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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

(Amendment No. 1)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2022

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, 2022, there were 812,825,217 shares outstanding of the registrant’s $0.001 par value common stock.

Table of Contents

TABLE OF CONTENTS

PAGE

PART I

4

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

4

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

27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

40

ITEM 4. CONTROLS AND PROCEDURES

40

PART II

42

ITEM 1. LEGAL PROCEEDINGS

42

ITEM 1A. RISK FACTORS

42

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

42

ITEM 6. EXHIBITS

43

2

Table of Contents

EXPLANATORY NOTE

This Amendment No. 1 has been filed solely to complete the interactive data file generated as part of our Quarterly Report on Form 10-Q for the quarterly period ended August 31, 2022 filed on October 11, 2022 (the “Original Quarterly Report”), with a table presented in Note 6, Equity Awards, discussing Black-Scholes valuation assumptions, which was included in Item 1 of Part I of the Original Quarterly Report but which was omitted from the interactive data file generated on October 11, 2022. Other than the inclusion in this Amendment No. 1 of new certifications required by management (and related amendment to the exhibit index to reflect the addition of such certifications), this Amendment No. 1 speaks only as of the date of the Original Quarterly Report and does not modify or update any other disclosures contained in the Original Quarterly Report.

3

Table of Contents

PART I. Financial Information

Item 1. Consolidated Financial Statements

CytoDyn Inc.

Consolidated Balance Sheets

(Unaudited, in thousands, except par value)

August 31, 2022

    

May 31, 2022

Assets

 

Current assets:

 

 

  

Cash

$

4,676

$

4,231

Prepaid expenses

 

4,143

 

5,198

Prepaid service fees

 

1,038

 

1,086

Total current assets

 

9,857

 

10,515

Inventories, net

17,929

17,929

Other non-current assets

 

608

 

741

Total assets

$

28,394

$

29,185

Liabilities and Stockholders’ Deficit

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

68,991

$

67,974

Accrued liabilities and compensation

 

5,014

 

8,995

Accrued interest on convertible notes

 

7,120

 

5,974

Accrued dividends on convertible preferred stock

 

4,361

 

3,977

Convertible notes payable, net

 

36,833

 

36,241

Total current liabilities

 

122,319

 

123,161

Operating leases

 

387

 

422

Total liabilities

 

122,706

 

123,583

Commitments and Contingencies (Note 9)

 

  

 

  

Stockholders’ deficit:

 

  

 

  

Preferred stock, $0.001 par value; 5,000 shares authorized:

 

  

 

  

Series B convertible preferred stock, $0.001 par value; 400 authorized; 19 issued and outstanding at August 31, 2022 and May 31, 2022, respectively

 

 

Series C convertible preferred stock, $0.001 par value; 8 authorized; 6 and 7 issued and outstanding at August 31, 2022 and May 31, 2022, respectively

 

 

Series D convertible preferred stock, $0.001 par value; 12 authorized; 9 issued and outstanding at August 31, 2022 and May 31, 2022, respectively

 

 

Common stock, $0.001 par value; 1,350,000 shares authorized; 812,698 and 720,028 issued, and 812,255 and 719,585 outstanding at August 31, 2022 and May 31, 2022, respectively

 

813

 

720

Treasury stock, $0.001 par value; 443 at August 31, 2022 and May 31, 2022

Additional paid-in capital

 

687,732

 

671,013

Accumulated deficit

 

(782,857)

 

(766,131)

Total stockholders’ deficit

 

(94,312)

 

(94,398)

Total liabilities and stockholders' deficit

$

28,394

$

29,185

See accompanying notes to consolidated financial statements.

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CytoDyn Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

Three months ended August 31,

    

2022

    

2021

(Restated) (1)

Revenue

$

$

41

Cost of goods sold

1

Gross margin

40

Operating expenses:

 

  

 

  

General and administrative

6,333

7,617

Research and development

 

576

 

12,020

Amortization and depreciation

 

99

 

276

Inventory charge

2,704

1,764

Total operating expenses

 

9,712

 

21,677

Operating loss

 

(9,712)

 

(21,637)

Interest and other expense:

Interest on convertible notes

 

(1,146)

 

(1,686)

Amortization of discount on convertible notes

(576)

(952)

Amortization of debt issuance costs

 

(16)

 

(28)

Loss on induced conversion

 

(18,530)

Finance charges

 

(940)

 

(35)

Inducement interest expense

 

 

(528)

Legal settlement

 

 

(1,941)

Loss on derivatives

(8,601)

Total interest and other expense

 

(11,279)

 

(23,700)

Loss before income taxes

 

(20,991)

 

(45,337)

Income tax benefit

 

 

Net loss

$

(20,991)

$

(45,337)

Basic and diluted:

Weighted average common shares outstanding

787,856

632,597

Loss per share

$

(0.03)

$

(0.07)

(1) See Note 2, Summary of Significant Accounting Policies.

See accompanying notes to consolidated financial statements.

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CytoDyn Inc.

Consolidated Statement of Changes in Stockholders’ Deficit

(Unaudited, in thousands)

Preferred stock

Common stock

Treasury stock

    

Additional

    

Accumulated

    

Total stockholders'

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

paid-in capital

deficit

deficit

Balance at May 31, 2022

35

$

720,028

$

720

443

$

$

671,013

$

(766,131)

$

(94,398)

Stock issued for compensation

879

1

 

344

 

 

345

Stock issued for private offerings

85,378

85

 

17,459

 

 

17,544

Issuance costs related to stock issued for private offerings

 

(6,289)

 

 

(6,289)

Conversion of Series C convertible preferred stock to common stock

(1)

1,136

1

 

(1)

 

 

Warrant exercises

657

1

 

263

 

 

264

Deemed dividend paid in common stock due to down round provision, recorded in additional paid-in capital

4,620

5

 

(5)

 

 

Accrued preferred stock dividends

 

(384)

 

 

(384)

Reclassification of warrants from liability to equity classified

8,601

8,601

Stock-based compensation

 

996

 

 

996

Reclassification to additional paid-in capital of prior period preferred stock dividends previously charged to accumulated deficit

(4,265)

4,265

Net loss

 

 

(20,991)

 

(20,991)

Balance at August 31, 2022

34

$

812,698

$

813

443

$

$

687,732

$

(782,857)

$

(94,312)

Preferred stock

Common stock

Treasury stock

    

Additional

    

Accumulated

    

Total stockholders'

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

paid-in capital 

deficit

deficit

(Restated) (1)

(Restated) (1)

(Restated) (1)

Balance at May 31, 2021 

96

$

626,123

$

626

443

$

$

532,031

$

(553,675)

$

(21,018)

Issuance of stock for convertible note repayment

11,816

12

 

13,832

 

 

13,844

Loss on induced conversion

18,530

18,530

Issuance of legal settlement warrants

 

1,744

 

 

1,744

Stock option exercises

300

 

189

 

 

189

Stock issued for compensation and tendered for income tax

1,014

1

 

(1)

 

 

Stock issued for private offerings

2,872

3

 

2,869

 

 

2,872

Private warrant exchanges

1,327

1

 

774

 

 

775

Warrant exercises

668

1

 

502

 

 

503

Inducement interest expense related to private warrant exchanges

 

528

 

 

528

Accrued preferred stock dividends

 

 

(420)

 

(420)

Stock-based compensation

 

2,597

 

 

2,597

Net loss

 

 

(45,337)

 

(45,337)

Balance at August 31, 2021

96

$

644,120

$

644

443

$

$

573,595

$

(599,432)

$

(25,193)

(1) See Note 2, Summary of Significant Accounting Policies.

See accompanying notes to consolidated financial statements.

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CytoDyn Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Three months ended August 31,

    

2022

    

2021

(Restated) (1)

Cash flows from operating activities:

 

  

 

Net loss

$

(20,991)

$

(45,337)

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

 

  

 

  

Amortization and depreciation

 

99

 

276

Amortization of debt issuance costs

 

16

 

28

Amortization of discount on convertible notes

 

576

 

952

Legal settlement

1,744

Loss on derivatives

8,601

Loss on induced conversion

18,530

Inducement interest expense and non-cash finance charges

 

 

528

Inventory charge

2,704

1,764

Stock-based compensation

 

1,341

 

2,597

Changes in operating assets and liabilities:

 

 

  

Increase in prepaid expenses and other assets

(1,601)

(2,370)

Decrease in accounts payable and accrued expenses

 

(1,819)

 

(10,453)

Net cash used in operating activities

 

(11,074)

 

(31,741)

Cash flows from investing activities:

 

  

 

  

Furniture and equipment purchases

 

 

(8)

Net cash used in investing activities

 

 

(8)

Cash flows from financing activities:

 

  

 

  

Proceeds from warrant transactions, net of offering costs

775

Proceeds from sale of common stock and warrants, net of issuance costs

 

11,255

 

2,872

Proceeds from warrant exercises

 

264

 

503

Exercise of option to repurchase shares held in escrow

 

 

9

Proceeds from stock option exercises

189

Net cash provided by financing activities

 

11,519

 

4,348

Net change in cash and restricted cash

 

445

 

(27,401)

Cash beginning of period

 

4,231

 

33,943

Cash end of period

$

4,676

$

6,542

Cash and restricted cash consisted of the following:

Cash

$

4,676

$

6,533

Restricted cash

9

Total cash and restricted cash

$

4,676

$

6,542

Supplemental disclosure:

Cash paid for interest

$

$

35

Non-cash investing and financing transactions:

 

  

 

  

Issuance of common stock for principal and interest of convertible notes

$

$

14,950

Accrued dividends on convertible Series C and D Preferred Stock

$

384

$

420

Deemed dividend on common stock issued due to down round provision, recorded in additional paid-in capital

$

4,154

$

(1) See Note 2, Summary of Significant Accounting Policies.

See accompanying notes to consolidated financial statements.

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CYTODYN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AUGUST 31, 2022

(Unaudited)

Note 1. Organization

CytoDyn Inc. (together with its wholly owned subsidiaries, 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 clinical-stage biotechnology company focused on the clinical development of innovative treatments for multiple therapeutic indications based on its product candidate, leronlimab (PRO 140), a novel humanized monoclonal antibody targeting the CCR5 receptor. The Company is studying leronlimab in human immunodeficiency virus (“HIV”), oncology, and non-alcoholic steatohepatitis (“NASH”).

Leronlimab is being investigated as a viral entry inhibitor for HIV, believed to competitively bind to the N-terminus and second extracellular loop of the CCR5 receptor. For immunology, the CCR5 receptor is believed to be implicated in immune-mediated illnesses such as NASH. Leronlimab is being studied in NASH, oncology, and other therapeutic indications where CCR5 is believed to play an integral role.

The Company has pursued the regulatory approval of leronlimab in hopes that commercial sales will be obtained based on positive data from its Phase 2b/3 clinical trial for leronlimab as a combination therapy with highly active antiretroviral therapy (“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. In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA submission for leronlimab as a combination therapy with HAART for highly treatment-experienced HIV patients. The FDA informed the Company that the BLA did not contain certain information and data needed to complete a substantive review and therefore, the FDA would not file the BLA. The deficiencies cited by the FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. In November 2021, the Company resubmitted the non-clinical and chemistry, manufacturing, and controls (“CMC”) sections of the BLA. As of March 2022, the FDA had commenced its review of the CMC section.

As described in Note 9, Commitments and Contingencies - Legal Proceedings, the Company is in dispute with its former contract research organization (“CRO”). In the context of the litigation, the Company obtained an order requiring the CRO to release the Company’s clinical data related to the BLA and other clinical trials, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services.

Additionally, in March of 2022, the FDA placed the HIV program on a partial clinical hold, which may affect our ability to resubmit the BLA. The Company is in the process of evaluating the data, results of the audit, and implications of the partial clinical hold. The Company will update the feasibility of the resubmission of the clinical section of the BLA once it completes its evaluation.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements include the accounts of CytoDyn Inc. and its wholly owned subsidiaries, CytoDyn Operations Inc. and Advanced Genetic Technologies, Inc. (“AGTI”); AGTI is a dormant entity. All intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim financial statements. The interim financial information and notes thereto should be read in conjunction with the Company's latest Annual Report on Form 10-K for the fiscal year ended May 31, 2022 (the “2022 Form 10-K”). The results of operations for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year or for any other future annual or interim period.

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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. Such reclassifications did not have material effect on the Company’s previously reported financial position, results of operations, stockholders’ deficit, or net cash provided by operating activities.

During the quarter ended August 31, 2022, the Company reclassified amounts recorded as accumulated dividends for Series C and D preferred stockholders from accumulated deficit to additional paid-in capital. These reclassifications were made to reflect the proper presentation for accrued dividends when an entity has accumulated deficit.

Revision and Restatement of Financial Statements

During the preparation of the quarterly financial statements as of and for the period ended November 30, 2021, the Company identified an error in how non-cash inducement interest expense was calculated in previous reporting periods dating back to fiscal year 2018. The error resulted in an understatement of non-cash inducement interest expense and additional paid-in capital. For details, refer to Note 2, Summary of Significant Accounting Policies - Revision of Financial Statements in the 2022 Form 10-K. Also during the preparation and audit of the annual financial statements as of and for the fiscal year ended May 31, 2022, the Company concluded that a material error was identified in how the Company was accounting for common stock issued to settle certain convertible note obligations dating back to fiscal year 2021. For details, refer to Note 14, Restatement in the 2022 Form 10-K. Neither of the errors had impact on operating loss, cash, net cash used in or provided by operating, financing, and investing activities, assets, liabilities, commitments and contingencies, total stockholders’ deficit, number of shares issued and outstanding, basic and diluted weighted average common shares outstanding, and number of shares available for future issuance for any period presented, and are reflected in the accompanying statement of operations, changes in stockholders’ deficit, and statement of cash flows.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of approximately $21.0 million for the three months ended August 31, 2022, and has an accumulated deficit of approximately $782.9 million as of August 31, 2022. 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 the development of its product candidate, leronlimab, obtain approval to commercialize leronlimab from regulatory agencies, continue to outsource manufacturing of leronlimab, and ultimately achieve revenues and attain profitability. The Company plans to continue to engage in 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 regulatory compliance and approval, and 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 primarily from the sale of equity and debt securities, combined with additional funding from other sources. However, there can be no assurance that the Company will be successful in these endeavors.

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Use of Estimates

The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, and 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 status of our analysis of the results of our clinical trials and/or discussions with the FDA which could have an impact on the Company’s 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, capitalization of pre-launch inventories, write-off for excess and obsolete inventories, research and development expenses, commitments and contingencies, and the assumptions used to value warrants and warrant modifications. Actual results could differ from these estimates.

Pre-launch Inventories

Pre-launch inventories are comprised of raw materials required to commercially produce leronlimab and substantially completed commercially produced leronlimab in anticipation of commercial sales of the product upon potential regulatory approval as a combination therapy for HIV patients in the United States. The Company’s pre-launch inventories consist of (1) raw materials purchased for commercial production, (2) work-in-progress materials which consist of bulk drug substance, which is the manufactured drug stored in bulk storage, and (3) drug product, which is the manufactured drug in unlabeled vials. 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.

The Company capitalizes inventories procured or produced in preparation for product launches. 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 becomes 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, it may make a determination that the related inventory no longer qualifies for capitalization.

The Company determines whether raw materials purchased for commercial production are usable for production based on the manufacturer’s assigned expiration date. In evaluating whether raw materials included in the pre-launch inventories will be usable for production, the Company takes into account the shelf-life of raw materials at the time they are expected to be used in manufacturing. Any raw materials past expiration date at the time of the next manufacturing run are removed from inventory.

As one stage of the manufacturing process, the Company produces work-in-progress materials which consist of bulk drug substance, which is the manufactured drug stored in bulk storage. The initial shelf-life of bulk drug substance is established based on prior experience and periodically performed stability studies and is set at four years from the date of manufacturing. Bulk drug substance is subject to deep freeze storage, and stability studies are performed on a periodic basis in accordance with the established stability protocols. If drug substance meets suitability criteria beyond the initial shelf-life, its shelf-life may be extended based on prior experience and stability trend analysis, and during the extension period periodic stability testing is performed on the drug substance. Regardless of the number of stability studies performed, if drug substance continues to meet prespecified suitability parameters it may be used in manufacturing; if drug substance fails to meet suitability criteria beyond its assigned shelf-life at that time, it may no longer be used and is considered to be expired.

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The Company utilizes resins, a reusable raw material, in its bulk drug manufacturing process. Shelf-life of a resin used in commercial manufacturing of biologics is determined by the number of cycles for which it has been validated to be used in a manufacturing process before it is considered unusable. Unpacked and unused resins have a manufacturer’s expiration date by which resins are expected to start being used in the manufacturing process without loss of their properties. Prior to a new manufacturing campaign, and between manufacturing campaigns, the resins are removed from storage, and are treated and tested for suitability. Once resins are used in the manufacturing process, their shelf-life is measured by a validated predetermined number of manufacturing cycles they are usable for, conditional on appropriate storage solution under controlled environment between production campaigns, as well as by performing pre-production usability testing. Before a manufacturing campaign, each resin is tested for suitability. Regardless of the number of cycles, if a resin fails to meet prespecified suitability parameters it may not be used in manufacturing; likewise, even if the resin meets suitability criteria beyond the lifetime cycles, it may no longer be used. The cost of the resins used in a manufacturing campaign is allocated to the cost of the drug product in vials.

The Company values its inventory at the lower of cost or net realizable value using the average cost method. Inventory is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory considering 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 became obsolete, has a cost in excess of its expected net realizable value, or is in 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. Quarterly, the Company also evaluates whether certain raw materials held in its inventory are expected to reach the end of their estimated shelf-lives based on passage of time, the number of manufacturing cycles they are used in and results of pre-production testing prior to the expected production date, or when resins used in the manufacturing process fail suitability tests. If any of such events occur, the Company may make a determination to record a charge if it is expected that such inventories will become obsolete prior to the expected production date.

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 inventories, the Company considers the product stability data for all of the pre-approval inventory procured or produced to date to determine whether there is adequate shelf-life. 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 additional stability testing to determine if the inventory is still viable, which can result in an extension of its shelf-life and revaluation of the need for and the amount of the previously recorded reserves. 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 that it is not likely that shelf-life may be extended or the inventory cannot be sold prior to expiration, the Company may record a charge to bring inventory to its net realizable value.

For additional information about the Company’s significant accounting policies, refer to Note 2, Summary of Significant Accounting Policies, in the 2022 Form 10-K.

Recently Adopted Accounting Pronouncements

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 ASU No. 2020-06 as of June 1, 2022, using the modified retrospective method. The adoption of ASU No. 2020-06 had no impact on the Company’s balance sheets, statements of operations, cash flows or financials statement disclosures.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of

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Freestanding Equity-Classified Written Call Options. ASU 2021-04 addresses the accounting for certain modifications or exchanges of freestanding equity-classified written call options (e.g., warrants). Entities should treat a modification of the terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after modification or exchange, as an exchange of the original instrument for a new instrument. Guidance should be applied prospectively after the date of initial application. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted.

The Company adopted the new guidance prospectively as of June 1, 2022 and used the framework to record a modification to the exercise price of equity classified warrants during the three months ended August 31, 2022. The incremental value of modification to equity instruments as a result of a trigger of a down round provision was recorded as a deemed dividend in accordance with this guidance, resulting in an approximate $4.2 million charge to additional paid-in capital. The deemed dividend was included in the loss per share calculation; refer to Note 7, Loss per Common Share. Refer to Note 6, Equity Awards and Warrants for further information.

Note 3. Inventories, net

Inventories were as follows (in thousands):

August 31, 2022

May 31, 2022

Raw materials

$

16,264

$

16,264

Work-in-progress

 

1,665

 

1,665

Total inventories, net

$

17,929

$

17,929

The table below summarizes inventory that had been capitalized and subsequently charged off for accounting purposes. Work-in-progress and finished drug product inventories continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives can be extended as a result of the performance of on-going stability tests.

Raw Materials

Work-in-progress

(in thousands, Expiration period ending August 31,)

    

Remaining shelf-life (mos)

    

Specialized

Resins

Other

Total Raw Materials

Bulk drug product

Finished drug product

Total inventories

2023

0 to 12

$

3,658

$

-

$

1,421

$

5,079

$

1,824

$

-

$

6,903

2024

13 to 24

682

16,264

1,590

18,536

1,665

-

20,201

2025

25 to 36

2,099

-

-

2,099

-

29,142

31,241

2026

37 to 48

3,435

-

-

3,435

-

32,344

35,779

Thereafter

49 or more

-

-

-

-

-

-

-

Inventories, gross

9,874

16,264

3,011

29,149

3,489

61,486

94,124

Inventory charge

(9,874)

-

(3,011)

(12,885)

(1,824)

(61,486)

(76,195)

Inventories, net

$

-

$

16,264

$

-

$

16,264

$

1,665

$

-

$

17,929

The Company determines whether raw materials purchased for commercial production are usable for production based on the manufacturer’s assigned expiration date. In evaluating whether raw materials included in the pre-launch inventories will be usable for production, the Company takes into the account the shelf-life of raw materials at the time they are expected to be used in manufacturing. Any raw materials past expiration date at the time of the next manufacturing run are removed from inventory. Also, as one of the stages of the manufacturing process, the Company produces work-in-progress materials which consist of bulk drug substance, which is the manufactured drug stored in bulk storage. The initial shelf-life of bulk drug substance is established based on prior experience and periodically performed stability studies and is set at four years from the date of manufacturing. Bulk drug substance is subject to deep freeze storage, and stability studies performed on a periodic basis in accordance with the established stability protocols. If drug substance meets suitability criteria beyond the initial shelf-life, its shelf-life may be extended based on prior experience and stability trend analysis, and during the extension period periodic stability testing is performed on the drug substance. Regardless of the number of stability studies performed, if drug substance continues to meet prespecified suitability parameters it may be used in manufacturing; if drug substance fails to meet suitability criteria beyond its assigned shelf-life at that time, it may no longer be used and is considered to be expired. Further, the Company utilizes resins, a reusable raw material, in its bulk drug manufacturing process. Shelf-life of a resin used in commercial

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manufacturing of biologics is determined by the number of cycles for which it has been validated to be used in a manufacturing process before it is considered unusable. Unpacked and unused resins have a manufacturer’s expiration date by which resins are expected to start being used in the manufacturing process without loss of their properties. Prior to a new manufacturing campaign, and between manufacturing campaigns, the resins are removed from storage, treated and tested for suitability. Once resins are used in the manufacturing process, their shelf-life is measured by a validated predetermined number of manufacturing cycles they are usable for, conditional on appropriate storage solution under controlled environment between production campaigns, as well as by performing pre-production usability testing. Before a manufacturing campaign, each resin is tested for suitability. Regardless of the number of cycles, if a resin fails to meet prespecified suitability parameters it may not be used in manufacturing; likewise, even if the resin meets suitability criteria beyond the lifetime cycles, it may no longer be used. The cost of the resins used in a manufacturing campaign is allocated to the cost of the drug product in vials.

During the fourth quarter of fiscal 2022, the Company concluded that a significant portion of inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration. This is due to delays experienced from the originally anticipated BLA approval by the FDA. Although these inventories are no longer being capitalized as pre-launch inventories for US GAAP accounting purposes, the inventories written-off for accounting purposes continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives are extended as the result of the performance of on-going stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. The Company also concluded that, due to delays of future production, certain raw materials would expire prior to production and as such no longer qualify for capitalization. Specifically, the Company evaluated its raw materials, which consist of specialized raw materials, resins, and other, against the anticipated production date and determined that while the next production date was indeterminable as of May 31, 2022, specialized raw materials have remaining shelf-lives ranging from 2023 to 2026. Therefore, a reserve of $10.2 million for the entire remaining value of specialized and other raw materials was recorded as of May 31, 2022. The Company also concluded that approximately $29.1 million, composed of five batches of drug product, out of a total of nine manufactured, is likely to expire prior to the anticipated date the product may be approved for commercialization. Additionally, the Company anticipates that approximately $34.2 million of the drug product comprising the remaining four manufactured batches, with shelf-lives lasting into 2026, may expire prior to receiving approval for commercialization. The Company wrote-off the entire remaining balance of the drug product, in the amount of $63.3 million, as of May 31, 2022.

During the first quarter of fiscal 2023, the Company reviewed purchase commitments made by its manufacturing partner, Samsung BioLogics Co., Ltd. (“Samsung”), under the master agreement between the Company and Samsung, and its vendors for specialized raw materials for which the Company made a prepayment in the amount of $2.7 million in the third quarter of fiscal 2022, which were recorded as other assets in the consolidated financial statements as of May 31, 2022. The Company and its manufacturing partner have been in discussions, among other things, about cancelling the commitments to the suppliers, which have been unsuccessful to date. These additional specialized raw materials are estimated to have shelf-lives ranging from 2023 to 2026. The entire amount was reserved for as of August 31, 2022.

During the fourth quarter of fiscal 2022, the Company completed its validation of the resins’ properties based on the number of cycles they have been used for, and the remaining number of manufacturing cycles they may be used for; the Company did not identify any resins that failed suitability validation. As of August 31, 2022, the remaining life of resins remained unchanged, ranging between 37 and 62 cycles. The Company will continue to present its resins inventory based on the remaining shelf-lives until a new shelf-life is assigned based on the results of usability testing.

Note 4. Accounts Payable and Accrued Liabilities

As of August 31, 2022 and May 31, 2022, the accounts payable balance was approximately $69.0 million and $68.0 million, respectively, with two vendors accounting for 69% and 73% of the total balance of accounts payable at the respective dates.

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The components of accrued liabilities are as follows (in thousands):

August 31, 2022

May 31, 2022

Compensation and related expense

$

792

$

1,522

Legal fees and settlement

1,017

2,006

Clinical expense

311

3,727

Unbilled inventory

 

2,218

 

1,392

License fees

541

150

Lease payable

135

134

Other liabilities

-

64

Total accrued liabilities

$

5,014

$

8,995

Note 5. Convertible Instruments and Accrued Interest

Convertible Preferred Stock

The following table presents the number of potentially issuable shares of common stock should shares of preferred stock and amounts of undeclared and accrued preferred dividends be converted to common stock.

August 31, 2022

May 31, 2022

(in thousands)

    

Series B

    

Series C

    

Series D

    

Series B

    

Series C

    

Series D

Shares of preferred stock

19

6

9

19

7

9

Total shares of common stock if converted

190

12,670

10,565

190

13,806

10,565

Undeclared dividends

$

11

$

-

$

-

$

10

$

-

$

-

Accrued dividends

$

-

$

2,186

$

2,175

$

-

$

2,014

$

1,963

Total shares of common stock if dividends converted

22

4,372

4,350

20

4,028

3,926

Under the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), dividends on its outstanding shares of Series B Convertible Preferred Stock (the “Series B preferred stock”) may be paid in cash or shares of the Company’s common stock at the option of the Company. Dividends on outstanding shares of Series C Convertible Preferred Stock (the “Series C preferred stock”) and Series D Convertible Preferred Stock (the “Series D preferred stock”) are payable in cash or shares of common stock at the election of the holder. The preferred stockholders have the right to dividends only when and if declared by the Company’s Board of Directors. Under Section 170 of the Delaware General Corporation Law, the Company is permitted to pay dividends only out of capital surplus or, if none, out of net profits for the fiscal year in which the dividend is declared or net profits from the preceding fiscal year.

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Series B Convertible Preferred Stock

Each share of the Series B preferred stock is convertible into ten shares of the Company’s common stock. Dividends are cumulative and payable to the Series B preferred stockholders when and as declared by the Company’s Board of Directors (the “Board”). Dividends on the Series B preferred stock accumulate at the rate of $0.25 per share per annum, and may be paid, at the option of the Company at the time of conversion, either in cash or shares of the Company’s common stock valued at $0.50 per share. 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 preferred stockholders have no voting rights. The Company does not accrue dividends on Series B preferred stock until such dividends are declared.

Series C and Series D Convertible Preferred Stock

The Series C and Series D Certificates of Designation provide, among other things, that holders of Series C and Series D 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 and Series D preferred stock, which is $1,000 per share (the “Stated Value”). Dividends on the Series C and 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. Dividends on the Series C and Series D preferred stock may be paid in cash or shares of the Company’s common stock at the option of the holder. Series C and Series D preferred stock does not have redemption rights. Each share of Series C and Series D preferred stock is convertible at the holder’s option into shares of common stock, with Series C stockholders having conversion price of $0.50 per share, and Series D stockholders having conversion price of $0.80 per share, together with accrued and unpaid dividends payable, at the option of the holder, in cash or shares of common stock based on the conversion price. Given the obligation to settle all dividends, including those in arrears, in cash at the election of the preferred stockholder upon conversion, whether or not declared by the Company, the Company accrues dividends on Series C and D preferred stock as a liability in its consolidated financial statements.

In the event of liquidation, dissolution or winding up of the Company, the holders of Series D preferred stock will be entitled to receive, on a pari passu basis with the holders of the Series C preferred stock and in preference to any payment or distribution to holders of the Series B preferred stock and common stock, an amount per share equal to the Stated Value plus the amount of any accrued and unpaid dividends. If, at any time while the Series C and 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 C and the Series D Certificates of Designation, a “Fundamental Transaction”), a holder of Series C and 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 C and Series D preferred stock immediately prior to the Fundamental Transaction. Except as otherwise provided in the Series C and Series D Certificates of Designation or as otherwise required by law, the Series C and Series D preferred stock have no voting rights.

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Convertible Notes and Accrued Interest

For additional information about the Company’s debt policies, refer to Note 2, Summary of Significant Accounting Policies, of the 2022 Form 10-K. Outstanding balances associated with the Company’s convertible notes and related accrued interest are as follows:

August 31, 2022

May 31, 2022

(in thousands)

    

April 2, 2021 Note

    

April 23, 2021 Note

    

Total

    

April 2, 2021 Note

    

April 23, 2021 Note

    

Total

Convertible notes payable outstanding principal

$

9,819

$

28,500

$

38,319

$

9,819

$

28,500

$

38,319

Less: Unamortized debt discount and issuance costs

(359)

(1,127)

(1,486)

(512)

(1,566)

(2,078)

Convertible notes payable, net

9,460

27,373

36,833

9,307

26,934

36,241

Accrued interest on convertible notes

2,920

4,200

7,120

2,599

3,375

5,974

Outstanding convertible notes payable, net and accrued interest

$

12,380

$

31,573

$

43,953

$

11,906

$

30,309

$

42,215

Changes to the outstanding balance of convertible notes, including accrued interest, were as follows:

(in thousands)

April 2, 2021 Note

April 23, 2021 Note

Total

Outstanding balance at May 31, 2022

$

11,906

$

30,309

$

42,215

Amortization of issuance discount and costs

153

439

592

Interest expense

321

825

1,146

Outstanding balance at August 31, 2022

$

12,380

$

31,573

$

43,953

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 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. Interest accrues at an annual rate of 10% on the outstanding balance, with the rate increasing to the lesser of 22% per annum or the maximum rate permitted by applicable law upon occurrence of an event of default. 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 events of default are listed in Section 4 of the April 2, 2021 Note filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 8, 2021. The April 2, 2021 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

Pursuant to the terms of 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 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 adjustments and volume and ownership limitations. 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 of 1933, as amended (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 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 note, in part or in full, plus a 15% premium, at any time upon 15 trading days’ notice.

Pursuant to the terms of the April 2, 2021 Note, the Company is obligated, at the discretion of the noteholder, to reduce the outstanding balance by $7.5 million per month for five months. During fiscal 2022, in partial satisfaction of debt reduction amounts, the Company and the April 2, 2021 Note holder entered into exchange agreements, pursuant to

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which the April 2, 2021 Note was partitioned into new notes (the “Partitioned Notes”) with an aggregate principal amount of $18.7 million, which were exchanged concurrently with the issuance of approximately 25.3 million shares of common stock. The outstanding balance of the April 2, 2021 Note was reduced by the Partitioned Notes to a principal amount of $9.8 million. The Company accounted for the restructured partitioned notes and exchange settlements as induced conversion, and, accordingly, recorded an aggregate loss on convertible debt induced conversion of $18.8 million through May 31, 2022; none for the three months ended August 31, 2022 and 2021.

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 April 2, 2021 Note 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. Interest accrues at an annual rate of 10% on the outstanding balance of the April 23, 2021 Note, with the rate increasing to the lesser of 22% per annum or the maximum rate permitted by applicable law upon the occurrence of an event of default. 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. The April 23, 2021 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

Pursuant to the terms of 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 investor may convert all or any part of the outstanding balance 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.

The holders of the April 2 and April 23 Notes waived provisions in the notes that could have triggered the imposition of a default interest rate, a downward adjustment of the conversion price, or specified other provisions relating to default, breach or imposition of a penalty. The related events included the grant of registration rights to investors in specified private offerings, the issuance of warrants to purchase 30 million shares of common stock with registration rights to certain parties and potential incurrence of debt pursuant to a Surety Bond Backstop Agreement (the “Backstop Agreement”), and the grant of a security interest in the Company’s intellectual property to certain parties to the Backstop Agreement. Refer to Note 6, Equity Awards and Warrants.

Note 6. Equity Awards

Approval of Increase in Authorized Common Stock

On August 31, 2022, the stockholders’ of the Company, at a special stockholders’ meeting approved a proposal to increase the total number of authorized shares of common stock from 1.0 billion shares to 1.35 billion shares.

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From June 24, 2022 through August 31, 2022, the Company had insufficient authorized common stock to reserve for the shares underlying the Surety Backstop warrants and warrants issued to a placement agent in connection with the June 2022 offering (Refer to Private Placement of Warrants under Surety Bond Backstop Agreement and Private Placement of Common Stock and Warrants through Placement Agent sections below.) On August 31, 2022, the stockholders of the Company approved an increase to the Company’s authorized common stock, after which sufficient shares were authorized, including those to cover the shares underlying the warrants. Given that the Company did not have a sufficient number of authorized shares for the two instruments at the time they were issued, the Company evaluated, and accounted for such warrants between June and August, as liability classified warrants consistent with ASC 815, Derivatives and Hedging.

In accordance with the prescribed accounting guidance, the Company measured fair value of liability classified warrants using fair value hierarchy which include:

Level 1. Quoted prices in active markets for identical assets or liabilities.

Level 2.

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

Level 3.

Unobservable inputs to the valuation methodology are significant to the measurement of the fair value of assets or liabilities. These Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that the Company was unable to corroborate with observable market data.

As of August 31, 2022, in accordance with ASC 815, Derivatives and Hedging, the Company reclassified the warrants to equity due to having a sufficient number of authorized shares upon receiving approval of an increase to the Company’s authorized common stock. The Company recorded a loss on derivatives of approximately $8.6 million in the quarter ended August 31, 2022 due to change in fair market value of the liability classified warrants between June 24 and August 31, 2022. The table below presents a reconciliation of the beginning and ending balances for liabilities measured at fair value during the three months ended August 31, 2022, and the year ended May 31, 2022:

(in thousands)

    

Liability Classified Warrants

Balance at May 31, 2022

$

Classified as liability due to lack of shares availability at issuance

 

14,522

Classified as equity upon increase in availability

 

(23,123)

Loss on derivative due to change in fair market value

 

8,601

Balance at August 31, 2022

$

The Company used a Black Scholes valuation model to estimate the value of the liability classified warrants using assumptions presented in the table below. The Black Scholes valuation model was used because management believes it reflects all the assumptions that market participants would likely consider in negotiating the transfer of the warrant. The Company’s derivative liability is classified within Level 3.

    

    

Initial Fair Market Value At Issuance

    

Fair Market Value at August 31, 2022

Backstop

Backstop

Placement

Backstop

Backstop

Placement

Warrant #1

Warrant #2

Agent Warrants

Warrant #1

Warrant #2

Agent Warrants

Fair value of underlying stock

$ 0.44

$ 0.42

$ 0.44

$ 0.52

$ 0.52

$ 0.52

Risk free rate

3.17%

3.06%

3.13%

3.34%

3.31%

3.16%

Expected term (in years)

4.65

5.00

10.00

4.46

4.88

9.82

Stock price volatility

110.20%

109.49%

95.99%

117.29%

113.59%

95.87%

Expected dividend yield

0.00%