UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1933 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(Registrant’s telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
☒ | Accelerated Filer | ☐ | |
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Non-accelerated Filer | ☐ | Smaller Reporting Company | |
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| 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
On September 30, 2021, there were
TABLE OF CONTENTS
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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 |
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Current assets: |
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Cash | $ | | $ | | ||
Restricted cash |
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Accounts receivable | | — | ||||
Inventories, net |
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Prepaid expenses |
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Prepaid service fees |
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Total current assets |
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Operating leases right-of-use asset |
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Property and equipment, net |
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Intangibles, net |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders’ (Deficit) Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued liabilities and compensation |
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Accrued interest on convertible notes |
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Accrued dividends on convertible preferred stock |
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Operating leases liabilities |
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Convertible notes payable, net |
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Warrant exercise proceeds held in escrow |
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Total current liabilities |
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Long-term liabilities: |
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Operating leases liabilities |
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Total long-term liabilities |
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Total liabilities |
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Commitments and Contingencies (Note 9) |
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Stockholders’ (deficit) equity: |
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Preferred Stock, $ |
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Series D convertible preferred stock, $ |
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Series C convertible preferred stock, $ |
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Series B convertible preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated (deficit) |
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Treasury stock, $ |
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Total stockholders’ (deficit) equity |
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Total liabilities and stockholders' (deficit) equity | $ | | $ | |
See accompanying notes to consolidated financial statements.
3
CytoDyn Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three months ended August 31, | |||||||
| 2021 |
| 2020 |
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Revenues: | |||||||
Product Revenue | $ | | $ | — | |||
Total Revenues | | — | |||||
Cost of Goods Sold: | |||||||
Cost of Goods Sold | | — | |||||
Total Cost of Goods Sold | | — | |||||
Gross Margin | | — | |||||
Operating expenses: |
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General and administrative | | | |||||
Research and development |
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Amortization and depreciation |
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Total operating expenses |
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Operating loss |
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Other income (expense): | |||||||
Loss on extinguishment of convertible notes | ( | — | |||||
Legal settlement | ( | — | |||||
Interest expense: |
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Finance charges |
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Amortization of discount on convertible notes |
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Amortization of debt issuance costs |
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Inducement interest expense |
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Interest on convertible notes payable |
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Total interest expense |
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Loss before income taxes |
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Income tax benefit |
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Net loss | $ | ( | $ | ( | |||
Basic and diluted loss per share | $ | ( | $ | ( | |||
Basic and diluted weighted average common shares outstanding |
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See accompanying notes to consolidated financial statements.
4
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 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( | |||||||||
First Quarter Fiscal Year Ended May 31, 2022 | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — | — | | | — | — |
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Exercise of stock options | — | — | | — | — | — |
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Issuance of common stock upon vesting of stock-based compensation awards | — | — | | | — | — |
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Stock issued for private offering ($ | — | — | | | — | — |
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Private warrant exchange | — | — | | | — | — |
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Exercise of warrants | — | — | | | — | — |
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Inducement interest expense related to private warrant exchange | — | — | — | — | — | — |
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Dividends accrued on preferred stock | — | — | — | — | — | — |
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Stock-based compensation | — | — | — | — | — | — |
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Issuance of legal settlement warrants (see Note 6) | — | — | — | — | — | — |
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Net loss for August 31, 2021 | — | — | — | — | — | — |
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Balance August 31, 2021 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( |
Preferred stock | Common stock | Treasury stock |
| Additional |
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| Total stockholders' | ||||||||||||||||
| Shares |
| Amount |
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| Amount |
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| Amount | paid-in capital | deficit | (deficit) equity | ||||||||||
Balance May 31, 2020 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( | |||||||||
First Quarter Fiscal Year Ended May 31, 2021 | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — | — | | | — | — |
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Issuance of legal settlement shares | — | — | | | — | — |
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Exercise of stock options | — | — | | — | — | — |
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Stock issued for incentive compensation and tendered for income tax | — | — | | — | | — |
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Conversion of Series B preferred stock to common stock | ( | — | | — | — | — |
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Private warrant exchange | — | — | | | — | — |
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Exercise of warrants | — | — | | | — | — |
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Inducement interest expense related to private warrant exchange | — | — | — | — | — | — |
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Offering costs related to private warrant exchange | — | — | — | — | — | — |
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Dividend declared and paid on Series B preferred stock ($ | — | — | — | — | — | — |
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Dividends accrued on preferred stock | — | — | — | — | — | — |
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Stock-based compensation | — | — | — | — | — | — |
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Net loss for August 31, 2020 | — | — | — | — | — | — |
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Balance August 31, 2020 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | |
See accompanying notes to consolidated financial statements.
5
CytoDyn Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three months ended August 31, | |||||||
| 2021 |
| 2020 |
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Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Amortization and depreciation |
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Amortization of debt issuance costs |
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Amortization of discount on convertible notes |
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Non-cash warrant issuance cost for legal settlement | | — | |||||
Inventory reserve | | — | |||||
Inducement interest expense |
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Stock-based compensation |
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Loss on extinguishment of convertible notes |
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Changes in operating assets and liabilities: |
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(Increase) in accounts receivable | ( | — | |||||
Decrease (increase) in inventories, net |
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Decrease (increase) in prepaid expenses | ( | | |||||
(Decrease) increase in accounts payable and accrued expenses |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Furniture and equipment purchases |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from warrant transactions, net of offering costs | | | |||||
Proceeds from sale of common stock and warrants |
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Proceeds from warrant exercises |
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Proceeds from warrant and stock options exercises held in escrow |
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Proceeds from stock option exercises | | | |||||
Payment of payroll withholdings related to tender of common stock for income tax withholding | — | ( | |||||
Proceeds from convertible notes payable, net |
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Dividend declared and paid on Series B preferred stock | — | ( | |||||
Net cash provided by financing activities |
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Net change in cash |
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Cash and restricted cash, beginning of period |
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Cash and restricted cash, end of period | $ | | $ | | |||
Cash and restricted cash consisted of the following: | |||||||
Cash | $ | | $ | | |||
Restricted cash | | | |||||
Total cash and restricted cash | $ | | $ | | |||
Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest | $ | | $ | | |||
Non-cash investing and financing transactions: |
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Issuance of common stock for principal and interest of convertible notes | $ | | $ | | |||
Accrued dividends on convertible preferred stock | $ | | $ | |
See accompanying notes to consolidated financial statements.
6
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
7
incurred a net loss of approximately $
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 $
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
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
or as of August 31, 2021. The Company did not have during the three months ended August 31, 2020 and did not have any contract or 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.
10
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
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 | | | |||
Convertible notes payable | | | |||
Convertible preferred stock | | |
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
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 | $ | | $ | | ||
Work-in-progress |
| |
| | ||
Total | $ | | $ | |
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
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 | $ | | $ | - | $ | - | $ | | |||||
2023 | 12 or 24 months | | - | - | | |||||||||
2024 | 24 to 36 months | | - | - | | |||||||||
2025 | 36 to 48 months | | - | | | |||||||||
2026 | 48 to 60 months | | - | - | | |||||||||
Thereafter | 60 or more months | | | - | | |||||||||
Total inventories | | | | | ||||||||||
Inventories reserved | ( | - | - | ( | ||||||||||
Total inventories, net | $ | | $ | | $ | | $ | |
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 $
Note 4. Accounts Payable and Accrued Liabilities
As of August 31, 2021 and May 31, 2021, the accounts payable balance was approximately $
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 | $ | | $ | | ||
Accrued legal settlement and fees | | | ||||
Accrued other liabilities |
| |
| | ||
Total accrued liabilities | $ | | $ | |
As of August 31, 2021, the approximately $
Note 5. Convertible Instruments
Convertible Preferred Stock
Series D Convertible Preferred Stock
As of August 31, 2021, the Company had authorized
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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$
Series C Convertible Preferred Stock
As of August 31, 2021, the Company had authorized
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 $
Series B Convertible Preferred Stock
As of August 31, 2021, the Company had authorized
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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 $
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 | $ | | $ | | $ | | |||
Consideration received | - | - | - | ||||||
Amortization of issuance discount and costs | | | | ||||||
Interest expense accrued | | | | ||||||
Cash repayments | - | - | - | ||||||
Conversions | - | - | - | ||||||
Fair market value of shares exchanged for repayment | ( | - | - | ||||||
Debt extinguishment loss | | - | - | ||||||
Outstanding balance August 31, 2021 | $ | - | $ | | $ | |
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
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
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 $
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upon failure to deliver common stock within specified timeframes and requires the Company to maintain a share reservation of
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 $
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 $
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 $
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 $
Amortization of debt discounts and issuance costs associated with the November 2020 Note during the three months ended August 31, 2021 amounted to approximately $
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
Interest accrues on the outstanding balance of the April 2, 2021 Note at an annual rate of
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 $
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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
The investor may redeem any portion of the April 2, 2021 Note, at any time beginning
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 $
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 $
The Company and the holder of the April 2, 2021 Note agreed to defer the September 2021 Debt Redemption Amount of $
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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
Interest accrues on the outstanding balance of the April 23, 2021 Note at an annual rate of
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 $
The investor may redeem any portion of the April 23, 2021 Note, at any time beginning
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 $
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 $
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Note 6. Equity Awards and Warrants
The Company has
Stock Options and Other Equity Awards
During the three months ended August 31, 2021, the Company granted stock options, covering a total of approximately
During the three months ended August 31, 2021, the Company issued approximately
During the three months ended August 31, 2021, the Company issued approximately
During the three months ended August 31, 2021, the Company issued approximately
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
Compensation expense related to stock options and warrants, for the three months ended August 31, 2021 and August 31, 2020, totaled approximately $
20
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 |
| | $ | |
| $ | | |||
Granted |
| | $ | |
| — |
| — | ||
Exercised |
| ( | $ | |
| — |
| — | ||
Forfeited or expired and cancelled |
| ( | $ | |
| — |
| — | ||
Options and warrants outstanding August 31, 2021 |
| | $ | |
| $ | | |||
Outstanding exercisable August 31, 2021 |
| | $ | |
| $ | |
As of August 31, 2021, approximately
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 | $ | | $ | | ||
ProstaGene, LLC intangible asset acquisition, net of impairment |
| | | |||
Website development costs |