|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer or Identification No.) |
|
|
(Address of principal executive offices) | (Zip Code) |
(
(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 |
| Name of Each Exchange |
|---|---|---|---|---|
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 | ☐ | |
|
|
|
|
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
On March 31, 2022, there were
TABLE OF CONTENTS
2
PART I. Financial Information
Item 1. Consolidated Financial Statements
CytoDyn Inc.
Consolidated Balance Sheets
(Unaudited, in thousands, except par value)
| February 28, 2022 |
| May 31, 2021 | |||
(Revised) (1) | ||||||
Assets |
|
|
|
| ||
Current assets: |
|
|
| |||
Cash | $ | | $ | | ||
Restricted cash |
| |
| — | ||
Inventories, net | | | ||||
Prepaid expenses |
| |
| | ||
Prepaid service fees |
| |
| | ||
Total current assets |
| |
| | ||
Operating leases - right-of-use asset |
| |
| | ||
Property and equipment, net |
| |
| | ||
Intangibles, net |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and Stockholders’ (Deficit) Equity |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued liabilities and compensation |
| |
| | ||
Accrued interest on convertible notes |
| |
| | ||
Accrued dividends on convertible preferred stock |
| |
| | ||
Operating leases |
| |
| | ||
Convertible notes payable, net |
| |
| | ||
Total current liabilities |
| |
| | ||
Long-term liabilities - operating leases |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and Contingencies (Note 10) |
|
|
|
| ||
Stockholders’ (deficit) equity: |
|
|
|
| ||
Preferred Stock, $ |
|
|
|
| ||
Series B convertible preferred stock, $ |
|
| ||||
Series C convertible preferred stock, $ |
|
| ||||
Series D convertible preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Treasury stock, $ |
|
| ||||
Total stockholders’ deficit |
| ( |
| ( | ||
Total liabilities and stockholders' equity | $ | | $ | | ||
(1) See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021.
See accompanying notes to consolidated financial statements.
3
CytoDyn Inc.
Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
Three months ended February 28, | Nine months ended February 28, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(Revised) (1) | (Revised) (1) | ||||||||||||
Revenue: | |||||||||||||
Product revenue | $ | — | $ | — | $ | | $ | — | |||||
Total revenue | — | — | | — | |||||||||
Cost of goods sold: | |||||||||||||
Cost of goods sold | — | — | | — | |||||||||
Total cost of goods sold | — | — | | — | |||||||||
Gross margin | — | — | | — | |||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
General and administrative | | | | | |||||||||
Research and development |
| |
| |
| |
| | |||||
Amortization and depreciation |
| |
| |
| |
| | |||||
Intangible asset impairment charge | — | | — | | |||||||||
Total operating expenses |
| |
| |
| |
| | |||||
Operating loss |
| ( |
| ( |
| ( |
| ( | |||||
Interest and other expense: | |||||||||||||
Interest on convertible notes |
| ( |
| ( |
| ( |
| ( | |||||
Amortization of discount on convertible notes | ( | ( | ( | ( | |||||||||
Amortization of debt issuance costs |
| ( |
| ( |
| ( |
| ( | |||||
Loss on extinguishment of convertible notes |
| ( | ( | ( | ( | ||||||||
Finance charges |
| ( |
| ( |
| ( |
| ( | |||||
Inducement interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Legal settlement |
| — |
| — |
| ( |
| — | |||||
Total interest and other expense |
| ( |
| ( |
| ( |
| ( | |||||
Loss before income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Income tax benefit |
| — |
| — |
| — |
| — | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Basic and diluted loss per share | ( | ( | ( | ( | |||||||||
Basic and diluted weighted average common shares outstanding |
| |
| |
| |
| | |||||
(1) See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021.
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 | ||||||||||
(Revised) (1) | (Revised) (1) | (Revised) (1) | ||||||||||||||||||||||
Balance at May 31, 2021 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( | |||||||||
For the three months ended August 31, 2021: | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Issuance of legal settlement warrants | — | — | — | — | — | — |
| |
| — |
| | ||||||||||||
Exercise of stock options | — | — | | — | — | — |
| |
| — |
| | ||||||||||||
Stock issued for incentive compensation and tendered for income tax | — | — | | | — | — |
| ( |
| — |
| — | ||||||||||||
Stock issued for private offering ($ | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Private warrant exchange | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Exercise of warrants | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Inducement interest expense related to private warrant exchange | — | — | — | — | — | — |
| |
| — |
| | ||||||||||||
Dividends accrued on Series C and D preferred stock | — | — | — | — | — | — |
| — |
| ( |
| ( | ||||||||||||
Stock-based compensation | — | — | — | — | — | — |
| |
| — |
| | ||||||||||||
Net loss | — | — | — | — | — | — |
| — |
| ( |
| ( | ||||||||||||
Balance at August 31, 2021 | | — | | | | — | | ( | ( | |||||||||||||||
For the three months ended November 30, 2021: | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — | — | | | — | — | | — |
| | ||||||||||||||
Exercise of stock options | — | — | | — | — | — | | — |
| | ||||||||||||||
Private warrant exchange | — | — | | | — | — | | — |
| | ||||||||||||||
Stock issued for private offering ($ | — | — | | | — | — | | — |
| | ||||||||||||||
Issuance costs related to stock issued for private offering | — | — | — | — | — | — | ( | — | ( | |||||||||||||||
Conversion of Series B convertible preferred stock to common stock | ( | — | | | — | — | — | — | | |||||||||||||||
Exercise of warrants | — | — | | | — | — | | — | | |||||||||||||||
Inducement interest expense related to private warrant exchange | — | — | — | — | — | — | | — |
| | ||||||||||||||
Dividend declared and paid in common stock on Series B preferred stock ($ | — | — | | — | — | — | | ( |
| — | ||||||||||||||
Dividends accrued on Series C and D preferred stock | — | — | — | — | — | — | — | ( |
| ( | ||||||||||||||
Stock-based compensation | — | — | — | — | — | — | | — |
| | ||||||||||||||
Net loss | — | — | — | — | — | — | — | ( |
| ( | ||||||||||||||
Balance at November 30, 2021 | | — | | | | — | | ( | ( | |||||||||||||||
For the three months ended February 28, 2022: | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — | — | | | — | — | — | — | | — | — | — | | |||||||||||
Stock issued for private offering ($ | — | — | | | — | — | | — |
| | ||||||||||||||
Conversion of Series C convertible preferred stock to common stock | ( | — | | | — | — | ( | — |
| — | ||||||||||||||
Exercise of warrants | — | — | | — | — | — | — | — |
| — | ||||||||||||||
Modification of previously issued equity | — | — | | | — | — | | — |
| | ||||||||||||||
Dividend declared and paid in common stock upon conversion of Series C preferred stock ($ | — | — | | — | — | — | | — |
| | ||||||||||||||
Dividends accrued on Series C and D preferred stock | — | — | — | — | — | — | — | ( |
| ( | ||||||||||||||
Finance charges related to warrant issuance for surety bond backstop agreement | — | — | — | — | — | — | | — | | |||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ( | — |
| ( | ||||||||||||||
Net loss | — | — | — | — | — | — | — | ( |
| ( | ||||||||||||||
Balance at February 28, 2022 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( | |||||||||
| (1) | See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021. |
See accompanying notes to consolidated financial statements.
5
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 | ||||||||||
(Revised) (1) | (Revised) (1) | (Revised) (1) | ||||||||||||||||||||||
Balance at May 31, 2020 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( | |||||||||
For the three months ended August 31, 2020: | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Issuance of legal settlement warrants | — | — | | | — | — |
| ( |
| — |
| — | ||||||||||||
Exercise of stock options | — | — | | — | — | — |
| |
| — |
| | ||||||||||||
Stock issued for incentive compensation and tendered for income tax | — | — | | — | | — |
| |
| — |
| | ||||||||||||
Conversion of Series B preferred stock to common stock | ( | — | | — | — | — |
| — |
| — |
| — | ||||||||||||
Private warrant exchange | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Exercise of warrants | — | — | | | — | — |
| |
| — |
| | ||||||||||||
Inducement interest expense related to private warrant exchange | — | — | — | — | — | — |
| |
| — |
| | ||||||||||||
Offering costs related to private warrant exchange | — | — | — | — | — | — |
| ( |
| — |
| ( | ||||||||||||
Dividend declared and paid on Series B preferred stock ($ | — | — | — | — | — | — |
| — |
| ( |
| ( | ||||||||||||
Dividends accrued on Series C and D preferred stock | — | — | — | — | — | — |
| — |
| ( |
| ( | ||||||||||||
Stock-based compensation | — | — | — | — | — | — |
| |
| — |
| | ||||||||||||
Net loss | — | — | — | — | — | — |
| — |
| ( |
| ( | ||||||||||||
Balance at August 31, 2020 | | — | | | | — | | ( | | |||||||||||||||
For the three months ended November 30, 2020: | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — |
| — | |
| | — |
| — |
| |
| — |
| | |||||||||
Exercise of stock options | — |
| — | |
| — | — |
| — |
| |
| — |
| | |||||||||
Stock issued for private offering ($ | — |
| — | |
| | — |
| — |
| |
| — |
| | |||||||||
Private warrant exchange | — | — | | | — | | | |||||||||||||||||
Exercise of warrants | — | — | | | — | | | |||||||||||||||||
Inducement interest expense related to private warrant exchange | — |
| — | — |
| — | — |
| — |
| |
| — |
| | |||||||||
Dividends accrued on Series C and D preferred stock | — |
| — | — |
| — | — |
| — |
| — |
| ( |
| ( | |||||||||
Stock-based compensation | — |
| — | — |
| — | — |
| — |
| |
| — |
| | |||||||||
Net loss | — |
| — | — |
| — | — |
| — |
| — |
| ( |
| ( | |||||||||
Balance at November 30, 2020 | | — | | | | — | | ( | ( | |||||||||||||||
For the three months ended February 28, 2021: | ||||||||||||||||||||||||
Issuance of stock for convertible note repayment | — |
| — | |
| | — |
| — |
| |
| — |
| | |||||||||
Exercise of stock options | — |
| — | |
| | — |
| — |
| |
| — |
| | |||||||||
Conversion of Series B preferred stock to common stock | ( |
| — | |
| — | — |
| — |
| — |
| — |
| — | |||||||||
Private warrant exchange | — | — | | | — | — | | — | | |||||||||||||||
Exercise of warrants | — | — | | | — | — | | — | | |||||||||||||||
Inducement interest expense related to private warrant exchange | — | — | — | — | — | — | | — | | |||||||||||||||
Offering costs related to private warrant exchange | — | — | — | — | — | — | ( | — | ( | |||||||||||||||
Dividends accrued on preferred stock | — | — | — | — | — | — | — | ( | ( | |||||||||||||||
Stock-based compensation | — |
| — | — |
| — | — |
| — |
| |
| — |
| | |||||||||
Net loss | — |
| — | — |
| — | — |
| — |
| — |
| ( |
| ( | |||||||||
Balance at February 28, 2021 | | $ | — | | $ | | | $ | — | $ | | $ | ( | $ | ( | |||||||||
| (1) | See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021. |
See accompanying notes to consolidated financial statements.
6
CytoDyn Inc.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine months ended February 28, | |||||||
| 2022 |
| 2021 |
| |||
(Revised) (1) | |||||||
Cash flows from operating activities: |
|
|
|
| |||
Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
| |||
Amortization and depreciation |
| |
| | |||
Amortization of debt issuance costs |
| |
| | |||
Amortization of discount on convertible notes |
| |
| | |||
Non-cash warrant issuance cost for legal settlement | | — | |||||
Inducement interest expense and non-cash finance charges |
| |
| | |||
Inventory reserve and write offs | | | |||||
Stock-based compensation |
| |
| | |||
Loss on extinguishment of convertible notes |
| |
| | |||
Intangible asset impairment charge | — | | |||||
Changes in operating assets and liabilities: |
|
|
| ||||
Decrease (increase) in inventories | | ( | |||||
(Increase) decrease in prepaid expenses | ( | | |||||
(Decrease) increase in accounts payable and accrued expenses |
| ( |
| | |||
Net cash used in operating activities |
| ( |
| ( | |||
Cash flows from investing activities: |
|
|
|
| |||
Furniture and equipment purchases |
| ( |
| ( | |||
Net cash used in investing activities |
| ( |
| ( | |||
Cash flows from financing activities: |
|
|
|
| |||
Proceeds from warrant transactions, net of offering costs | | | |||||
Proceeds from sale of common stock and warrants, net of issuance costs |
| |
| | |||
Proceeds from warrant exercises |
| |
| | |||
Payment on convertible notes |
| — |
| ( | |||
Release of restricted cash held in trust for warrant tender offer |
| — |
| ( | |||
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 |
| — |
| | |||
Dividend declared and paid on Series B preferred stock | — | ( | |||||
Net cash provided by financing activities |
| |
| | |||
Net change in cash and restricted cash |
| ( |
| ( | |||
Cash and restricted cash, beginning of period |
| |
| | |||
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: |
|
|
|
| |||
Cash paid during the period for interest | $ | | $ | | |||
Non-cash investing and financing transactions: |
|
|
|
| |||
Issuance of common stock for principal and interest of convertible notes | $ | | $ | | |||
Accrued dividends on convertible Series C and D preferred stock | $ | | $ | | |||
Dividend declared and paid in common stock on Series B and C preferred stock conversions | $ | | $ | — | |||
Common stock issued upon conversion of preferred stock | $ | | $ | — | |||
Common stock issued related to modification of equity agreements | $ | | $ | — | |||
(1) See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021.
See accompanying notes to consolidated financial statements.
7
CYTODYN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 2022
(UNAUDITED)
Note 1. Organization
CytoDyn Inc. (together with its wholly own 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 late-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, non-alcoholic steatohepatitis (“NASH”), and coronavirus disease (“COVID-19”). The 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.
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, COVID-19, and other therapeutic indications where CCR5 is believed to play an integral role.
The Company capitalizes inventories procured or produced in preparation for product launches sufficient to support estimated initial market demand subject to regulatory approval for commercial sale. 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 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 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 FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. The Company is working with consultants to cure the BLA deficiencies noted and plans to resubmit the BLA as soon as practical. In November 2021, the Company resubmitted the non-clinical and chemistry, manufacturing, and controls (“CMC”) sections of the BLA and is currently reevaluating when it expects to complete the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. The Company is in dispute with its former contract research organization (“CRO”), as described in Note 10, Commitments and Contingencies, Legal Proceedings. Recently, 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, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services. Additionally, the FDA recently placed the HIV program on a partial clinical hold, which may affect the 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 status of its anticipated resubmission of the clinical section of the BLA once it completes its evaluation. The Company anticipates that when the FDA completes its review of the BLA following completion of the resubmission, leronlimab will be approved, and market acceptance of leronlimab as a treatment for HIV will be forthcoming, enabling the Company to sell the amount of pre-launch inventory on-hand prior to its expiration. Refer to Note 2, Summary of Significant Accounting Policies, Inventories, Note 3, Inventories, net, and Note 10, Commitments and Contingencies, and Part II, Item 2. Regulatory Matters, and Item 1A. Risk Factors for additional information.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
8
The unaudited interim consolidated financial statements include the accounts of CytoDyn Inc. and its subsidiaries and 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 period. 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, 2021, as amended by Amendment No. 1 filed with the SEC on September 28, 2021 (the “2021 Form 10-K”). The results of operations for the three and nine months ended February 28, 2022, are not necessarily indicative of results to be expected for the entire fiscal 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 previously reported.
Correction of Immaterial Misstatements in Prior Period 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 original inducement expense model was designed to calculate non-cash inducement interest expense specific to inducements that modified the warrant term (e.g., extension of the term or modification of exercise price) without settling the instrument. However, starting in fiscal year 2018, inducements were primarily structured to result in a settlement of the warrant, not merely a modification of a warrant that would remain outstanding for some period. The error was identified when the model started to calculate a gain on substantially all inducements, which was inconsistent with the economics of the arrangements. The error resulted in an understatement of non-cash inducement interest expense and additional paid-in capital. The Company assessed the materiality of the misstatement in accordance with Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, as well as SEC Staff Accounting Bulletins No. 99, Materiality, and No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and concluded that the misstatement was not material to the Company’s consolidated financial statements for the prior periods and, accordingly, that amendments of previously filed reports were not required. For additional information about this correction refer to Note 2, Summary of Significant Accounting Policies, of the Form 10-Q for the interim period ended November 30, 2021.
Going Concern
The consolidated accompanying 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 $
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 substantial revenues, and to attain profitability. The Company continues to pursue 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 primarily from the sale of equity and debt securities, combined with additional funding from other traditional sources. However, there can be no assurance, however, that the Company will be successful in these endeavors.
9
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 discussions with the United States Food and Drug Administration (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, reserve for excess and obsolete inventories, 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.
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.
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 the creditworthiness of the customer.
For the Company’s sole contract to date, the customer submits purchase orders to 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 indicated in the purchase order or master supply agreement applied to the quantity of leronlimab vials that the customer requested 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. If necessary, the Company will defer revenue recognized based on its estimate of the right of return, which considers the probability that an adverse regulatory ruling will occur and its estimate of product in the customer’s inventory.
Disaggregation of Revenue – The Company’s revenues are derived solely from the sale of leronlimab vials. The Company believes the revenues are presented at the appropriate level of detail in the accompanying consolidated statement of operations.
10
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. The Company did
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.
Inventories
Previously Expensed Inventories
The Company has recorded revenue related to sales of vials for emergency purposes only, solely to treat critically ill COVID-19 patients in the Philippines under Compassionate Special Permit. Cost of goods sold has been minimal because the vials sold were expensed in prior periods as research and development expense, as they were manufactured prior to the Company’s capitalization of pre-launch inventories as described below. Accordingly, all inventory amounts represent pre-launch inventories, and do not include any inventories previously expensed as research and development expense.
Capitalized Pre-launch 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.
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 considering the status of the product within the regulatory approval process.
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.
11
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, 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 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, and records reserves 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 of 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 it is not likely shelf-life will be able to be extended or the inventory cannot be sold prior to expiration, the Company will record the inventory down to its net realizable value.
Restricted cash
The Company records cash received from fundraising activities before the closing of the transaction as restricted cash on its consolidated balance sheets. As of February 28, 2022, the balance was $
For additional information about the Company’s significant accounting policies, refer to Note 2, Summary of Significant Accounting Policies, of the 2021 Form 10-K.
12
Note 3. Inventories, net
Inventories, net of reserves, are as follows:
(in thousands) |
| February 28, 2022 |
| May 31, 2021 | ||
Raw materials | $ | | $ | | ||
Work-in-progress |
| |
| | ||
Total inventories, net | $ | | $ | | ||
As of February 28, 2022, the remaining shelf-lives of the Company inventories are as follows:
(in thousands, Expiration period ending February 28,) |
| 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 | 13 to 24 months | | - | - | | |||||||||
2024 | 25 to 36 months | | - | | | |||||||||
2025 | 37 to 48 months | | - | | | |||||||||
2026 | 49 to 60 months | - | - | - | - | |||||||||
Thereafter | 61 or more months | | | - | | |||||||||
Total inventories | | | | | ||||||||||
Inventories reserved | ( | - | - | ( | ||||||||||
Total inventories, net | $ | | $ | | $ | | $ | | ||||||
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, 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 is in process of validating 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, and expects to conclude its validation by the end of the current fiscal year. At the conclusion of the validation, the Company expects to present shelf-life of resins to be extended beyond the 13 to 24 months, as currently presented and instead to present shelf-life of resins based on remaining production cycles instead of number of months they may be used for. As of February 28, 2022, the Company did not identify any resins that failed suitability validation.
During the three and nine months ended February 28, 2022, the Company reserved $
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 2b/3 clinical trial for leronlimab as a combination therapy with highly active antiretroviral therapy (“HAART”) for highly treatment-experienced HIV
13
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 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 FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. The Company is working with consultants to cure the BLA deficiencies noted and plans to resubmit the BLA as soon as practical. In November 2021, the Company resubmitted the non-clinical and CMC sections of the BLA and is currently reevaluating when it expects to complete the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. The Company is in dispute with its former CRO, as described in Note 10, Commitments and Contingencies, Legal Proceedings. Recently, 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, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services. Additionally, the FDA recently placed the HIV program on a partial clinical hold, which may affect the 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 status of its anticipated resubmission of the clinical section of the BLA once it completes its evaluation. The Company anticipates that when the FDA completes its review of the BLA following completion of the resubmission, leronlimab will be approved, and market acceptance of leronlimab as a treatment for HIV will be forthcoming, enabling the Company to sell the amount of pre-launch inventory on-hand prior to its expiration. Refer to Note 2, Summary of Significant Accounting Policies, Inventories, Note 3, Inventories, net, and Note 10, Commitments and Contingencies, and Part II, Item 2. Regulatory Matters, and Item 1A. Risk Factors for additional information.
Note 4. Intangible assets, net
Intangible assets were as follows:
(in thousands) |
| February 28, 2022 |
| May 31, 2021 | ||
Leronlimab (PRO 140) patent | $ | | $ | | ||
ProstaGene, LLC intangible asset acquisition, net of impairment |
| | | |||
Website development costs |
| |
| | ||
Gross carrying value | | | ||||
Accumulated amortization, net of impairment |
| ( |
| ( | ||
Total intangible assets, net | $ | | $ | | ||
Amortization expense related to intangible assets, all of which are classified as finite-lived, was $
14
The following table summarizes the estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives as of February 28, 2022:
Fiscal Year (in thousands) |
| Amount | |
2022 (3 months remaining) | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
Thereafter | | ||
Total | $ | | |
Note 5. Accounts Payable and Accrued Liabilities
As of February 28, 2022 and May 31, 2021, the accounts payable balance was $
The components of accrued liabilities are as follows:
(in thousands) | February 28, 2022 |
| May 31, 2021 | |||
Compensation and related expense | $ | | $ | | ||
Legal settlement and fees | | | ||||
Other liabilities |
| |
| | ||
Total accrued liabilities | $ | | $ | | ||
As of February 28, 2022, the entire amount of Accrued legal settlement and fees primarily related to accrued legal fees. As of May 31, 2021, $
Note 6. Convertible Instruments and Accrued Interest
Refer to Note 5, Convertible Instruments, of the 2021 Form 10-K for further information.
Convertible Preferred Stock
February 28, 2022 | May 31, 2021 | |||||||||||||||||
(in thousands) |
| Series B* |
| Series C** |
| Series D** |
| Series B* |
| Series C** |
| Series D** | ||||||
Undeclared dividends | $ | | $ | - | $ | - | $ | | $ | - | $ | - | ||||||
Accrued dividends | $ | - | $ | | $ | | $ | - | $ | | $ | | ||||||
Shares of common stock | | | | | | | ||||||||||||
* Series B preferred stock allows for non-accumulating dividend rights.
** Series C and D preferred stock allow for accumulating dividend rights.
The Company may elect to pay dividends in the Company’s common stock. Shares of common stock presented in the table above represent the number of shares that would have been issued had the dividend been paid in shares of the Company’s common stock as of February 28, 2022 and May 31, 2021.
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 2021 Form 10-K. Outstanding balances associated with the Company’s convertible notes and related accrued interest are as follows:
15
February 28, 2022 | May 31, 2021 | ||||||||||||||||||||
(in thousands) |
| April 2, 2021 Note |
| April 23, 2021 Note |
| Total |
| November 2020 Note |
| April 2, 2021 Note |
| April 23, 2021 Note |
| Total | |||||||
Convertible notes payable outstanding principal | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Less: Unamortized debt discount and issuance costs | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||
Convertible notes payable, net | | | | | | | | ||||||||||||||
Accrued interest on convertible notes | | | | | | | | ||||||||||||||
Outstanding convertible notes payable, net and accrued interest | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Changes to the outstanding balance of convertible notes, including accrued interest, are as follows:
(in thousands) | November 2020 Note | April 2, 2021 Note | April 23, 2021 Note | Total | ||||||||
Outstanding balance at May 31, 2021 | $ | | $ | | $ | | $ | | ||||
Amortization of issuance discount and costs | | | | | ||||||||
Interest expense | | | | | ||||||||
Fair market value of shares exchanged for repayment | ( | ( | - | ( | ||||||||
Debt extinguishment loss | | | - | | ||||||||
Outstanding balance at February 28, 2022 | $ | - | $ | | $ | | $ | | ||||
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
Interest accrued at an annual rate of
In addition, the Company was obligated to make monthly payments to reduce the outstanding balance of the note. 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 partitioned into new notes, and the November 2020 Note was reduced by the balance of the new notes. The new notes were exchanged concurrently with issuance for shares of the Company’s common stock. Refer to Note 5, Convertible Instruments, in the 2021 Form 10-K for additional discussion.
On June 11, 2021, June 21, 2021, and June 30, 2021, in partial satisfaction of the June 2021 debt redemption amount on the November 2020 Note, 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 of $
On July 14, 2021 and July 27, 2021, in partial 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 of $
16
and the holder of the November 2020 Note agreed to defer the remaining $
On August 4, 2021, August 16, 2021, and August 30, 2021, in partial 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 of $
Amortization of debt discounts and issuance costs, and interest expense during nine months ended February 28, 2022 were $
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 470-50-40-10, Debt Modifications and Extinguishments. The Company concluded that debt extinguishment accounting treatment was necessary and, accordingly, recorded aggregate debt extinguishment loss of $
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 at an annual rate of
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 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 $
17
Company to satisfy its redemption obligations in cash within 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
In addition, beginning in May 2021 and for each of the following
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 conversion feature of 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 did 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 considered not 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.
In September 2021, the Company and the holder of the April 2, 2021 Note agreed to defer the $
On October 5, 2021 and October 21, 2021, in partial satisfaction of the October 2021 debt reduction amount, the Company and the April 2, 2021 Note holder entered into exchange agreements, pursuant to which the April 2, 2021 Note was partitioned into new notes (the “October 2021 Partitioned Notes”) with a principal amount of $
On November 2, 2021 and November 16, 2021, in partial satisfaction of the outstanding principal amount, the Company and the April 2, 2021 note holder entered into exchange agreements, pursuant to which the April 2, 2021 Note was partitioned into new notes (the “November 2021 Partitioned Notes”) with a principal amount of $
On December 7, 2021 and December 29, 2021, in partial satisfaction of the outstanding principal amount, the Company and the April 2, 2021 note holder entered into exchange agreements, pursuant to which the April 2, 2021 Note was partitioned into new notes (the “December 2021 Partitioned Notes”) with a principal amount of $
On January 19, 2022, in partial satisfaction of the outstanding principal amount, the Company and the April 2, 2021 Note holder entered into an exchange agreement, pursuant to which the April 2, 2021 Note was partitioned into a new note (the “January 2022 Partitioned Note”) with a principal amount of $
18
On February 18, 2022, in partial satisfaction of the outstanding principal amount, the Company and the April 2, 2021 Note holder entered into an exchange agreement, pursuant to which the April 2, 2021 Note was partitioned into a new note (the “February 2022 Partitioned Note”) with a principal amount of $
Amortization of debt discounts and issuance costs associated with the April 2, 2021 Note during the three and nine months ended February 28, 2022 was $
In connection with the October 2021 to February 2022 Partitioned Notes, the Company analyzed the restructured notes against debt extinguishment accounting under ASC 470-50-40-10, Debt Modifications and Extinguishments, and concluded that debt extinguishment accounting treatment was required. The Company recorded an aggregate debt extinguishment loss of $
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 at an annual rate of
The investor may convert all or any part of the outstanding balance 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 $
19
Amortization of debt discounts and issuance costs associated with the April 23, 2021 Note during the three and nine months ended February 28, 2022 was $
The 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.
The holders of the April 2 and April 23 Notes have waived provisions in the notes that would have resulted in the imposition of a default interest rate, a downward adjustment in the conversion price, or any other default, breach or imposition of a penalty. The related transactions consisted of the issuance of warrants to purchase
Note 7. Equity Awards and Warrants
Stock option and warrants activity is presented in the table below:
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 at May 31, 2021 |
| | $ | |
| $ | | |||
Granted |
| | $ | |
| — |
| — | ||
Exercised |
| ( | $ | |
| — |
| — | ||
Forfeited or expired and cancelled |
| ( | $ | |
| — |
| — | ||
Options and warrants outstanding February 28, 2022 |
| | $ | |
| $ | | |||
Options and warrants outstanding and exercisable at February 28, 2022 |
| | $ | |
| $ | | |||
As of February 28, 2022, approximately
In the three and nine months ended February 28, 2022 and 2021, stock-based compensation expense related to equity instruments discussed herein totaled $(
20
Equity Incentive Plan
As of February 28, 2022, the Company had
Stock Options and Other Equity Awards
During the nine months ended February 28, 2022, the Company granted stock options covering a total of approximately
During the nine months ended February 28, 2022, the Company issued approximately
During the nine months ended February 28, 2022, the Company issued approximately
During the nine months ended February 28, 2022, the Company issued approximately
Private Placement of Shares of Common Stock and Warrants
During the nine months ended February 28, 2022, the Company entered into privately negotiated warrant exchange agreements with certain accredited investors, pursuant to which the investors purchased shares of common stock at exercise prices ranging from $
During the nine months ended February 28, 2022, the Company issued in a private placement to accredited investors a total of approximately
21
share of common stock and one quarter of warrant to purchase one share of common stock. The total proceeds were $
During the three months ended February 28, 2022, in connection with the private placement to accredited investors described above, certain accredited investors who participated in previous private placements purchased
During the nine months ended February 28, 2022, the Company settled a dispute with a placement agent in part by the issuance of warrants covering
On February 16, 2022, the Company issued to a third-party consultant as consideration for services a warrant to purchase
Private Placement of Warrants under Surety Bond Backstop Agreement
On February 14, 2022, the Company entered into a Surety Bond Backstop Agreement (the “Backstop Agreement”) with an accredited investor in his individual capacity and as trustee of a revocable trust as well as certain other related parties (collectively, the “Indemnitors”). Pursuant to the Backstop Agreement, the Indemnitors agreed to assist the Company in obtaining a surety bond (the “Surety Bond”) for posting in connection with the Company’s ongoing litigation with Amarex Clinical Research, LLC (Amarex”), by, among other things, agreeing to indemnify the issuer of the Surety Bond with respect to the Company’s obligations under the Surety Bond. Under the Backstop Agreement, as consideration for the Company’s indemnity of the Surety Bond, the Company agreed to issue a warrant for the purchase of
22
Private Placement of Common Stock and Warrants through Placement Agent
During the nine months ended February 28, 2022, the Company issued in a private placement to accredited investors an aggregate of approximately
Former CEO Severance in Common Stock
On January 24, 2022, the Board of Directors terminated the employment of the Company’s President and Chief Executive Officer, Nader Z. Pourhassan, Ph.D. (the “former CEO”), and removed him as an officer of the Company. Under the terms of his employment agreement, Dr. Pourhassan was also deemed to resign, without any further action or notice, from all positions held with the Company and its subsidiaries, including, without limitation, as a member of the Board. Under the terms of the severance agreement and in accordance with the employment agreement, as amended, with the former CEO, the Company is obligated to pay severance within
Note 8. 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 includes 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 units (including those subject to performance conditions), convertible notes, and convertible preferred stock (including undeclared dividends) that were not included in the computation of basic and diluted weighted average number of shares of common stock outstanding for the periods presented:
Three and nine months ended February 28, | |||||
(in thousands) |
| 2022 |
| 2021 | |
Stock options, warrants, and unvested restricted stock units | | | |||
Convertible notes | | | |||
Convertible preferred stock | | | |||
23
Note 9. Income Taxes
The Company calculates 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 and nine months ended February 28, 2022 and February 28, 2021, was
Note 10. Commitments and Contingencies
Refer to Note 10, Commitments and Contingencies, of the 2021 Form 10-K for further information.
Commitments with Samsung BioLogics Co., Ltd. (“Samsung”)
In April 2019, the Company entered into an agreement with Samsung, pursuant to which Samsung will perform technology transfer, process validation, manufacturing, and supply services for the commercial supply of leronlimab effective through calendar year 2027. In 2020, the Company entered into an additional agreement, pursuant to which Samsung will perform technology transfer, process validation, vial filling and storage services for clinical, pre-approval inspection, and commercial supply of leronlimab. Samsung is obligated to procure necessary raw materials for the Company and manufacture a specified minimum number of batches, and the Company is required to provide a rolling
On January 6, 2022, Samsung provided written notice to the Company alleging that the Company had materially breached the parties’ Master Services and Project Specific Agreements for failure to pay $
As of February 28, 2022, the future commitments pursuant to these agreements were estimated as follows:
Fiscal Year (in thousands) |
| Amount | |
2022 (3 months remaining) | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
Total | $ | | |
Commitments with Contract Research Organization (“CRO”)
The Company continues to maintain agreements with its CRO and related laboratory vendors to perform project work for each of the clinical trials. Under the terms of these agreements, the Company prepaid execution fees for direct services costs, which are recorded as a current asset. In the event the Company were to terminate any trial, it may incur certain financial penalties that would become payable to the CRO. Conditioned upon the form of termination of any one
24
trial, the financial penalties may range up to $
Distribution and Licensing
Refer to Note 9, License Agreements, of the 2021 Form 10-K for further information.
The Company has
In December 2019, the Company entered into Commercialization and License Agreement, and Supply Agreement (together the “License Agreements”) with Vyera Pharmaceuticals, LLC (“Vyera”) under which the Company granted Vyera an exclusive royalty-bearing license to commercialize pharmaceutical preparations containing leronlimab for treatment of HIV in the United States. The License Agreements gave Vyera the right to assign its rights and obligations under the Licence Agreements to an affiliate of Vyera. In October 2020, Vyera assigned the License Agreements to SevenScore Pharmaceuticals, which in turn, in December 2021, assigned them to Regnum Corp. Vyera, SevenScore and Regnum are each controlled by their parent Phoenixus AG.
The License Agreements, as assigned, provide that, pursuant to the terms and subject to the conditions set forth therein, Regnum will, at its cost, use commercially reasonable efforts to commercialize leronlimab for treatment of HIV in the United States. The Company retained the right to license leronlimab for uses in the United States for purposes other than the treatment of HIV and for any purposes outside the United States. The License Agreements obligate Regnum to pay the Company up to $
On April 6, 2021, the Company entered into an exclusive supply and distribution agreement with Biomm S.A., a Brazilian pharmaceutical company, granting the exclusive right to distribute and sell leronlimab in Brazil upon Brazilian regulatory approval.
On April 15, 2021, the Company entered into an exclusive supply and distribution agreement with Chiral Pharma Corporation, a Philippine pharmaceutical company, granting the exclusive right to distribute and sell up to
On May 11, 2021, the Company entered into an exclusive supply and distribution agreement with Macleods Pharmaceuticals Ltd., an Indian pharmaceutical company, granting the exclusive right to distribute and sell up to
25
As further described in Item I, Business of the 2021 Form 10-K, under the Progenics Purchase Agreement, we are required to pay Progenics the following ongoing milestone payments and royalties: (i) $
Legal Proceedings
The Company is a party to various legal proceedings. The Company recognizes accruals for such proceedings to the extent a loss is determined to be both probable and reasonably estimable. The best estimate of a loss within a possible range is accrued; however, if no estimate in the range is more probable than another, then the minimum amount in the range is accrued. If it is determined that a material loss is not probable but reasonably possible and the loss or range of loss can be estimated, the possible loss is disclosed. It is not possible to determine the outcome of proceedings that have not been concluded, including the defense and other litigation-related costs and expenses that may be incurred by the Company, as the outcomes of legal proceedings are inherently uncertain, and the outcomes could differ significantly from recognized accruals. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a recognized accrual or if an accrual had not been made, could be material to the Company’s consolidated financial statements.
Refer to Note 10, Commitments and Contingencies, Legal Proceedings, of the 2021 Form 10-K for further information. As of February 28, 2022, the Company did not record any legal accruals related to the outcomes of the matters described below.
Shareholder Derivative Lawsuit under Section 16(b) of the Securities Exchange Act
On September 10, 2020, certain stockholders of the Company filed a derivative action in the U.S. District Court for the Western District of Washington against then CEO Nader Z. Pourhassan, Ph.D. The plaintiffs claimed that certain of Dr. Pourhassan’s transactions in the Company’s common stock violated Section 16(b) of the Securities Exchange Act of 1934. The Company was only a nominal defendant in the action, and the plaintiffs sought no relief against the Company. On March 12, 2021, the district court granted Dr. Pourhassan’s motion to dismiss the plaintiffs’ complaint with prejudice. The plaintiffs timely appealed that decision to the U.S. Court of Appeals for the Ninth Circuit. On April 8, 2022, the Court of Appeals affirmed the district court’s ruling.
Pestell Employment Dispute
On August 22, 2019, Dr. Richard Pestell filed a lawsuit in the U.S. District Court for the District of Delaware (Pestell v. CytoDyn Inc., et al.), against the Company, its Chief Executive Officer, and its Chairman of the Board, alleging breach of his employment agreement with the Company, failure to pay wages, and defamation, among other claims. The Company has asserted counterclaims alleging Dr. Pestell’s breach of a Confidential Information, Inventions and Noncompetition Agreement. In November 2020, the Court dismissed Dr. Pestell’s wage claims and his claims against the Company’s Chief Executive Officer and the Chairman of the Board. On March 18, 2022, the Court entered summary judgment in favor of the Company on Dr. Pestell’s defamation claim and deferred for trial the Company’s counterclaims and the issue of whether Dr. Pestell is entitled to additional damages for his alleged inability to liquidate shares under a restricted stock agreement. Dr. Pestell has moved for a continuation of the trial date. The new trial date is set for June 2022. Dr. Pestell is seeking approximately $
26
ProstaGene LLC (of which Dr. Pestell was a controlling owner) which are currently held in escrow; and approximately $
Securities Class Action Lawsuit
On March 17, 2021, a stockholder filed a putative class-action lawsuit (the “March 17, 2021 lawsuit”) in the U.S. District Court for the Western District of Washington against the Company and certain current and former officers. The complaint generally alleges the defendants made false and misleading statements regarding the viability of leronlimab as a potential treatment for COVID-19. On April 9, 2021, a second stockholder filed a similar putative class action lawsuit in the same court, which the plaintiff voluntarily dismissed without prejudice on July 23, 2021. On August 9, 2021, the court appointed lead plaintiffs for the March 17, 2021 lawsuit. On December 21, 2021, lead plaintiffs filed an amended complaint, which is brought on behalf of an alleged class of those who purchased the Company’s common stock between March 27, 2020 and May 17, 2021. The amended complaint generally alleges that the Company and certain current and former officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making purportedly false or misleading statements concerning, among other things, the safety and efficacy of leronlimab as a potential treatment for COVID-19, the Company’s CD10 and CD12 clinical trials, and its HIV BLA. The amended complaint also alleges that the individual defendants violated Section 20A of the Exchange Act by selling shares of the Company’s common stock purportedly while in possession of material nonpublic information. The amended complaint seeks, among other relief, a ruling that the case may proceed as a class action and unspecified damages and attorneys’ fees and costs. On February 25, 2022, the defendants filed a motion to dismiss the amended complaint. The Company and the individual defendants deny all allegations of wrongdoing in the complaint and intend to vigorously defend the matter. Since this case is in an early stage where the number of plaintiffs is not known, and the claims do not specify an amount of damages, the Company is unable to predict the ultimate outcome of the lawsuit and cannot reasonably estimate the potential loss or range of loss the Company may incur.
2021 Shareholder Derivative Lawsuits
On June 4, 2021, a stockholder filed a purported derivative lawsuit against certain of the Company’s current and former officers, certain current and former Board members, and the Company as a nominal defendant, in the U.S. District Court for the Western District of Washington. Two additional shareholder derivative lawsuits were filed against the same defendants in the same court on June 25, 2021 and August 18, 2021, respectively. The court has consolidated these
Securities and Exchange Commission and Department of Justice Investigations
The Company has received subpoenas from the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) requesting documents and information concerning, among other matters, leronlimab, the Company’s public statements regarding the use of leronlimab as a potential treatment for COVID-19, HIV, and triple-negative breast cancer, related communications with the FDA, investors, and others, litigation involving former employees, the Company’s retention of investor relations consultants, and trading in the
27
Company’s securities. Certain Company executives have received subpoenas concerning similar issues and may be interviewed by the DOJ or SEC in the future. The SEC informed the Company that its inquiry should not be construed as an indication that any violations of law have occurred or that the SEC has any negative opinion of any person, entity or security.
The Company is cooperating fully with these non-public, fact-finding investigations, and as of the date of this filing, the Company is unable to predict the ultimate outcome and cannot reasonably estimate the potential possible loss or range of loss, if any.
Amarex Dispute
On October 4, 2021, the Company filed a complaint for declaratory and injunctive relief and a motion for a preliminary injunction against NSF International, Inc. and its subsidiary Amarex Clinical Research LLC (“Amarex”), the Company’s former CRO. Over the past eight years, Amarex provided clinical trial management services to the Company and managed numerous clinical studies of the Company’s drug product candidate, leronlimab. On December 16, 2021, the U.S. District Court for the District of Maryland issued a preliminary injunction requiring Amarex to provide the Company with access to all of its materials in the possession of Amarex. The court also granted CytoDyn the right to conduct an audit of Amarex’s work for CytoDyn.
The Company simultaneously filed a demand for arbitration with the American Arbitration Association. The arbitration demand alleges that Amarex failed to perform services to an acceptable professional standard and failed to perform certain services required by the parties’ agreements. Further, the demand alleges that Amarex billed the Company for services it did not perform. The Company contends that, due to Amarex’s failures, it has suffered avoidable delays in obtaining regulatory approval of leronlimab and has paid for services not performed. In light of the fact that this dispute is in an early stage, the Company cannot predict the ultimate outcome of the lawsuit and cannot reasonably estimate the potential loss or range of loss that the Company may incur.
Note 11. Related Party Transactions
The Board’s Audit Committee, composed of independent directors, or the full Board, reviews and approves all related party transactions. The terms and amounts described below are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
On September 23, 2021, Jordan G. Naydenov, a member of the Board, entered into a private warrant exchange in which he exercised warrants to purchase approximately
Note 12. Subsequent Events
On March 18, 2022, the Company issued to an accredited investor in a private placement a total of
On March 25, 2022, the Board of Directors approved the continued appointment of the individuals currently on the Company’s Scientific Advisory Board (the “SAB”) and appointed
28
options were granted to the SAB members exercisable for a total of
On March 27, 2022, the Board of Directors approved the appointment of Karen J. Brunke, Ph.D., as a director of the Company, subject to satisfactory completion of a background check. Her appointment was effective on March 30, 2022. The Board also appointed Dr. Brunke to the Board’s Compensation Committee and Audit Committee.
On March 31, 2022, the Company announced that the FDA placed a full clinical hold on its COVID-19 program and a partial clinical hold on its HIV program in the United States. The Company previously had notified FDA that it was pausing its COVID-19 trials in Brazil. Under the partial clinical hold on the Company’s HIV program, no clinical studies may be initiated or resumed until the partial clinical hold has been resolved. As a result of the partial clinical hold on the HIV program, patients currently enrolled in the extension trials will be transitioned to other available therapeutics. Under the full clinical hold on the COVID-19 program, no new clinical studies may be initiated until the clinical hold is resolved.
In early April 2022, the Company commenced an offering of up to
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to information previously reported under Part I, Item 1 of the 2021 Form 10-K.
Certain information included in this Quarterly Report on Form 10-Q contains, or incorporates by reference, forward-looking statements within the meaning of Section 21E of the Exchange Act. The words “anticipate,” “believe,” “hope,” “expect,” “intend,” “predict,” “plan,” “seek,” “estimate,” “project,” “continue,” “could,” “may,” and similar terms and expressions, or the use of future tense, are intended to identify forward-looking statements. These statements include, among others, statements about leronlimab, its ability to have positive health outcomes, the Company’s ability to resolve the clinical holds recently imposed by the FDA, and information regarding future operations, future capital expenditures and future net cash flows. Such statements reflect current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, (i) the regulatory determinations of leronlimab’s safety and effectiveness by the U.S. Food and Drug Administration and various drug regulatory agencies in other countries; (ii) the Company’s ability to raise additional capital to fund its operations; (iii) the Company’s ability to meet its debt and other payment obligations; (iv) the Company’s ability to enter into or maintain partnership or licensing arrangements with third-parties; (v) the Company’s ability to recruit a permanent CEO and retain other key employees; (vi) the timely and sufficient development, through internal resources or third-party consultants, of analyses of the data generated from the Company’s clinical trials required by the FDA or other regulatory agencies in connection with the Company’s BLA resubmission or other applications for approval of the Company’s drug product, (vii) the Company’s ability to achieve approval of a marketable product; (viii) the design, implementation and conduct of the Company’s clinical trials; (ix) the results of the Company’s clinical trials, including the possibility of unfavorable clinical trial results; (x) the market for, and marketability of, any product that is approved; (xi) the existence or development of vaccines, drugs, or other treatments that are viewed by medical professionals or patients as superior to the Company’s products; (xii) regulatory initiatives, compliance with governmental regulations and the regulatory approval process; (xiii) legal proceedings, investigations or inquiries affecting the Company or its products; (xiv) general economic and business conditions; (xv) changes in foreign, political, and social conditions; (xvi) stockholder actions or proposals with regard to the Company, its management, or its Board of Directors; and (xvii) various other matters, many of which are beyond the Company’s control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated, or otherwise indicated. Consequently, the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments. For a discussion of the risks and uncertainties that could materially and adversely affect the Company’s financial condition and results of operations, see “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended May 31, 2021, as amended by Amendment No. 1 filed with the SEC on September 28, 2021 (the “2021 Form 10-K”), as well as those risks and uncertainties identified in Part II, Item 1A of this Form 10-Q.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the 2021 Form 10-K and the other sections of this Form 10-Q, including our consolidated financial statements and related notes set forth in Part I, Item 1. This discussion and analysis contain forward-looking statements, including information about possible or assumed results of our financial condition, operations, plans, objectives and performance that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated and set forth in such forward-looking statements.
Overview
The Company is a late-stage biotechnology company focused on the clinical development and potential commercialization of its product candidate, leronlimab (PRO 140), which is being studied for the treatment of HIV infection, and other therapeutic indications including oncology and nonalcoholic steatohepatitis (“NASH”). Our current business strategy is to seek the removal of the partial and full clinical holds recently imposed by the US FDA, continue the resubmission process for our Biologics License Application (“BLA”) for leronlimab as a combination therapy for highly treatment-experienced HIV patients , and to seek to further develop leronlimab for other HIV-related indications. We also seek to advance our clinical development of leronlimab for various forms of cancer, including metastatic triple-negative breast cancer (“mTNBC”) and other solid tumors as well as plan to continue to evaluate NAFLD and NASH, and concurrently explore other potential immunologic indications for leronlimab.
30
The target of leronlimab is the immunologic receptor CCR5. The CCR5 receptor is a protein located on the surface of white blood cells that serves as a receptor for chemical attractants called chemokines. The CCR5 receptor may also be present on cells that undergo malignant transformation and may also be present in the tumor microenvironment. Chemokines are the key orchestrators of leukocyte trafficking by attracting immune cells to the sites of inflammation. At the site of an inflammatory reaction, chemokines are released. These chemokines are specific for CCR5 and cause the migration of cells to these sites, promoting further inflammation. The Company believes the mechanism of action of leronlimab has the potential to decrease the movement of cells to inflammatory sites, which could be instrumental in diminishing or eliminating inflammatory responses. Some disease processes that could possibly benefit from CCR5 blockade include transplantation rejection, autoimmunity, and chronic inflammation.
As further discussed in Part I, Note 2, Summary of Significant Accounting Policies, Inventories, Note 3, Inventories, net, and Note 10, Commitments and Contingencies, the Company capitalized procured or produced pre-launch inventories in preparation for product launches sufficient to support estimated initial market demand. The Company considers anticipated future sales, shelf-lives, and expected approval date when evaluating realizability of pre-launch inventories. 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 stability data of all inventories. 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. The Company also considers potential delays associated with regulatory approval in determining whether pre-approval inventory remains salable. Although we believe our product will receive market acceptance, the introduction of a competing product could negatively impact the demand for our product and affect the realizability of our inventories. In addition, if physicians are unwilling or unable to prescribe leronlimab to their patients, or the target patient population was reluctant to try leronlimab as a new therapy, the salability of our pre-launch inventory would be adversely affected.
Third Quarter Overview
COVID-19 Clinical Developments
In March 2022, the United States FDA notified the Company it had placed a full clinical hold on its COVID-19 program. The Company was not conducting any COVID-19 trials in the United States at the time the hold was placed, and elected to withdraw the respective IND. The Company will need to resolve the clinical hold and submit another IND to initiate any future COVID-19 trials in the United States. Further, the Company had elected to pause its Brazil COVID-19 trials pending results from its previously scheduled data safety monitoring board (“DSMB”) meeting in early April 2022.
In April 2022, the DSMB for the Brazilian COVID-19 clinical trials met and recommended that the Brazilian COVID-19 trials, previously paused by the Company, may continue based on the review of the interim patient safety data from the clinical trials. The Company is in the process of providing this information to ANVISA for their subsequent review of the information prior to commencing the enrollment of new patients in the Brazilian trials.
For business updates related to previous periods refer to Part I, Item 2 of the Form 10-Q for the period ended November 30, 2021.
HIV BLA Clinical Developments
The remaining BLA section to be completed and submitted remains in progress as of the date of this filing. The Company is in a dispute with its former contract research organization (“CRO”), and the Company obtained an order requiring the CRO to release the Company’s clinical data related to the BLA, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services. Additionally, the FDA recently placed the HIV program on a partial clinical hold, which may affect the ability to resubmit the BLA. As of March 2022, the FDA had commenced their review of the CMC section. 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 status of its anticipated resubmission of the clinical section of the BLA once it completes its evaluation.
31
In March 2022, the United States FDA notified the Company it had place a partial clinical hold on its HIV programs. The Company was not enrolling any new patients in the trials placed on hold. The partial clinical hold on the HIV program impacts patients currently enrolled in HIV extension trials. The impacted patients will be transitioned to other available therapeutics. No clinical studies can be initiated or resumed until the partial clinical hold is resolved. The Company intends to work with the FDA to resolve the partial clinical hold as soon as possible.
For business updates related to previous periods refer to Part I, Item 2 of the Form 10-Q for the period ended November 30, 2021.
Cancer Clinical Developments
During 2021, the Company stopped and reported results from metastatic Triple-Negative Breast Cancer (“mTNBC”) patients who had failed at least two lines of previous therapy in the Compassionate Use program, our Phase 1b/2 clinical trial, and our Basket trial. The data were insufficient to support resubmission of a Breakthrough Therapy designation request without additional data. The Company is identifying the next steps in clinical development and potential business opportunities to continue the development of this indication, including potentially facilitating research in leronlimab’s role in oncology at various academic institutions.
For business updates related to previous periods refer to Part I, Item 2 of the Form 10-Q for the period ended November 30, 2021.
NASH Clinical Developments
The Company is in the process of completing its final analysis of the data from its Phase 2 NASH trial and plans to release the updated and final results in the near future. There is currently no approved drug for NASH, and liver disease is one of the leading causes of non-AIDS-related death in HIV patients. The Company is identifying the next steps in clinical development and is exploring potential business opportunities to continue the investigation of leronlimab in the NASH indication.
For business updates related to previous periods refer to Part I, Item 2 of the Form 10-Q for the period ended November 30, 2021.
Corporate Developments
On January 24, 2022, the Board of Directors terminated the employment of Nader Z. Pourhassan, Ph.D., as President and CEO of the Company and he is no longer a member of the Board of Directors. A committee of three Board members has been appointed to initiate the search for a new permanent CEO, with a focus on identifying a candidate possessing the requisite pharmaceutical industry experience to enhance the Company’s efforts to achieve regulatory approval and commercialization of leronlimab. Antonio Migliarese, the Company’s Chief Financial Officer, was also appointed interim President.
During February 2022, the Board approved the continued appointments to the Scientific Advisory Board (“SAB”) of Dr. Hope Rugo (oncology), Dr. Mazen Noureddin (hepatology), Dr. Jonah Sacha (HIV), Dr. Norman Gaylis (rheumatology), and Dr. Eric Mininberg (oncology), as well as new SAB members Dr. Otto Yang (infectious diseases/immunology), Dr. Kabir Mody (oncology), and Dr. Paul Edison (neuroscience/neuroinflammation).
On March 27, 2022, the Board of Directors appointed Karen J. Brunke, Ph.D., as a director of the Company. Dr. Brunke has over 30 years of scientific, operational, clinical, senior executive, and corporate development managerial experience with large and small biotechnology companies.
For business updates related to previous periods refer to Part I, Item 2 of the Form 10-Q for the period ended November 30, 2021.
32
Results of Operations
The Company’s operating results may fluctuate significantly depending on the outcomes of clinical trials, patient enrollment and/or completion rates in various trials, entering into new or potential amendments to existing clinical trial protocols, and their related effect on research and development expenses, regulatory and compliance activities, activities related to resubmission and preparation of our HIV BLA, general and administrative expenses, professional fees, and legal proceedings and the related outcomes. Additionally, our operating results are significantly affected by manufacturing activities, specifically by the timing of product manufacturing activities, as well as estimates related to shelf lives of pre-launch inventories, and reclassification of inventory from pre-launch to clinical use.
We also require a significant amount of additional capital and our ability to continue to fund operations will continue to depend on our ability to raise such capital. The type of agreements we utilize to raise capital may create various forms of expense such as non-cash interest expense, inducement expense, or expense related to amortization of issuance costs. Further, we negotiate settlement of debt payment obligations in exchange for equity securities of the Company, which may create a non-cash charge upon extinguishment of debt.
Refer to Risk Factors previously reported under Part 1, Item 1A of the 2021 Form 10-K, to Going Concern section below and to Part II, Item 1A of this report.
Three months ended February 28, | Change | Nine months ended February 28, | Change | |||||||||||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| $ |
| % |
| 2022 |
| 2021 |
| $ |
| % | ||||||||
(Revised) (1) | (Revised) (1) | |||||||||||||||||||||||
Total revenue | $ | — | $ | — | $ | — | — | % | $ | 266 | $ | — | $ | 266 | 100 | % | ||||||||
Total cost of goods sold | — | — | — | — | % | 53 | — | 53 | 100 | % | ||||||||||||||
Gross margin | — | — | — | — | % | 213 | — | 213 | 100 | % | ||||||||||||||
Operating expenses: |
|
|
| |||||||||||||||||||||
General and administrative | 10,140 |
| 7,902 | 2,238 | 28 | % | 33,960 |
| 25,328 | 8,632 | 34 | % | ||||||||||||
Research and development |
| 9,128 |
|
| 12,323 |
| (3,195) | (26) | % |
| 31,952 |
|
| 44,061 |
| (12,109) | (27) | % | ||||||
Amortization and depreciation |
| 129 |
|
| 511 |
| (382) | (75) | % |
| 657 |
|
| 1,522 |
| (865) | (57) | % | ||||||
Intangible asset impairment charge | — | 10,049 | (10,049) | (1) | % | — | 10,049 | (10,049) | (100) | % | ||||||||||||||
Total operating expenses |
| 19,397 |
|
| 30,785 |
| (11,388) | (37) | % |
| 66,569 |
|
| 80,960 |
| (14,391) | (18) | % | ||||||
Operating loss |
| (19,397) |
|
| (30,785) |
| 11,388 | 37 | % |
| (66,356) |
|
| (80,960) |
| 14,604 | 18 | % | ||||||
Other income (expense): | ||||||||||||||||||||||||
Interest and other expense: |
| |||||||||||||||||||||||
Interest on convertible notes |
| (1,187) |
|
| (1,257) |
| 70 | 6 | % |
| (4,299) |
|
| (2,870) |
| (1,429) | (50) | % | ||||||
Amortization of discount on convertible notes | (637) | (157) | (480) | (306) | % | (2,382) | (2,739) | 357 | 13 | % | ||||||||||||||
Amortization of debt issuance costs | (19) | (21) | 2 | 10 | % | (70) | (40) | (30) | (75) | % | ||||||||||||||
Loss on extinguishment of convertible notes |
| (3,109) |
|
| (7,625) |
| 4,516 | 59 | % |
| (11,072) |
|
| (11,794) |
| 722 | 6 | % | ||||||
Finance charges |
| (7,025) |
|
| (1) |
| (7,024) | (702,400) | % |
| (8,084) |
|
| (138) |
| (7,946) | (5,758) | % | ||||||
Inducement interest expense |
| (954) |
|
| (5,360) |
| 4,406 | 82 | % |
| (6,186) |
|
| (12,922) |
| 6,736 | 52 | % | ||||||
Legal settlement |
| — |
|
| — |
| — | — | % |
| (1,941) |
|
| — |
| (1,941) | (100) | % | ||||||
Interest and other expense |
| (12,931) |
|
| (14,421) |
| 1,490 | 10 | % |
| (34,034) |
|
| (30,503) |
| (3,531) | (12) | % | ||||||
Loss before income taxes |
| (32,328) |
|
| (45,206) |
| 12,878 | 28 | % |
| (100,390) |
|
| (111,463) |
| 11,073 | 10 | % | ||||||
Income tax benefit |
| — |
|
| — |
| — | — |
| — |
|
| — |
| — | — | ||||||||
Net loss | $ | (32,328) |
| $ | (45,206) | $ | 12,878 | 28 | % | $ | (100,390) |
| $ | (111,463) | $ | 11,073 | 10 | % | ||||||
Basic and diluted loss per share | $ | (0.05) | $ | (0.08) | $ | 0.03 | 36 | % | $ | (0.15) | $ | (0.19) | $ | 0.04 | 20 | % | ||||||||
Basic and diluted weighted average common shares outstanding |
| 695,614 | 577,854 |
| 117,760 | 20 | % |
| 663,373 |
| 595,226 |
| 68,147 | 11 | % | |||||||||
(1) See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021.
33
Product revenue
For the nine months ended February 28, 2022, we recognized revenue of approximately $0.3 million; none in the three months ended February 28, 2022 and the three and nine months of the comparable periods of fiscal 2021. Revenue was related to the fulfillment of orders under a Compassionate Special Permit (“CSP”) in the Philippines for the treatment of COVID-19 patients. As discussed in the previous filings, sales were made under the April 2021 exclusive supply and distribution agreement granting Chiral the right to distribute and sell up to 200,000 vials of leronlimab through April 15, 2022.
For additional information about the revenue recognition policy, refer to Item 1, Note 2, Summary of Significant Accounting Policies, Revenue Recognition, of this Form 10-Q.
Cost of goods sold (“COGS”) and Gross margin
For the nine months ended February 28, 2022, we recognized cost of goods sold of approximately $53.0 thousand; none in the three months ended February 28, 2022. We did not have revenue or associated costs in the comparable periods of 2021. At the time of the sales, FDA approval had not yet been received for leronlimab and the product sold was previously expensed as research and development expense due to its being manufactured prior to the commencement of the manufacturing of commercial grade pre-launch inventories. Therefore, COGS consists only of the costs of packaging and shipping of the vials, including related customs and duties. When product manufactured prior to the manufacturing of pre-launch inventories is fully depleted and commercial grade pre-launch inventories for which manufacturing costs have been capitalized are sold, it is expected that COGS will significantly increase and gross margin will significantly decrease.
For additional information about the inventories policies, refer to Note 2, Summary of Significant Accounting Policies, Inventories, of the 2021 Form 10-K and this Form 10-Q.
General and administrative (“GA”) expenses
GA expenses consisted of the following:
Three months ended February 28, | Change | Nine months ended February 28, | Change | |||||||||||||||||||||
(in thousands) | 2022 |
| 2021 |
| $ |
| % |
| 2022 |
| 2021 |
| $ |
| % | |||||||||
(Revised) (1) | (Revised) (1) | |||||||||||||||||||||||
Salaries, benefits, and other compensation | $ | 3,227 | $ | 2,436 | $ | 791 | 32 | % | $ | 5,463 | $ | 7,417 | $ | (1,954) | (26) | % | ||||||||
Stock-based compensation |
| (438) |
| 1,937 | (2,375) | (123) |
| 4,219 |
| 9,053 | (4,834) | (53) | ||||||||||||
Legal fees | 5,161 | 2,520 | 2,641 | 105 | 16,718 | 5,100 | 11,618 | 228 | ||||||||||||||||
Other |
| 2,190 |
| 1,009 | 1,181 | 117 |
| 7,560 |
| 3,758 | 3,802 | 101 | ||||||||||||
Total general and administrative | $ | 10,140 | $ | 7,902 | $ | 2,238 | 28 | % | $ | 33,960 | $ | 25,328 | $ | 8,632 | 34 | % | ||||||||
GA expenses increased approximately $2.2 million, or 28%, for the three months ended February 28, 2022 compared to the same period in the prior year. The increase was primarily driven by increased other compensation, legal fees, and other. The increase in other compensation was related to the accrual of expenses related to severance due to the Company’s former CEO, which was partially settled in stock in March 2022. Refer to the further discussion regarding the separation of the former CEO provided in Item 1, Note 7, Equity Awards and Warrants, Former CEO Severance in Common Stock, of this Form 10-Q. The increase in legal fees was primarily related to legal fees associated with the SEC and DOJ investigations, the Pestell employment dispute, and the Amarex dispute. The decrease in stock-based compensation was primarily related to the forfeiture of unvested equity grants of the former CEO upon separation. Additionally, the increase in other GA expense was primarily due to increased insurance premiums and outsourced consulting and recruiting services.
GA expenses increased approximately $8.6 million, or 34%, for the nine months ended February 28, 2022 compared to the same period in the prior year. The increase was primarily driven by increased legal fees and other GA expense, which were partially offset by decreased employee-related costs. The increase in legal fees was primarily
34
related to the proxy contest and related lawsuits, SEC and DOJ investigations, the Pestell employment dispute, and the Amarex dispute. The increase in other was primarily due to increased insurance premiums, costs associated with the 2021 annual meeting of stockholders, and outsourced consulting and recruiting services. The reduction in salaries, benefits and other compensation was attributable to a reduction in bonuses and the reclassification of previously accrued incentive compensation to stock-based compensation due to the compensation being issued in stock, offset by an increase in severance costs related to the termination of employees and salaries and benefits. The decrease in stock-based compensation was primarily related to the forfeiture of unvested equity grants of the former CEO upon separation, partially offset by the issuance of common stock for bonus compensation instead of cash.
Research and development (“RD”) expenses
RD expenses consisted of the following:
Three months ended February 28, | Change | Nine months ended February 28, | Change | |||||||||||||||||||||
(in thousands) | 2022 |
| 2021 |
| $ |
| % |
| 2022 |
| 2021 |
| $ |
| % | |||||||||
(Revised) (1) | (Revised) (1) | |||||||||||||||||||||||
Clinical | $ | 2,612 | $ | 10,194 | $ | (7,582) | (74) | % | $ | 17,273 | $ | 26,650 | $ | (9,377) | (35) | % | ||||||||
Non-clinical |
| 203 |
| 52 | 151 | 290 |
| 878 |
| 1,090 | (212) | (19) | ||||||||||||
CMC |
| 6,067 |
| 1,804 | 4,263 | 236 |
|
| 13,086 |
| 15,618 | (2,532) | (16) |
| ||||||||||
License and patent fees |
| 246 |
| 273 | (27) | (10) |
|
| 715 |
| 703 | 12 | 2 |
| ||||||||||
Total research and development | $ | 9,128 | $ | 12,323 | $ | (3,195) | (26) | % | $ | 31,952 | $ | 44,061 | $ | (12,109) | (27) | % | ||||||||
For the nine months ended February 28, 2022, RD expenditures were primarily devoted to: (1) COVID-19 clinical trials, (2) HIV extension studies which continue to provide leronlimab to patients who have previously successfully completed a trial, (3) NASH clinical trial, (4) HIV BLA resubmission , (5) clinical trials for oncology and other immunology indications, and (6) CMC activities related to clinical and commercialization inventories, including expenses associated with inventory related charges.
For the three months ended February 28, 2022, RD expenses decreased approximately $3.2 million, or 26%, compared to the same period in the prior year. The decrease was primarily due to decreased clinical expenses, offset by CMC related activities and a slight increases in non-clinical expenses. The reduction in clinical expenses was primarily attributable to decreased expenses associated with the various clinical trials related to COVID-19, HIV extension studies, NASH, oncology, costs related to resubmission of our HIV BLA, and the packaging and shipping of leronlimab. The driver of the increase in the CMC expense was related to the increase of the inventory reserve for the estimated obsolescence of raw materials, and the expensing of vialed drug product used for clinical purposes and inventory rendered defective for commercial purposes due to manufacturing errors committed by the contract manufacturer during the manufacturing process. The increase in non-clinical expenses was attributable to increased activity associated with pre-clinical studies.
For the nine months ended February 28, 2022, RD expenses decreased approximately $12.1 million, or 27%, compared to the same period from 2021. The decrease was primarily due to lower clinical, CMC, and non-clinical expenses. The decrease in clinical expenses was primarily attributable to reduced expenses associated with the various clinical trials related to COVID-19, HIV extension studies, and oncology, and the packaging and shipping of leronlimab. The reduction in CMC expense was due to decreased manufacturing activity tied to the commercialization of leronlimab, partially offset by the increase of inventory reserves for estimated obsolescence of raw materials, and the expensing of vialed drug product used for clinical purposes and inventory rendered defective for commercial purposes due to manufacturing errors committed by the contract manufacturer during the manufacturing process. The reduction in non-clinical expenses was attributable to decreased activity associated with pre-clinical studies.
Amortization and depreciation expenses, and intangible asset impairment charge
In the three and nine months ended February 28, 2022 and 2021, amortization and depreciation expense was approximately $0.1 million and $0.5 million, and approximately $0.7 million and $1.5 million, respectively. The decrease of approximately $0.4 million, or 75%, and approximately $0.8 million, or 57% is primarily attributable to the
35
non-cash impairment charge related to the ProstaGene asset recorded in the third quarter of fiscal year 2021, in addition to some intangible assets becoming fully amortized.
Interest and other expense
Interest and other expense consisted of the following:
Three months ended February 28, | Change | Nine months ended February 28, | Change | |||||||||||||||||||||
(in thousands) | 2022 |
| 2021 |
| $ |
| % |
| 2022 |
| 2021 |
| $ |
| % | |||||||||
(Revised) (1) | (Revised) (1) | |||||||||||||||||||||||
Interest on convertible notes payable | $ | 1,187 | $ | 1,257 | $ | (70) | (6) | % | $ | 4,299 | $ | 2,870 | $ | 1,429 | 50 | % | ||||||||
Amortization of discount on convertible notes |
| 637 |
| 157 | 480 | 306 |
| 2,382 |
| 2,739 | (357) | (13) | ||||||||||||
Amortization of debt issuance costs | 19 | 21 | (2) | (10) | 70 | 40 | 30 | 75 | ||||||||||||||||
Loss on extinguishment of convertible notes |
| 3,109 |
| 7,625 | (4,516) | (59) |
|
| 11,072 |
| 11,794 | (722) | (6) |
| ||||||||||
Finance charges |
| 7,025 |
| 1 | 7,024 | 702,400 |
|
| 8,084 |
| 138 | 7,946 | 5,758 |
| ||||||||||
Inducement interest expense | 954 | 5,360 | (4,406) | (82) | 6,186 | 12,922 | (6,736) | (52) | ||||||||||||||||
Legal settlement | — | — | — | — | 1,941 | — | 1,941 | 100 | ||||||||||||||||
Total interest and other expense | $ | 12,931 | $ | 14,421 | $ | (1,490) | (10) | % | $ | 34,034 | $ | 30,503 | $ | 3,531 | 12 | % | ||||||||
(1) See Note 2, Correction of Immaterial Misstatements in Prior Period Financial Statements in Form 10-Q for the period ended November 30, 2021.
In the three and nine months ended February 28, 2022 and 2021, we recognized a non-cash loss on the extinguishment of convertible notes of approximately $3.1 million and $7.6 million, and approximately $11.1 million and $11.8 million, respectively. The losses resulted from separate and independently negotiated note payment settlements in which certain debt was agreed to be settled in exchange for shares issued at a price less than the closing price at the date of the respective transactions. The original underlying convertible notes were entered into on November 10, 2020 and April 2, 2021. The November 10, 2020 note was fully retired during the three months ended November 30, 2022. Refer to Item I, Note 6, Convertible Instruments and Accrued Interest, for further information.
The increase in finance charges in the three and nine months ended February 28, 2022 as compared to the same periods in the prior year, was primarily attributable to a non-cash expense related to the issuance of 15.0 million warrants pursuant to the Backstop Agreement in addition to interest charges assessed on amounts due to vendors. Refer to Part I, Note 7, Equity Awards and Warrants, Private Placement of Warrants under Surety Bond Backstop Agreement for additional information.
For the three months ended February 28, 2022 as compared to the same period in the prior year, interest on convertible notes did not change significantly. In the nine months ended February 28, 2022 as compared to the same period in the prior year, the increase is attributable to the larger amount of debt carried by the Company at the beginning of the fiscal year.
For the nine months ended February 28, 2022, we incurred approximately $1.9 million as legal settlement expense; none in the three months ended February 28, 2022 and three and nine months of the comparable periods of fiscal 2021. The legal settlement expense consisted of a $0.2 million cash payment and approximately $1.7 million of non-cash expense related to the issuance of warrants in connection with a negotiated settlement of a dispute with a placement agent.
Liquidity and Capital Resources
Cash
The Company’s cash and restricted cash position of approximately $2.4 million as of February 28, 2022 decreased by approximately $31.6 million, when compared to the balance of $33.9 million at May 31, 2021. This decrease was
36
primarily the result of approximately $71.7 million in cash used in our operating activities offset by approximately $40.1 million in cash provided by financing activities. Refer to Item 1, Note 2, Summary of Significant Accounting Policies, Going Concern, and Going Concern discussion below to obtain an understanding of the Company’s ability to continue to fund its operations and satisfy its payment obligations and commitments.
Nine months ended February 28, | Change | |||||||||
(in thousands) | 2022 |
| 2021 |
| $ | |||||
(Revised) (1) | ||||||||||
Net cash (used in) provided by: | ||||||||||
Net cash used in operating activities | $ | (71,679) | $ | (84,767) | $ | 13,088 | ||||
Net cash used in investing activities | $ | (30) | $ | (100) | $ | 70 | ||||
Net cash provided by financing activities | $ | 40,129 | $ | 84,866 | $ | (44,737) | ||||
Cash used in operating activities
During the nine months ended February 28, 2022, we used $71.7 million for operating activities, an improvement of $13.1 million as compared to the same period in the prior year. The decrease in the net amount of cash used in operating activities was due primarily to the change in our net loss, working capital fluctuations, and changes in our non-cash expenses, all of which are highly variable.
Cash used in investing activities
Net cash used in investing activities was insignificant in the nine months ended February 28, 2022, compared to the same period in the prior year.
Cash provided by financing activities
During the nine months ended February 28, 2022, net cash provided by financing activities was $40.1 million, a decrease of $44.7 million as compared to the same period in the prior year. The decrease was primarily attributable to a decrease in proceeds received from convertible notes of $50.0 million, and from stock option and warrant exercises.
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 in light of the Company’s expectation regarding 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. See Item 1, Note 2, Summary of Significant Accounting Policies – Inventories, and Note 3, Inventories, net, for further discussion of the capitalization of pre-launch inventories.
The Company’s inventory position as of February 28, 2022 was approximately $82.7 million, net of an approximate $5.8 million reserve, a decrease of approximately $10.8 million when compared to a balance of approximately $93.5 million as of May 31, 2021, net of an approximate $0.7 million reserve. During the nine months ended February 28, 2022, the decrease in inventory was primarily related to $5.1 million reserved for current and future estimated obsolescence of raw materials, approximately $3.6 million related to the write-off of expired raw materials not previously reserved for and vialed drug product used for clinical purposes, $3.3 million of inventories returned or credits received from vendors, offset by inventory purchases of approximately $2.0 million. As of February 28, 2022 the raw materials balance was approximately $19.5 million, net of an approximate $5.8 million reserve, and the total work-in-progress was approximately $63.2 million. 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. Bulk drug substance and drug product comprised approximately $1.7 million and $61.5 million, respectively, of work-in-progress inventory.
37
Convertible debt
A summary of our convertible debt arrangements is included in Note 6, Convertible Instruments and Accrued Interest, of the Notes to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
April 2, 2021 Note
On April 2, 2021, we issued a convertible note with a principal amount of $28.5 million resulting in net cash proceeds of $25.0 million, after $3.4 million of debt discount and $0.1 million of offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of $10.00 per share, and matures in April 2023. The April 2, 2021 Note required monthly debt reduction payments of $7.5 million for the six months beginning in May 2021, which could also be satisfied by payments on other notes held by the noteholder or its affiliates. Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to $3.5 million. The outstanding balance of the April 2, 2021 Note, including accrued interest, was $11.4 million as of February 28, 2022.
April 23, 2021 Note
On April 23, 2021, we issued a convertible note with a principal amount of $28.5 million resulting in net cash proceeds of $25.0 million, after $3.4 million of debt discount and $0.1 million of offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of $10.00 per share, and matures in April 2023. Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to $7.0 million. The outstanding balance of the April 23, 2021 Note, including accrued interest, was $29.1 million as of February 28, 2022.
Common stock
We have 1,000.0 million authorized shares of common stock. As of February 28, 2022, we had approximately 713.3 million shares of common stock outstanding, approximately 79.3 million shares of common stock issuable upon the exercise of warrants, approximately 32.2 million shares of common stock issuable upon conversion of convertible preferred stock and undeclared dividends, approximately 19.0 million shares of common stock issuable upon the exercise of outstanding stock options or the vesting of outstanding restricted stock units, approximately 10.2 million shares of common stock reserved for issuance pursuant to future stock-based awards under our equity incentive plan, and approximately 12.0 million shares of common stock reserved and issuable upon conversion of outstanding convertible notes. As a result, as of February 28, 2022, we had approximately 134.0 million unreserved authorized shares of common stock available for issuance.
Our ability to continue to fund our operations depends on our ability to raise such capital. The funding necessary for our operations may not be available on acceptable terms or at all. If we may need to scale back operations and/or slow CMC-related activities, delay, reduce the scope of, or eliminate one or more of our clinical trials or postpone our regulatory submissions and commercialization initiatives or our ability to adequately fund legal proceedings, which would adversely affect our business, financial condition, and stock price. If we deplete our cash reserves, we may have to discontinue our operations and liquidate our assets, in extreme cases, we could be forced to file for bankruptcy protection, discontinue operations or liquidate assets.
Off-Balance Sheet Arrangements
As of February 28, 2022, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current or future financial condition, results of operations, liquidity, capital expenditures or capital resources.
38
Contractual Obligations
Refer to Note 5, Accounts Payable and Accrued Liabilities, Note 6, Convertible Instruments and Accrued Interest, and Note 10, Commitments and Contingencies included in Part I, Item 1 of this Form 10-Q, and in Item 7 of the 2021 Form 10-K.
Legal Proceedings
The Company is a party to various legal proceedings. As of February 28, 2022, we were not party to any material pending legal proceedings, other than those described in Note 10, Commitments and Contingencies, to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. The Company recognizes accruals for such proceedings to the extent a loss is determined to be both probable and reasonably estimable. The best estimate of a loss within a possible range is accrued; however, if no estimate in the range is more probable than another, then the minimum amount in the range is accrued. If it is determined that a material loss is not probable but reasonably possible and the loss or range of loss can be estimated, the possible loss is disclosed. It is not possible to determine the outcome of these proceedings, including the defense and other litigation-related costs and expenses that may be incurred by the Company, as the outcomes of legal proceedings are inherently uncertain, and the outcomes could differ significantly from recognized accruals. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a recognized accrual or if an accrual has not been made, could be material to the Company’s consolidated financial statements. As of February 28, 2022, the Company had not recorded any accruals related to the outcome of the matters described in Note 10, Commitments and Contingencies, Legal Proceedings.
Regulatory Matters
FDA Refusal to File Letter re HIV BLA Submission
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 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 FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. The Company is working with consultants to cure the BLA deficiencies noted and will resubmit the BLA as soon as practical. In November 2021, the Company resubmitted the non-clinical and CMC sections of the BLA and is currently reevaluating when it expects to complete the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. The Company is in dispute with its former contract research organization (“CRO”), as described in Note 10, Commitments and Contingencies – Legal Proceedings. Recently, 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, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services. Additionally, the FDA recently placed the HIV program on a partial clinical hold, which may affect the 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 provide an updated timeline anticipated resubmission date once it completes its evaluation, the impact those results may have on the BLA and the estimated resubmission timeline.
FDA Warning Letter re COVID-19 Misbranding of Investigational Drug
In January 2022, the Company received a Warning Letter from the United States FDA alleging that its former CEO and President, Dr. Nader Pourhassan, had made references in a video interview to COVID-19 and leronlimab in a promotional context to the effect that leronlimab, an investigational new drug, is safe and effective for the purpose for which it is being investigated or otherwise promoted the drug. The FDA warned the Company that leronlimab has not been approved or authorized by the FDA, its safety and effectiveness has not yet been established, and that the related clinical trial data was mischaracterized in the video. The FDA further alleged the video misbrands leronlimab under section 502(f)(1) of the FDC Act and in violation of section 301(a) of the FDC Act, as the claims in the video make representations in a promotional context regarding the safety and efficacy of an investigational new drug that has not
39
been approved or authorized by the FDA. The Company is working closely with the FDA to resolve this matter and take the proper corrective actions.
FDA Partial Clinical Hold re HIV and Full Clinical Hold re COVID-19 Letters
In March 2022, the United States FDA placed a partial clinical hold on the Company’s HIV program and a full clinical hold on its COVID-19 program in the United States. The Company was not enrolling any new patients in the trials placed on hold in the United States. The partial clinical hold on the HIV program impacts patients currently enrolled in extension trials. These patients will be transitioned to other available therapeutics and no clinical studies can be initiated or resumed until the partial clinical hold is resolved. CytoDyn is working closely with the FDA to resolve the partial clinical hold as soon as possible. Under the full clinical hold on the COVID-19 program, no new clinical studies may be initiated until the clinical hold is resolved. The Company is not currently conducting any COVID-19 trials in the United States, as it is evaluating the most optimal programs on which to focus its resources and attention. The Company is working closely with the FDA to resolve the partial clinical hold as soon as possible.
Going Concern
As presented in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of $100.4 million for the nine months ended February 28, 2022 and has an accumulated deficit of $636.1 million as of February 28, 2022. The Company has had limited to no activities that produced revenue in the periods presented and has sustained operating losses since inception.
We currently require and will continue to require a significant amount of additional capital to fund operations and pay our liabilities and commitments, and our ability to continue as a going concern is dependent on our ability to raise such additional capital, commercialize our product and achieve profitability. If the Company is not able to raise such additional capital on a timely basis or on favorable terms, it may need to scale back operations and/or slow CMC-related activities, delay or reduce the scope of, or eliminate one or more of our clinical trials or postpone our regulatory submissions and commercialization initiatives, or ability to adequately fund legal proceedings, which could materially delay commercialization initiatives and its ability to achieve profitability. The Company’s failure to raise additional capital could also affect its relationships with key vendors, including Samsung, disrupting its ability to timely execute its business plan. In extreme cases, the Company could be forced to file for bankruptcy protection, discontinue operations or liquidate assets.
Since inception, the Company has financed its activities principally from the public and private sale of equity securities and proceeds from convertible notes payable and related party notes payable. The Company intends to finance its future operating activities and its working capital needs largely from the sale of equity and debt securities, combined with additional potential funding from other traditional and non-traditional financing sources. As of the date of this filing, the Company has approximately 134.0 million shares of common stock unreserved, authorized and available for issuance under its certificate of incorporation, as amended.
The sale of equity and convertible debt securities to raise additional capital may result in dilution to stockholders and those securities may have rights senior to those of common shares. If the Company raises funds through the issuance of additional preferred stock, convertible debt securities or other debt or equity financing, the related transaction documents could contain covenants restricting its operations. On April 2 and April 23, 2021, the Company entered into long-term convertible notes that are secured by all of our assets (excluding our intellectual property), and include certain restrictive provisions, including limitations on incurring additional indebtedness and future dilutive issuances of securities, any of which could impair our ability to raise additional capital on acceptable terms and conditions. On February 14, 2022, in exchange for warrants the Company entered into a Backstop Arrangement with an accredited investor whereby the Company pledged its patents and the investor agreed to indemnify the issuer of the Surety Bond in the Amarex dispute with respect to the Company’s obligations under the Surety Bond. Any other third-party funding arrangements could require the Company to relinquish valuable rights. The Company expects to require additional capital beyond currently anticipated needs. Additional capital, if available, may not be available on reasonable or non-dilutive terms. Refer to Item 1A in the 2021 Form 10-K and Item 1A in Part II of this Form 10-Q for additional information.
40
New Accounting Pronouncements
There have been no material changes in recently issued or adopted accounting standards from those disclosed in the 2021 Form 10-K. Also refer to Item 1, Note 2, Summary of Significant Accounting Policies, Revenue Recognition, and Note 3, Inventories, net of this Form 10-Q for additional discussion.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
The Company capitalizes inventories procured or produced in preparation for product launches sufficient to support estimated initial market demand subject to regulatory approval for commercial sale. 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 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 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 FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. The Company is working with consultants to cure the BLA deficiencies noted and will resubmit the BLA as soon as practical. In November 2021, the Company resubmitted the non-clinical and chemistry, manufacturing, and controls (“CMC”) sections of the BLA and is currently reevaluating when it expects to complete the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. The Company is in dispute with its former contract research organization (“CRO”), as described in Note 10, Commitments and Contingencies, Legal Proceedings. Recently, 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, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services. Additionally, the FDA recently placed the HIV program on a partial clinical hold, which may affect the 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 status of its anticipated resubmission of the clinical section of the BLA once it completes its evaluation. The Company anticipates that when the FDA completes its review of the BLA following completion of the resubmission, leronlimab will be approved, and market acceptance of leronlimab as a treatment for HIV will be forthcoming, enabling the Company to sell the amount of pre-launch inventory on-hand prior to its expiration. Refer to Note 2, Summary of Significant Accounting Policies, Inventories, Note 3, Inventories, net, and Note 10, Commitments and Contingencies, and Part II, Item 2. Regulatory Matters, and Item 1A. Risk factors for additional discussions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information previously reported under Part II, Item 7A of the 2021 Form 10-K.
41
Interest Rate Risk
We are exposed to market risks in the ordinary course of business. These risks primarily include interest rate sensitivities. As of February 28, 2022, we had $2.4 million in cash and restricted cash. We intend to hold our cash in interest-bearing money market accounts. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash and the low risk profile of its investment, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash.
Common Stock Price Volatility
The Compensation Committee of the Board of Directors has historically granted stock incentive awards to management and employees in the form of stock options. Stock-based compensation expense is recognized for stock options over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model and the market value of our publicly traded common stock on the date of grant. This expense is reflected as part of the general and administrative expense line item in our consolidated statements of operations. In addition to the market value of our common stock, one of the inputs into this model that significantly impacts the fair value of the options is the expected volatility of our common stock over the estimated life of the option. We estimate expected volatility by using the most recent historical experience.
Since November 2019, our common stock has experienced periods of elevated volatility in trading. Grants of stock options and warrants during 2022 will continue to reflect expected volatility in the estimation of grant date fair value of stock options that would result in a higher value and related stock-based compensation expense for these awards when compared to prior years.
Additionally, we negotiate the settlement of debt payment obligations in exchange for equity securities of the Company, which can create a non-cash charge upon extinguishment of debt as the price of our common stock fluctuates. If we continue to enter into these settlements, the increased levels of volatility in our common stock trading price will result in increased dilution and extinguishment gains or losses.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the Exchange Act) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Financial Officer, who has also been performing the functions of the Chief Executive Officer as interim President since January 25, 2022, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As previously disclosed in the Form 10-Q for the period ended November 30, 2021, we identified an error that resulted in revisions to additional paid-in capital and non-cash inducement interest expense beginning in fiscal year 2018 through the three months ended August 31, 2021. The error relates to a pre-existing model used to calculate non-cash inducement interest expense designed to calculate inducement interest expense specific to modification of a warrant term (e.g., extension of the term or modification of exercise price) without settling the instrument. However, starting in fiscal year 2018 and to date, inducements have been primarily structured to be a settlement of the warrant, not a modification. We believe the failure to identify these errors on a timely basis resulted from a material weakness related to the evaluation of complex accounting issues due to staffing constraints and lack of technical expertise. In connection with the identification of the material weakness in our internal control over financial reporting, we continue to evaluate, design and implement controls and procedures to address this weakness. In recent periods, we have entered into consulting arrangements for external resources and have hired additional personnel with accounting skills to strengthen internal control over financial reporting, specifically in the areas of technical accounting and financial reporting. A
42
material weakness in internal control over financial reporting is a matter that may require some period of time to correct. We will continue to evaluate, design and implement policies and procedures to address the material weakness, including enhancing accounting personnel to adequately execute our accounting processes and address our internal control over financial reporting as a public company. We are also implementing several transformation initiatives to centralize and simplify our business processes and systems. We expect to complete their implementation by the end of the current fiscal year; we believe they will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives.
Other than the changes to date described above, there have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Financial Officer, who has also been performing the functions of the Chief Executive Officer as interim President since January 25, 2022, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of February 28, 2022 due to the material weakness in internal control over financial reporting described above.
43
PART II – Other Information
Item 1. Legal Proceedings
Refer to Note 10, Commitments and Contingencies, included in Part I, Item 1 of this Form 10-Q, for a description of pending material legal proceedings.
Item 1A. Risk Factors
We are subject to various risks, including risk factors identified in our Annual Report on Form 10-K for the year ended May 31, 2021, as amended by Amendment No. 1 filed with the SEC on September 28, 2021, as well as the risk factors described below. You should carefully consider these risk factors in addition to other information in this Form 10-Q.
Our cash reserves are extremely low, requiring that we raise substantial additional financing to satisfy our current payment obligations and to fund our operations.
We must raise substantial additional funds in the near term to meet our payment obligations and fund our operations. This funding may not be available on acceptable terms or at all. In addition, as of March 28, 2022, we had only approximately 134.0 million shares of common stock available for issuance in new financing transactions. If we fail to raise additional funds on a timely basis, we may be forced to delay, reduce the scope of, or eliminate one or more of our planned operating activities, including resubmission of our BLA application, analysis of clinical trial data for purposes of responding to FDA requirements and preparing additional regulatory submissions, engaging in additional clinical trials, or seeking additional commercialization opportunities, regulatory and compliance activities, and legal defense activities. Any such delay or inability to pursue our planned activities could adversely affect our business, financial condition, and stock price. If we deplete our cash reserves, we may have to discontinue our operations and liquidate our assets.
We have capitalized pre-launch inventories prior to receiving FDA marketing approval. If either FDA approval or market acceptance post-approval do not occur at all or on a timely basis prior to shelf-life expiration, the Company will be required to write-off pre-launch inventories, which would materially and adversely affect, financial condition ability to raise additional financing, and stock price.
Pre-launch inventories consist of raw materials and work-in-progress related to our product candidate leronlimab, the costs of which were capitalized prior to. If FDA approval is significantly delayed, the salability of our product may be affected due to shelf-life of our pre-launch inventory. In addition, market acceptance of our product could fall short of our expectations due to introduction of a competing product, physicians being unwilling or unable to prescribe leronlimab to their patients, or if our target patient population is reluctant to try leronlimab as a new therapy. If any of these risks were to materialize with respect to our product, or if the launch of such product is significantly postponed, the salability of our pre-launch inventories would be adversely affected and may require write-off of a significant portion of the carrying value of our pre-launch inventories.
Pre-launch inventories consist of costs of raw materials and work-in-progress related to our product candidate leronlimab, which have been capitalized prior to the date that we anticipate that such product will receive FDA final marketing approval. The BLA resubmission will require updating the previously provided analyses which could result in significant delay in obtaining approval. If FDA approval is significantly delayed, the salability of our product may be affected due to shelf-life of our pre-launch inventory. In addition, market acceptance of our product could fall short of our expectations due to introduction of a competing product, physicians unwilling or unable to prescribe leronlimab to their patients, or if our target patient population is reluctant to try leronlimab as a new therapy. If any of these risks were to materialize with respect to our product, or if the launch of such product is significantly postponed, the salability of our
44
pre-launch inventories would be adversely affected and may require write-off of the carrying value of our pre-launch inventories in amounts that could have a material adverse effect on our results of operations and financial condition.
In September 2021, we notified the FDA of an expected delay in the completion of resubmission of our BLA for the use of leronlimab as a combination therapy with HAART for highly treatment-experienced HIV patients. The delay was caused by what we believe to be performance failures by our former contract research organization, coupled with the additional time for a new team to address the deficiencies. Subsequent events have resulted in further delays in the resubmission process, including the action by the United States FDA in March 2022 to place a partial clinical hold on the Company’s HIV program and a full clinical hold on its COVID-19 program in the United States. We are currently evaluating the steps required to resolve the issues underlying the clinical holds and continue to advance the resubmission process. We cannot currently predict with any certainty when we will be able to complete our BLA resubmission. We likely will need to obtain significant additional funding to cover the costs of preparing for BLA resubmission, among other activities, which may not be available on acceptable terms, if at all. Substantial additional delays in our efforts to commercialize our drug product are likely to result in the need to write down the value of our inventories due to obsolescence. Investor confidence in our company may also be adversely affected, which may reduce the market price of our common stock and decrease stockholder value.
We received notice of a material breach of our payment obligations to Samsung, which ultimately could result in termination of our agreements for manufacturing of our drug product and related services we expect Samsung to provide under the agreements.
Beginning in January 2022, Samsung has communicated with us regarding alleged defaults by the Company in our payment obligations under our agreements with Samsung. Negotiations are ongoing with Samsung regarding potential approaches to resolve these issues, including entering into a revised schedule of payments over an extended period of time, satisfaction of a portion of our payment obligations in equity securities of the Company, and postponing or cancelling the manufacturing of additional drug product provided for in our agreements. There can be no assurance that we will be able to address the issues raised by Samsung in a timely manner or avoid being found to be in default under our agreement with Samsung. Failure to do so may ultimately result in termination of our agreements with Samsung, which could jeopardize our ability to properly store our inventories of drug product and manufacture additional drug product when needed.
Refer to Note 10, Commitments and Contingencies, included in Part I, Item 1 of this Form 10-Q for additional information.
Our Commercialization and License Agreement with Vyera was assigned in December 2021 to Regnum Corp., which has no operations and virtually no assets.
Our Commercialization and License Agreement with Vyera (the “License Agreement”), under which we had exclusive rights to commercialize leronlimab for use with HIV patients in the U.S., gave Vyera the right to assign its rights and obligations under the agreement to an affiliate of Vyera. In October 2020, Vyera assigned the agreement to SevenScore Pharmaceuticals, which in turn assigned the agreement to Regnum Corp. in December 2021. Vyera, SevenScore and Regnum are each affiliates controlled by their parent Phoenixus AG. Phoenixus acquired Regnum in April 2021; at September 30, 2021, Regnum had $4,000 in assets and had no operations or revenues during the nine months ended September 30, 2021. Regnum likely will require a significant infusion of capital to fund its obligations under the License Agreement following approval of leronlimab by the FDA. Refer to Licensing in Part 7, of the Annual Report on Form 10-K for the fiscal year ended May 31, 2021, as amended by Amendment No. 1 filed with the SEC on September 28, 2021 for additional information regarding the License Agreement.
We have identified a material weakness in our internal control over financial reporting as of November 30, 2021, which could, if not remediated, result in material misstatements in, or untimely reporting of, our financial results which could lead to substantial additional costs and an adverse impact on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations require us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal quarter, and to include a management report
45
assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K for each fiscal year. Management determined that, as of November 30, 2021, we had a material weakness in our internal control over financial reporting and that, accordingly, our disclosure controls and procedures were ineffective. Refer to Part II, Item 4, Controls and Procedures, of the Form 10-Q for the period ended November 30, 2021 for additional information regarding Material Weakness. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be detected or prevented on a timely basis. We continue to evaluate, design and work through the process of implementing controls and procedures under a remediation plan designed to address the material weakness. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control are identified in the future, our financial statements may contain material misstatements requiring us to restate our financial results, and potentially resulting in substantial additional costs for accounting and legal fees, shareholder litigation and a decline in our stock price.
Our business, operating results and financial condition could be negatively affected as a result of actions by activist investors.
As described in Note 10, Commitments and Contingencies, to the Form 10-Q for the period ended November 30, 2021, we have experienced unsuccessful litigation by activist shareholder groups. Similar actions may occur in the future. While the Company welcomes opinions of all stockholders, responding to demands, litigation, proxy contests or other initiatives by activist investors may divert the attention of our Board, management team, and employees from their regular duties in the pursuit of business opportunities to enhance stockholder value. Such actions may also cause our existing or potential customers, employees, strategic partners and stockholders to have questions or doubts about the future direction of the Company and may provide our competitors with an opportunity to exploit these concerns. Such circumstances could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
On March 27, 2022, the Board of Directors approved the appointment of Karen J. Brunke, Ph.D., as a director of the Company, subject to satisfactory completion of a background check. Her appointment was effective on March 30, 2022. The Board also appointed Dr. Brunke to the Board’s Compensation Committee and Audit Committee.
In early April 2022, the Company commenced an offering of up to 61.3 million units, with each unit consisting of one share of common stock and three-quarters of a warrant to purchase one share of common stock. The offering is being conducted in a private placement through a placement agent in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC thereunder. The securities being offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The intended use of proceeds is to fund operations and for general corporate purposes, including the reduction of indebtedness.
46
Item 6. Exhibits
Incorporated by Reference | ||||||||
Exhibit |
| Description | Filed | Form | Exhibit No. | Filing Date | ||
3.1 | Amended and Restated Certificate of Incorporation, as corrected April 7, 2022. | X | ||||||
4.1 | Form of Initial Warrant issued under Security Bond Backstop Agreement | 8-K | 4.1 | 2/17/2022 | ||||
4.2 | Form of Make-Whole Warrant issued under Security Bond Backstop Agreement | 8-K | 4.2 | 2/17/2022 | ||||
10.1 | X | |||||||
10.2 | X | |||||||
31.1 | X | |||||||
32.1 | X | |||||||
101.INS | Inline XBRL Instance Document. | X | ||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | X | ||||||
*Furnished, not filed.
**Schedule 3 has been omitted; a copy will be furnished to the SEC upon request.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| CYTODYN INC. | |
|
| (Registrant) | |
|
|
|
|
Dated: April 11, 2022 |
|
| /s/ Antonio Migliarese |
|
|
| Antonio Migliarese |
|
|
| Chief Financial Officer and Interim President |
|
|
| (Principal Financial and Accounting Officer) |
48