Acquisition of Patents and Intangibles
|12 Months Ended|
May 31, 2021
|Business Combinations [Abstract]|
|Acquisition of patents and intangibles||
Note 8. Acquisition of Patents and Intangibles
The following presents intangible assets activity, inclusive of patents (in thousands):
Amortization expense related to all intangible assets for the fiscal year ended May 31, 2021, May 31, 2020, and May 31, 2019 was approximately $1.8 million, $2.0 million and $1.2 million, respectively. The following table summarizes the estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives as of May 31, 2021 (in thousands):
The Company consummated an asset purchase on October 16, 2012, and paid $3.5 million 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 ASC 805, Business Combinations, to determine if the Company acquired a business. Based on the prescribed accounting, the Company acquired assets and not a business. As of May 31, 2021 and May 31, 2020, the Company has recorded and is amortizing $3.5 million of intangible assets related to the patent rights acquired. The Company estimates the acquired patent has an estimated life of. 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 and formulations comprising leronlimab through at least 2031 and 2038, respectively, in various countries.
On November 16, 2018, the Company completed the acquisition of substantially all the assets of ProstaGene, LLC (“ProstaGene”), a biotechnology start-up company, which included patents related to clinical research, a proprietary CCR5 algorithm technology for early cancer diagnosis, and a noncompetition agreement with ProstaGene’s founder and Chief Executive Officer, Richard G. Pestell. The Company accounted for the ProstaGene acquisition as an asset acquisition under ASC 805-10-55, Business Combinations, because the assets acquired from ProstaGene did not include an assembled workforce, and the gross value of the assets acquired met the screen test in ASC 805-10-55-5A 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 acquisition of ProstaGene’s assets expanded the Company’s clinical development of leronlimab into cancer indications and potential commercialization of certain cancer diagnostic tests. The aggregate purchase price of the ProstaGene acquisition was approximately $11.6 million based on the issuance of approximately 20.3 million shares of the Company’s common stock at $0.57 per share, including approximately 1.6 million shares issued to an investment bank for advisory services.
A summary of the net purchase price and allocation to the acquired assets is as follows (in thousands):
Assets acquired from ProstaGene included (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 14-gene 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 approximated the consideration paid. The Company did not assume any liabilities.
The fair value of the technology acquired was identified using the Income Approach. The fair value of the patents acquired is identified using the Cost to Reproduce Method. The fair value of the noncompetition agreement acquired was identified using the Residual Value Method. Goodwill was not recorded as the transaction represented an asset acquisition in accordance with ASU 2017-01. 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 was recorded as a cost of the acquisition.
The Company concluded a five-day arbitration hearing on March 19, 2021 concerning a claim by ProstaGene for approximately 3.1 million shares of common stock that the Company withheld for damages incurred by the Company in connection with the acquisition of the proprietary algorithm intangible asset from ProstaGene in November 2018. Expert testimony and report during the arbitration hearing revealed the stage of development was low, among other issues, and projected the technology would require a sizable amount of incremental capital and development time to advance towards a possible monetization. Based on this expert testimony and report, it was management’s conclusion the net carrying value of the proprietary algorithm is fully impaired. As such, the Company recorded an intangible asset impairment charge of approximately $10.0 million during the quarter ended February 28, 2021 resulting from the write-off of the allocated purchase price of $12.2 million and $2.2 million of associated accumulated amortization.
In connection with the ProstaGene purchase transaction, the Company entered into a Stock Restriction Agreement with Dr. Pestell, (the “Stock Restriction Agreement”), restricting the transfer of approximately 8.3 million shares of common stock (the “Restricted Shares”) issued to Dr. Pestell. The Stock Restriction Agreement provided that, in the event Dr. Pestell’s employment with the Company were terminated by Dr. Pestell other than for Good Reason or by the
Company for Cause, as defined in Dr. Pestell’s employment agreement with the Company, the Company would have an option to repurchase the Restricted Shares from Dr. Pestell at a purchase price of $0.001 per share. The Restricted Shares were to vest and be released from the Stock Restriction Agreement in three equal annual installments commencing on November 16, 2019. On July 25, 2019, the Board terminated the employment of Dr. Pestell prior to the vesting of any of the Restricted Shares. The Restricted Shares are subject to litigation between the Company and Dr. Pestell. See Note 10.
As of May 31, 2021 and May 31, 2020, the Company has recorded and is amortizing $4.6 million of intangible assets in the form of patents attributable to the leronlimab acquisition and the ProstaGene transaction. The Company estimates the acquired patents have an estimated life of. Subsequent to the acquisition dates, 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 and formulations comprising PRO 140 through at least 2031 and 2038, respectively, in various countries.