Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Patents and Intangibles

Acquisition of Patents and Intangibles
3 Months Ended
Aug. 31, 2019
Acquisition of Patents
Note 7 – Acquisition of Patents and Intangibles
As discussed in Note 9 below, the Company consummated an asset purchase on October 16, 2012, and paid $3,500,000 for certain assets, including intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the leronlimab (PRO 140) drug substance. The Company followed the guidance in Financial Accounting Standards Topic 805 to determine if the Company acquired a business. Based on the prescribed accounting, the Company acquired assets and not a business. As of August 31, 2019, the Company has recorded and is amortizing $3,500,000 of intangible assets in the form of patents. The Company estimates the acquired patents have an estimated life of ten years. Subsequent to the acquisition date, the Company has continued to expand, amend and file new patents central to its current clinical trial strategies, which, in turn, have extended the protection period for certain methods of using leronlimab (PRO 140) and formulations comprising leronlimab (PRO 140) out through at least 2031 and 2038, respectively, in various countries.
On November 16, 2018, the Company completed the acquisition of substantially all of the assets of ProstaGene, LLC (“ProstaGene”), a biotechnology
company, which included patents related to clinical research, a proprietary CCR5 technology for early cancer diagnosis, and a noncompetition agreement with ProstaGene’s founder and Chief Executive Officer, Richard G. Pestell, M.D., Ph.D. The acquisition of ProstaGene’s assets expands the Company’s clinical development of leronlimab (PRO 140) into cancer indications and commercialization of certain cancer diagnostic tests.
The aggregate purchase price paid for the ProstaGene acquisition was $11,558,000 based on the issuance of 20,278,000 shares of common stock of CytoDyn at $0.57 per share, including 1,620,000 shares earned, but not yet issued, by the investment bank for advisory services. In connection with the purchase, the Company entered into a Stock Restriction Agreement (“Agreement”), restricting the transfer of 8,342,000 shares of common stock payable to Dr. Pestell for a three-year period from the closing date of the transaction. Dr. Pestell’s employment with the Company was terminated on July 25, 2019, and as defined in the employment agreement, on September 17, 2019 the Company exercised its option to repurchase such Restricted Shares from Dr. Pestell at a purchase price of $0.001 per share. The repurchase is currently the subject of a legal proceedings between Dr. Pestell and the Company, as fully described in Part II, Item 1.
A summary of the net purchase price and allocation to the acquired assets is as follows:
    ProstaGene, LLC  
CytoDyn Inc. Equity
  $ 11,558,000  
Acquisition Expenses
Release of Deferred Tax Asset
Total Cost of Acquisition
  $ 15,126,216  
Intangible assets
  $ 15,126,216  
Allocation of Acquisition Costs
  $ 15,126,216  
Assets acquired from ProstaGene include (1) patents issued in the United States and Australia related to “Prostate Cancer Cell Lines, Gene Signatures and Uses Thereof” and “Use of Modulators of CCR5 in the Treatment of Cancer and Cancer Metastasis,” (2) an algorithm used to identify a
signature to predict the likelihood and severity of cancer diagnoses, and (3) a noncompetition agreement in connection with an employment agreement with Dr. Pestell as Chief Medical Officer of the Company. The fair value of the assets acquired approximates the consideration paid. The Company did not assume any liabilities. The Company accounted for the ProstaGene acquisition as an asset acquisition under ASC
“Business Combinations” because the assets retained from ProstaGene do not include an assembled workforce, and the gross value of the assets acquired meets the screen test in ASC
related to substantially all of the fair value being concentrated in a single asset or group of assets (i.e., the proprietary technology and patents) and, thus, is not considered a business. Thus, management concluded that the acquisition did not include both an input and substantive processes that together significantly contribute to the ability to create outputs.
The fair value of the technology acquired is identified using the Income Approach. The fair value of the patents acquired is identified using the Cost to Reproduce Method. The fair value of noncompetition agreement acquired is identified using the Residual Value Method. Goodwill is not recorded as the transaction represents an asset acquisition in accordance with ASU
Acquisition costs for asset acquisitions are capitalized and included in the total cost of the transaction. In addition, pursuant to ASC 805, the net tax effect of the deferred tax liability arising from the book to tax basis differences is recorded as a cost of the acquisition.
The following presents intangible assets activity:
    August 31, 2019     May 31, 2019  
Gross carrying amounts
  $ 3,500,000     $ 3,500,000  
Development of new Company website
    19,552     $ 19,553  
Intangible asset acquisition:
ProstaGene, LLC
    15,126,216       15,126,216  
Accumulated amortization
    (3,698,646     (3,170,315 )
Total amortizable intangible assets, net
     14,947,122       15,475,454  
Patents currently not amortized
Carrying value of intangibles, net
  $ 14,947,122     $ 15,475,454  
Amortization expense related to intangible assets patents was approximately $528,400 and $87,500 for the three months ended August 31, 2019 and 2018, respectively. The estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives is estimated to be approximately $2 million per year for the next two years, approximately $1.5 million the following year, approximately $1.1 million the year thereafter, and approximately $1.0 million the year following that.