively.

Convertible Notes

The following schedule sets forth a rollforward of the outstanding balance of convertible notes from May 31, 2021 to August 31, 2021:

(in thousands)

November 2020 Note

April 2, 2021 Note

April 23, 2021 Note

Outstanding balance May 31, 2021

$

13,554

$

25,715

$

25,485

Consideration received

-

-

-

Amortization of issuance discount and costs

98

441

441

Interest expense accrued

192

750

745

Cash repayments

-

-

-

Conversions

-

-

-

Fair market value of shares exchanged for repayment

(18,495)

-

-

Debt extinguishment loss

4,651

-

-

Outstanding balance August 31, 2021

$

-

$

26,906

$

26,671

Long-term Convertible Note—November 2020 Note

On November 10, 2020, the Company entered into a securities purchase agreement pursuant to which the Company issued a secured convertible promissory note with a two-year term to an institutional accredited investor in the initial principal amount of $28.5 million (the “November 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 November 2020 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

During the year ended May 31, 2021 and subsequent to the issuance of the November 2020 Note, the Company and the institutional investor entered into separately negotiated agreements whereby portions of the November 2020 Note were portioned into new notes, and the November 2020 Note was reduced by the balance of the new notes. The new notes were exchanged for shares of the Company’s common stock during the year ended May 31, 2021. Please refer to Note 5, Convertible Instruments, in the Company’s 2021 Form 10-K for additional discussion.

Interest accrues on the outstanding balance of the November 2020 Note at an annual rate of 10%. Upon the occurrence of an event of default, interest will accrue 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 November 2020 Note; upon such acceleration, the outstanding balance will increase automatically by 15%, 10% or 5%, depending on the nature of the event of default.

The investor may convert all or any part the outstanding balance of the November 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 November 2020 Note. In addition to standard anti-dilution adjustments, the conversion price of the November 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 “Securities Act”). The November 2020 Note provides for liquidated damages

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upon failure to deliver common stock within specified timeframes and requires the Company to maintain a share reservation of 6.0 million shares of common stock.

On June 11, 2021, June 21, 2021 and June 30, 2021, in satisfaction of the June 2021 debt redemption amount, the Company and the investor entered into separately negotiated exchange agreements, pursuant to which the November 2020 Note was partitioned into new notes (the “June 2021 Partitioned Notes”) with a principal balance equal to $6.0 million. The Company and the holder of the November 2020 Note agreed to defer the remaining $1.5 million June 2021 debt redemption amount. The outstanding balance of the November 2020 Note was reduced by the June 2021 Partitioned Notes, and the Company and the investor exchanged the June 2021 Partitioned Notes for approximately 4.2 million shares of the Company’s common stock.

On July 14, 2021 and July 27, 2021, in satisfaction of the July 2021 debt reduction amount, the Company and the November 2020 Note holder entered into exchange agreements, pursuant to which the November 2020 Note was partitioned into new notes (the “July 2021 Partitioned Notes”) with a principal amount equal to $4.0 million. The Company and the holder of the November 2020 Note agreed to defer the remaining $3.5 million July 2021 debt redemption amount. The outstanding balance of the November 2020 Note was reduced by the July 2021 Partitioned Notes. The Company and the investor exchanged the July 2021 Partitioned Notes for approximately 3.3 million shares of common stock.

On August 4, 2021, August 16, 2021 and August 30, 2021, in satisfaction of the August 2021 debt reduction amount, the Company and the November 2020 Note holder entered into exchange agreements, pursuant to which the remaining principal and accrued balance of the November 2020 Note was partitioned into new notes (the “August 2021 Partitioned Notes”) with a principal amount equal to approximately $4.9 million. The Company and the holder of the November 2020 Note agreed to defer the remaining approximately $2.6 million August 2021 debt reduction amount. The Company and the investor exchanged the August 2021 Partitioned Notes for approximately 4.4 million shares of common stock. Following the redemption, the November 2020 Note has been fully satisfied and there is no outstanding balance as of August 31, 2021.

In connection with the June 2021 Partitioned Notes, July 2021 Partitioned Notes, and August 2021 Partitioned Notes, the Company analyzed the restructured notes for potential requirement of debt extinguishment accounting under ASC 470, Debt Modifications and Extinguishments. The Company concluded debt extinguishment accounting treatment to be necessary and accordingly recorded aggregate debt extinguishment loss of approximately $4.7 million for the three months ended August 31, 2021, as the difference between the fair market value of the shares issued and the carrying value of the debt retired, which included the amortization of the relative debt discount and issuance costs.

Amortization of debt discounts and issuance costs associated with the November 2020 Note during the three months ended August 31, 2021 amounted to approximately $0.1 million recorded as interest expense.

Long-term Convertible Note—April 2, 2021 Note

On April 2, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued a secured convertible promissory note with a two-year term with the holder of the November 2020 Note in the initial principal amount of $28.5 million (the “April 2, 2021 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 April 2, 2021 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

Interest accrues on the outstanding balance of the April 2, 2021 Note at an annual rate of 10%. Upon the occurrence of an event of default, interest will accrue 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 April 2, 2021 Note; upon such acceleration, the outstanding balance will increase automatically by 15%, 10% or 5%, depending on the nature of the event of default.

The investor may convert all or any part the outstanding balance of the April 2, 2021 Note into shares of common stock at an initial conversion price of $10.00 per share upon five trading days’ notice, subject to certain

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adjustments and volume and ownership limitations specified in the April 2, 2021 Note. In addition to standard anti-dilution adjustments, the conversion price of the April 2, 2021 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. The April 2, 2021 Note provides for liquidated damages upon failure to deliver common stock within specified timeframes and requires the Company to maintain a share reservation of 6.0 million shares of common stock.

The investor may redeem any portion of the April 2, 2021 Note, at any time beginning six months after the issue date, upon three trading days’ notice, subject to a maximum monthly redemption amount of $3.5 million. The April 2, 2021 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 April 2, 2021 Note, in part or in full, plus a 15% premium, at any time upon 15 trading days’ notice. In addition, beginning in the month of May 2021 and for each of the following five months, the Company is obligated to reduce the outstanding balance of the April 2, 2021 Note by $7.5 million per month (the “Debt Reduction Amount”). Payments the Company makes under the November 2020 and April 23, 2021 Notes may be applied toward the payment of each Debt Reduction Amount. These payments were not subject to the 15% prepayment premium, which would otherwise be triggered if the Company were to make payments against such notes exceeding the allowed maximum monthly redemption amount. Consistent with ASC-470-50-40-10, Debt Modifications and Extinguishments, the Company will assess the restructuring of the outstanding agreements with the investor as either a debt modification or debt extinguishment through performance of the 10% cash flow test. The Company will assess if the change in present value of future cash flows is less than 10% for all modifications, and therefore, accounted for the restructuring as a debt modification.

Pursuant to the terms of the securities purchase agreement and the April 2, 2021 Note, the Company must obtain the investor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $50.0 million. In the event of any such approval, the outstanding principal balance of the April 2, 2021 Note will increase automatically by 5% upon the issuance of such additional debt.

The Company filed a Registration Statement on Form S-3 (Registration No. 333-258944) with the SEC on August 19, 2021, which was declared effective on October 6, 2021, registering a number of shares of common stock sufficient to convert the entire principal balance of the April 2, 2021 Note and the April 23, 2021 Note described below.

The embedded conversion feature in the April 2, 2021 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 common 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 evaluates the value of the default put provisions each reporting period to determine if the value becomes material to the financial statements.

Amortization of debt discounts and issuance costs associated with the April 2, 2021 Note during the three months ended August 31, 2021 was approximately $0.4 million. The unamortized discount and issuance costs balance for the April 2, 2021 Note is approximately $2.8 million as of August 31, 2021. The accrued interest balance for the April 2, 2021 Note is approximately $1.2 million as of August 31, 2021, which included approximately $0.7 million of interest expense for the three months ended August 31, 2021. The outstanding balance on the April 2, 2021 Note, including accrued interest, was approximately $29.7 million as of August 31, 2021.

The Company and the holder of the April 2, 2021 Note agreed to defer the September 2021 Debt Redemption Amount of $7.5 million.

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Long-term Convertible Note—April 23, 2021 Note

On April 23, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued a secured convertible promissory note with a two-year term to an institutional accredited investor affiliated with the holder of the November 2020 and April 2, 2021 Notes in the initial principal amount of $28.5 million (the “April 23, 2021 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 April 23, 2021 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

Interest accrues on the outstanding balance of the April 23, 2021 Note at an annual rate of 10%. Upon the occurrence of an event of default, interest will accrue 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 April 23, 2021 Note; upon such acceleration, the outstanding balance will increase automatically by 15%, 10% or 5%, depending on the nature of the event of default. The events of default are listed in Section 4 of the April 23, 2021 Note filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 29, 2021 and incorporated by reference.

The investor may convert all or any part the outstanding balance of the April 23, 2021 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 April 23, 2021 Note. In addition to standard anti-dilution adjustments, the conversion price of the April 23, 2021 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. The April 23, 2021 Note provides for liquidated damages upon failure to deliver common stock within specified timeframes and requires the Company to maintain a share reservation of 6.0 million shares of common stock.

The investor may redeem any portion of the April 23, 2021 Note, at any time beginning six months after the issue date, upon three trading days’ notice, subject to a maximum monthly redemption amount of $7.0 million. The April 23, 2021 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 April 23, 2021 Note, in part or in full, plus a 15% premium, at any time upon 15 trading days’ notice.

Pursuant to the terms of the securities purchase agreement and the April 23, 2021 Note, the Company must obtain the investor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $75.0 million. In the event of any such approval, the outstanding principal balance of the April 23, 2021 Note will increase automatically by 5% upon the issuance of such additional debt.

The embedded conversion feature in the April 23, 2021 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 common 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 evaluates the value of the default put provisions each reporting period to determine if the value becomes material to the financial statements.

Amortization of debt discounts and issuance costs associated with the April 23, 2021 Note during the three months ended August 31, 2021 was approximately $0.4 million. The unamortized discount and issuance costs balance for the April 23, 2021 Note was approximately $2.9 million as of August 31, 2021. The accrued interest balance for the April 23, 2021 Note was approximately $1.0 million at August 31, 2021, which included approximately $0.7 million of interest expense for the three months ended August 31, 2021. The outstanding balance on the April 23, 2021 Note, including accrued interest, was approximately $29.5 million as of August 31, 2021.

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Note 6. Equity Awards and Warrants

The Company has one active stock-based equity plan at August 31, 2021, the CytoDyn Inc. Amended and Restated 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 2012 Plan coverered a total of 50 million shares of common stock. Effective June 1, 2021, the amount covered and available shares under the 2012 Plan increased approximately by 6.3 million shares resulting from a provision in the 2012 Plan under which the total number of shares available to be issued automatically increases on the first day of each fiscal year in an amount equal to 1% of the total outstanding shares on the last day of the prior fiscal year, unless the Board determines otherwise before the fiscal yearend. As of August 31, 2021, there were approximately 26.1 million shares remaining available for future stock-based grants under the 2012 Plan.

Stock Options and Other Equity Awards

During the three months ended August 31, 2021, the Company granted stock options, covering a total of approximately 3.0 million shares of common stock, to employees with an exercise price of $1.32 per share. These stock options vest in three equal installments beginning on the first anniversary of the grant date and have a ten-year term and a grant date fair value of $1.00 per share.

During the three months ended August 31, 2021, the Company issued approximately 0.3 million shares of common stock in connection with the exercise of stock options. The stated exercise price was $0.63 per share, which resulted in aggregate gross proceeds of approximately $0.2 million to the Company.

During the three months ended August 31, 2021, the Company issued approximately 0.4 million shares of common stock in connection with the vesting of performance stock units (“PSUs”) awarded in June 2020. The PSUs were subject to the Compensation Committee’s determination of the level of achievement of certain performance conditions set forth in the respective award agreements. The original awards covered a total of 4.35 million PSUs, of which approximately 3.9 million PSUs were forfeited. In connection with the approximate 0.4 million shares of common stock that vested, the Company recognized approximately $1.3 million in stock-based compensation expense in the fourth quarter of fiscal year 2021.

During the three months ended August 31, 2021, the Company issued approximately 0.4 million shares of common stock in connection with the time-based vesting of restricted stock units (“RSUs”). The Company incurred $0.3 million in stock-based compensation expense during the three months ended August 31, 2021 related to RSUs. Also, during the three months ended August 31, 2021, certain members of management received shares of fully vested common stock in lieu of a portion of their cash bonus for services in fiscal year 2021 totaling approximately 0.2 million shares of common stock. The Company recognized $0.3 million of expense for these shares in lieu of cash bonus during the fourth quarter of fiscal year 2021.

Warrants

In connection with private warrant exchange agreements entered into during the three months ended August 31, 2021, the Company issued a total of approximately 0.7 million shares of common stock in connection with the exercise of warrants for the purchase of 0.7 million shares issued in 2018 and 2019. The stated exercise price of the original warrants ranged from $0.45 to $1.35 per share. Gross proceeds of the private warrant exchange transactions totaled approximately $0.5 million. See Note 10 below for additional information.

Compensation expense related to stock options and warrants, for the three months ended August 31, 2021 and August 31, 2020, totaled approximately $2.6 million and $2.0 million, respectively. Additionally, during the three months ended August 31, 2021, the Company settled a dispute in part by the issuance of warrants covering 1.6 million shares of common stock that expire in seven years and have a stated exercise price of $0.40 per share.

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The following table represents stock option and warrant activity as of and for the three months ended August 31, 2021:

Weighted 

average

Weighted

remaining

Aggregate

Number of

average

contractual

intrinsic

(in thousands, except per share data)

    

shares

    

exercise price

    

life in years

    

value

Options and warrants outstanding May 31, 2021

 

61,573

$

0.95

 

4.40

$

68,756

Granted

 

5,268

$

1.15

 

 

Exercised

 

(1,632)

$

0.66

 

 

Forfeited or expired and cancelled

 

(5,766)

$

0.73

 

 

Options and warrants outstanding August 31, 2021

 

59,443

$

0.99

 

4.14

$

36,673

Outstanding exercisable August 31, 2021

 

52,537

$

0.84

 

3.52

$

35,931

As of August 31, 2021, approximately 10.7 million outstanding stock options were vested, approximately 6.8 million outstanding stock options were unvested, and all outstanding warrants were exercisable.

Note 7. Acquisition of Patents and Intangibles

The following table presents intangible assets as of August 31, 2021 and May 31, 2021, inclusive of patents:

(in thousands)

    

August 31, 2021

    

May 31, 2021

Leronlimab (PRO 140) patent

$

3,500

$

3,500

ProstaGene, LLC intangible asset acquisition, net of impairment

 

2,926

2,926

Website development costs