10-K 1 d923315d10k.htm 10-K 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2020

or

 

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

For the transition period from                      to                     

Commission file number 000-49908

 

 

 

LOGO

CYTODYN INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   83-1887078

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1111 Main Street, Suite 660

Vancouver, Washington

  98660
(Address of principal executive offices)   (Zip Code)

Registrant’s Telephone Number, including area code: (360) 980-8524

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

None.   None.   None.

Securities registered pursuant to Section 12(g) of the Act:

Title of class

Common Stock, par value $0.001 per share

 

 


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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $106,487,002 as of November 30, 2019.

As of July 31, 2020, the registrant had 568,242,391 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

Document

 

Parts Into Which

Incorporated

Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders   Part III

 

 

 


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CYTODYN INC.

FORM 10-K FOR THE YEAR ENDED MAY 31, 2020

Table of Contents

 

          Page  

PART I

        4  

ITEM 1.

   BUSINESS      4  

ITEM 1A.

   RISK FACTORS      21  

ITEM 1B.

   UNRESOLVED STAFF COMMENTS      55  

ITEM 2.

   PROPERTIES      55  

ITEM 3.

   LEGAL PROCEEDINGS      55  

ITEM 4.

   MINE SAFETY DISCLOSURES      56  

PART II

        56  

ITEM 5.

   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      56  

ITEM 6.

   SELECTED FINANCIAL DATA      58  

ITEM 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      58  

ITEM 7A.

   QUANTITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      73  

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      73  

ITEM 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      116  

ITEM 9A.

   CONTROLS AND PROCEDURES      117  

ITEM 9B.

   OTHER INFORMATION      117  

PART III

        118  

ITEM 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      118  

ITEM 11.

   EXECUTIVE COMPENSATION      118  

ITEM 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      118  

ITEM 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE      118  

ITEM 14.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES      118  

PART IV

        119  

ITEM 15.

   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES      119  

ITEM 16.

   FORM 10-K SUMMARY      125  

 

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FORWARD-LOOKING STATEMENTS

This annual report contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict, including our clinical priorities and our current and proposed trials. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Our forward-looking statements are not guarantees of performance and actual results could differ materially from those contained in or expressed by such statements. In evaluating all such statements, we urge you to specifically consider various risk factors identified in this annual report, including the matters set forth under the heading “Risk Factors,” any of which could cause actual results to differ materially from those indicated by our forward-looking statements.

Our forward-looking statements reflect our current views with respect to future events and are based on currently available financial, economic, scientific, and competitive data and information on current business plans. Forward-looking statements specifically include statements about leronlimab, its ability to have positive health outcomes, the possible results of clinical trials, studies or other programs or ability to continue those programs, the ability to obtain regulatory approval for commercial sales, the market for actual commercial sales, and the impact of health epidemics, including the ongoing COVID-19 pandemic, on our business and operations. You should not place undue reliance on our forward-looking statements, which are subject to risks and uncertainties relating to, among other things: (i) the sufficiency of the Company’s cash position, (ii) the Company’s ability to raise additional capital to fund its operations, (iii) the Company’s ability to meet its debt obligations, if any, (iv) the Company’s ability to enter into partnership or licensing arrangements with third-parties, (v) the Company’s ability to identify patients to enroll in its clinical trials in a timely fashion, (vi) the Company’s ability to achieve approval of a marketable product, (vii) the design, implementation and conduct of the Company’s clinical trials, (viii) the results of the Company’s clinical trials, including the possibility of unfavorable clinical trial results, (ix) the market for, and marketability of, any product that is approved, (x) 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, (xi) regulatory initiatives, compliance with governmental regulations and the regulatory approval process, (xii) litigation affecting the Company or its products; (xiii) general economic and business conditions, (ix) changes in foreign, political, and social conditions, and (xv) various other matters, many of which are beyond the Company’s control. Should one or more of these risks or uncertainties develop, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated, or otherwise indicated by our forward-looking statements.

We intend that all forward-looking statements made in this annual report on Form 10-K will be subject to the safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), to the extent applicable. Except as required by law, we do not undertake any responsibility to update these forward-looking statements to take into account events or circumstances that occur after the date of this annual report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events that may cause actual results to differ from those expressed or implied by these forward-looking statements.

PART I

 

Item 1.

Business.

Corporate History/Business Overview

CytoDyn Inc. was originally incorporated under the laws of Colorado on May 2, 2002 under the name RexRay Corporation (our previous name). Effective August 27, 2015, we completed a reincorporation from

 

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Colorado to Delaware. Our principal business office is 1111 Main Street, Suite 660, Vancouver, Washington 98660. Our website can be found at www.cytodyn.com. We will make available on our website, free of charge, the proxy statements and reports on Forms 8-K, 10-K, and 10-Q that we file with the United States Securities and Exchange Commission (“SEC”) as soon as reasonably practicable, after such material is electronically filed with or furnished to, the SEC. We do not intend to incorporate any contents from our website into this annual report. Unless the context otherwise requires, references in this annual report to “CytoDyn,” the “Company,” “we,” “our,” or “us” are to CytoDyn Inc. and its subsidiaries.

We are a late-stage biotechnology company focused on the clinical development and potential commercialization of leronlimab (PRO 140), a CCR5 antagonist to treat HIV infection, with the potential for multiple therapeutic indications. In November 2018, the United States Adopted Names Council adopted “leronlimab” as the official nonproprietary name for PRO 140. The names leronlimab and PRO 140 will be used interchangeably throughout this annual report. The Company has also received conditional acceptance by the U.S. Food and Drug Administration (the “FDA”) of the proprietary name Vyrologix (pronounced—vie-ro-loj-iks) for leronlimab as a combination therapy for highly treatment experienced HIV patients in the United States. In addition, the Company has also received a notice of allowance from the U.S. Trademark Office for the trademark “Vyrologix”.

The preclinical and clinical development of PRO 140 was led by Progenics Pharmaceuticals, Inc. (“Progenics”) through 2011. The Company acquired the asset from Progenics in October 2012, as described in “PRO 140 Acquisition and Licensing Arrangements” below. In February 2018, we announced we had met the primary endpoint in its Phase 3 trial for leronlimab as a combination therapy with HAART for highly treatment experienced HIV patients, and filed the non-clinical portion of our Biologics License Application (“BLA) on March 18, 2019. We filed with the FDA the clinical, along with the Chemistry, Manufacturing, and Controls (“CMC”) portions of the BLA April and May of 2020. In July 2020, we received a Refusal to File letter from the FDA regarding the BLA filing, and requested a Type A meeting to discuss the FDA’s request for additional information.

Our current business strategy is to resubmit our BLA filing for leronlimab as a combination therapy for highly treatment experienced HIV patients as soon as possible, to seek approval for leronlimab as a potential therapeutic benefit for COVID-19 patients with mild-to-moderate, as well as, severe to critical indications, to advance our clinical trials with leronlimab for various forms of cancer, including, among others, our Phase 1b/2 clinical trial for metastatic triple-negative breast cancer and Phase 2 trial for 22 solid tumor cancers, to continue our Phase 2 trial for graft-versus-host disease (“GvHD”), to finalize with the FDA our submitted protocol for a pivotal Phase 3 clinical trial with leronlimab as a monotherapy for HIV patients and to concurrently explore other cancer and immunologic indications for leronlimab.

Overview

Leronlimab as a CCR5 Antagonist

We are focused on developing leronlimab, a monoclonal antibody C—C chemokine receptor type 5 (“CCR5”) receptor antagonist, to be used as a platform drug for a variety of indications. The target of leronlimab is the immunologic receptor CCR5. The CCR5 receptor is a protein located on the surface of a variety of cells including white blood cells and cancer cells. On white blood cells, it serves as a receptor for chemical attractants called chemokines. The CCR5 receptor is also the co-receptor needed for certain strains of HIV to infect healthy T-cells. Recent research has identified the CCR5 receptor as an important target for many disease processes including cancer metastasis and certain immunological conditions. Leronlimab is a unique humanized monoclonal antibody. Leronlimab prevents certain strains of HIV from using the CCR5 receptor as an entry gateway for healthy cells. Pre-clinical research has also shown that leronlimab blocks calcium channel signaling of the CCR5 receptor when present on the cancer cell surface. Calcium channel signaling of the CCR5 receptor is a crucial component to the spread of metastatic cancer.

 

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Leronlimab binds to the second extracellular loop and N-terminus of the CCR5 receptor, and due to its selectivity and target-specific mechanism of action, leronlimab does not appear to activate the immune function of the CCR5 receptor through agonist activity. This apparent target specificity differentiates leronlimab from other CCR5 antagonists. Leronlimab is a competitive rather than allosteric inhibitor of the CCR5 receptor. Other potential advantages of leronlimab include longer half-life and less frequent dosing requirements.

The CCR5 receptor has been identified as a target in HIV, GvHD, NASH, cancer metastasis, transplantation medicine, multiple sclerosis, traumatic brain injury, stroke recovery, and a variety of inflammatory conditions, including potentially COVID-19. As we progress in evaluating leronlimab via a multi-pathways approach, we see an opportunity to build a broad pipeline of indications through label expansion following initial approval for multi-drug resistant HIV.

Leronlimab and Human Immunodeficiency Virus (“HIV”)

We believe the leronlimab antibody shows promise as a powerful antiviral agent with the advantage of fewer side effects, lower toxicity and less frequent dosing requirements, as compared to daily drug therapies currently in use for the treatment of HIV. The leronlimab antibody belongs to a class of HIV therapies known as entry inhibitors that block HIV from entering into and infecting certain cells. Leronlimab blocks HIV from entering a cell by binding to a molecule called CCR5, a normal cell surface receptor protein to which certain strains of HIV, referred to as “R5” strains, attach as part of HIV’s entry into a cell.

Leronlimab does not appear to affect the normal function of the CCR5 co-receptor for HIV. Instead, leronlimab binds to a precise site on CCR5 that R5 strains of HIV use to enter the cell and, in doing so, inhibits the ability of these strains of HIV to infect the cell without appearing to affect the cell’s normal function. The R5 strains of HIV currently represent approximately 67% of all HIV infections in the United States. As a result, we believe leronlimab represents a distinct class of CCR5 inhibitors with advantageous virological and immunological properties and may provide a unique tool to treat HIV infected patients.

We believe leronlimab is uniquely positioned to address a growing HIV market, as an alternative, or in addition to current therapies, which are failing primarily due to patient non-compliance, which causes drug resistance. Several factors give rise to patient non-compliance issues, such as toxicity and side effects, coupled with the need for a strict regimen of daily dosing. In eight clinical trials previously conducted, leronlimab was generally well tolerated, and limited drug-related serious adverse events (“SAEs”), or dose-proportional adverse events (“AEs”), were reported. In addition, there were no dose-limiting toxicities or patterns of drug-related toxicities observed during these trials. The results of these studies established that leronlimab’s antiviral activity was potent, rapid, prolonged, dose-dependent, and statistically significant following a single dose. Because leronlimab’s mechanism of action (for a monoclonal antibody use in HIV) is a relatively new therapeutic approach, it provides a very useful method of suppressing the virus in treatment-experienced patients who have failed a prior HIV regimen and need new treatment options. Leronlimab, as a single agent therapy, has also demonstrated that it could potentially replace highly active antiretroviral therapy (“HAART”) altogether for a subpopulation of R5 patients who have suppressed viral load with HAART, but who are seeking an alternative treatment that affords the patient an improved quality of life, with the advantages of fewer side effects, lower toxicity and less frequent dosing requirements.

To date, leronlimab has been tested and administered to patients predominantly as a subcutaneous injection. We believe that if leronlimab is approved by the FDA for use as an injectable for HIV, it may be an attractive and marketable therapeutic option for patients, particularly in the following scenarios:

 

   

Patients desiring a break from existing treatment regimens, whether due to side-effects or for any personal reasons;

 

   

Patients with difficulty adhering to daily drug regimens;

 

   

Patients who poorly tolerate existing therapies;

 

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Patients with compromised organ function, such as hepatitis C (“HCV”) co-infection;

 

   

Patients with complex concomitant medical requirements; and

 

   

Patients who choose not to start their HAART regimen immediately after being infected with HIV.

Clinical trials for leronlimab have demonstrated potent antiretroviral activity (as compared to existing treatments) and no drug-related SAEs or dose-proportional AEs. Consequently, we believe that leronlimab has the potential to be the first long-acting (weekly or every other week), self-administered HIV therapy. Leronlimab appears to inhibit CCR5-tropic HIV while preserving CCR5’s natural function. As a result, we believe leronlimab represents a distinct class of CCR5 inhibitors with unique virological and immunological properties and may provide another distinct tool to treat HIV-infected patients.

Our ongoing HIV-related clinical trials, as summarized below, have been designed to demonstrate the proof of concept that leronlimab monotherapy can continue to suppress the viral load in certain HIV-infected, treatment-experienced patients who had suppressed viral load on HAART, but would like an alternative treatment that provides a higher quality of life with one dose a week through a self-injection. Once the viral load is undetectable, weekly administration of leronlimab can help maintain the suppressed viral load in a subpopulation of R5 patients over an extended period of time (currently shown to be in excess of six years). Based on the preliminary results of such studies, we believe that a leronlimab treatment option could also address the unmet medical need for therapy options for certain HIV-infected patients with uncontrolled viral load, despite conventional HAART treatments. Accordingly, we recently submitted to the FDA a pivotal Phase 3 trial protocol for leronlimab as monotherapy.

Importantly and in parallel with the submission of our pivotal trial protocol for monotherapy, we recently announced the completion of the development of a receptor occupancy test to measure the expression of CCR5 in HIV and tumor cells that are occupied by leronlimab. Development of this test could more precisely guide us in identification of HIV patients at screening for monotherapy, thereby potentially improving therapeutic success, along with further identifying cancer-patient candidates who have a form of cancer that CCR5 is over expressed.

Leronlimab and Coronavirus Disease 2019

SARS-CoV-2 was identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China. The origin of SARS-CoV-2 causing the COVID-19 disease is uncertain, and the virus is highly contagious. COVID-19 typically transmits person to person through respiratory droplets, commonly resulting from close personal contact. Coronaviruses are a large family of viruses, some causing illness in people and others that circulate among animals. For confirmed COVID-19 infections, symptoms have included fever, cough, and shortness of breath. The symptoms of COVID-19 may appear in as few as two days or as long as 14 days after exposure. Clinical manifestations in patients have ranged from non-existent to severe and fatal. At this time, there are minimal treatment options for COVID-19.

Based upon analyses of leronlimab’s potential effect on the immune system and the results from over 60 Emergency Investigation New Drug (EIND) authorizations provided by the FDA, the Company initiated two clinical trials for COVID-19, a Phase 2 randomized clinical trial for mild-to-moderate COVID-19 population in the U.S. and a Phase 3 randomized clinical trial for severe to critically ill COVID-19 population in several hospitals throughout the country. Following the completion of the Phase 2 trial, the Company reported positive results for safety in July 2020. The Top-line Report from the trial, including efficacy and safety data, is expected to be submitted to the FDA in August 2020. Recently, the Data Safety Monitoring Committee for the ongoing Phase 3 trial completed its first safety review of patients with severe to critical COVID-19 and reported it saw no cause to modify the study. The DSMC reviewed compiled safety data from 149 of the 169 patients enrolled in the Phase 3 trial. The DSMC did not raise any concerns regarding safety and recommended that the trial continue. As such, the Company will conduct a full interim analysis once 195 patients are enrolled, as provided in the trial’s protocol.

 

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Leronlimab and Cancer

Research indicates that the CCR5 receptor is the “GPS” system of a cancer cell that promotes metastatic disease. Pre-clinical studies have shown that leronlimab blocks the calcium channel signaling of the CCR5 receptor and has the potential to disable the GPS system. CCR5 inhibition may disrupt signaling and ultimately the spread of CCR5+ Circulating Tumor Cells (“CTCs”). Current therapies are directed to the primary tumor, rather than the movement or spread of cancer in the bloodstream. Metastatic disease, not the primary tumor, is the cause of death in the vast majority of cancer patients.

Research has shown that a majority of sampled patients in certain studies had increased CCR5 expression in their breast cancer. Increased CCR5 expression is an indicator of disease status in several cancers. Research has shown three key properties of the CCR5’s mechanism of action (“MOA”) in cancer. The first is that the CCR5 receptor on cancer cells was responsible for the migration and invasion of cells into the bloodstream, which leads to metastasis of breast, prostate, and colon cancer. The second is that blocking the CCR5 receptor also turns on anti-tumor fighting properties restoring immune function. The third key finding was that blockage of the CCR5/CCL5 interaction had a synergistic effect with chemotherapeutic therapy and controlled cancer progression. Chemotherapy traditionally increased expression of CCR5 so blocking it is expected to reduce the levels of invasion and metastasis.

In late November 2018, we received FDA approval of our Investigational New Drug application (“IND”) submission and subsequently initiated a Phase 1b/2 clinical trial for metastatic triple-negative breast cancer (“mTNBC”) patients. We have reported that our pre-clinical research with leronlimab was able to reduce by more than 98% the incidence of human breast cancer metastasis in a mouse xenograft model for cancer through six weeks with leronlimab. The temporal equivalency of the murine 6 weeks study may be up to 6 years in humans. In May 2019, the FDA granted Fast Track Designation for leronlimab (PRO 140) for use in combination with carboplatin for the treatment of patients with CCR5-positive mTNBC. In addition, the Company has intiated a Phase 2 basket trial with leronlimab for the treatment of 22 solid tumor cancers.

Leronlimab and Immunological Applications

We are continuing to explore opportunities for clinical applications for leronlimab involving the CCR5 receptor, other than HIV-related treatments, such as inflammatory conditions, autoimmune diseases and cancer.

The target of leronlimab is the immunologic receptor CCR5. We believe that the CCR5 receptor is more than the door for HIV to enter T-cells: it is also a crucial component in inflammatory responses. This could open the potential for multiple pipeline opportunities for leronlimab.

The CCR5 receptor is a protein located on the surface of white blood cells that serves as a receptor for chemical attractants called chemokines. 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 T-cells to these sites promoting further inflammation. The mechanism of action of PRO 140 has the potential to block the movement of T-cells to inflammatory sites, which could be instrumental in diminishing or eliminating inflammatory responses. Some disease processes that could benefit from CCR5 blockade include transplantation rejection, autoimmunity and chronic inflammation such as rheumatoid arthritis and psoriasis.

Due to leronlimab’s MOA, we believe leronlimab may have significant advantages in terms of reduced side effects over other CCR5 antagonists. Prior studies have demonstrated that leronlimab does not cause direct activation of T-cells. We have reported encouraging human safety data for our clinical trials with leronlimab in HIV-infected patients.

We have initiated our first clinical trial with leronlimab in an immunological indication – a Phase 2 clinical trial with leronlimab for GvHD in reduced intensity conditioning (“RIC”) patients with acute myeloid leukemia

 

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(“AML”) or myelodysplastic syndrome (“MDS”) who are undergoing bone marrow stem cell transplantation. GvHD represents an unmet medical need, with patients who contract GvHD during stem cell transplant having a significantly decreased 1-year survival rate with relapsed GvHD as the leading cause of death. Our pre-clinical study in GvHD has been published in the peer-reviewed journal Biology of Blood and Marrow Transplantation. The FDA has granted orphan drug designation to leronlimab for the prevention of acute GvHD.

GvHD is a risk when patients receive bone marrow stem cells donated from another person. GvHD is a serious complication that limits the use of Bone Marrow Stem Cell (“BMSC”) transplantation in patients with blood cancers. GvHD occurs when the donor’s immune cells attack the patient’s normal tissues (skin, liver, gut). GvHD can be acute or chronic. Its severity depends on the differences in tissue type between patient and donor. Acute GvHD can occur soon after the transplanted cells begin to appear in the recipient and can range from mild to severe and can be life-threatening.

The CCR5 receptor, the target for leronlimab, appears to be an important mediator of GvHD, especially in the organ damage that is the usual cause of death. We believe that the CCR5 receptor on engrafted cells is critical for the development of acute GvHD and by blocking this receptor from recognizing certain immune signaling molecules could be a viable approach to mitigating acute GvHD. The potential of leronlimab to prevent this life-threatening condition could help extend the use of BMSC transplantation to effectively treat more patients.

We are also exploring the ability of leronlimab to prevent the progression of Non-Alcoholic Fatty Liver Disease (“NAFLD”) into Non-Alcoholic Steatohepatitis (“NASH”). NAFLD is an inflammatory disease caused by the build-up of fat in hepatocytes (steatosis). In severe cases, NAFLD progresses into NASH. It is estimated that 30% to 40% of adults in the United States have NAFLD, while 3% to 12% of adults in the United States have NASH. If left untreated, NASH may progress to hepatocellular carcinoma and is expected to become the leading cause of liver transplantation by 2020.

We continue to expand the clinical focus with leronlimab to include the evaluation in certain cancer and immunological indications where CCR5 antagonism has shown initial promise.

Prostate Diagnostic Test—PCa Test

An asset undergoing continued evaluation and development that we acquired from ProstaGene, LLC (“ProstaGene”) is the Prostate Diagnostic Test (the “PCa Test”). This test, developed by a leading oncologist, is intended to determine outcomes of patients diagnosed with prostate cancer compared to the Gleason score, the current standard test for prostate cancer diagnosis. It leverages technology using an artificial intelligence approach based on gene signatures. The PCa Test employs 16 gene biomarker signatures for prognostication and therapeutic substratification of prostate cancer using sophisticated proprietary artificial intelligence algorithms.

Prostate cancer is the most commonly diagnosed cancer in men, except for non-melanoma skin cancer. About one in nine men in the United States will be diagnosed with prostate cancer during their lifetimes. It is believed to be the second leading cause of cancer death among men in the United States. Worldwide, it is estimated that there are well over 1 million new cases of prostate cancer and 366,000 prostate cancer deaths annually.

The current standard of care for treating prostate cancer is based upon the Gleason score. Patients with prostate cancer with a low Gleason score are observed, while those with higher Gleason scores typically undergo radical prostatectomy. The PCa Test potentially provides a “second opinion” and therefore could provide valuable guidance to assist physicians and patients to make more educated and informed decision regarding appropriate treatments. Our plan for the PCa Test is to successfully advance its development to obtain a Section 510(k) clearance from the FDA for commercial use or to out-license the proprietary technology to a third party.

 

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Current Clinical Trials

We will require a significant amount of additional capital to complete our clinical trial programs for leronlimab, which are designed to accelerate and maximize the leverage of our multi-pathway approach to identifying and evaluating multiple opportunities for clinical indications. See “Liquidity and Capital Resources” under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

To facilitate our clinical research plans and trials, we have previously engaged Amarex Clinical Research, LLC (“Amarex”), as our principal contract research organization (“CRO”), to provide comprehensive regulatory and clinical trial management services.

Leronlimab is currently being studied in the following clinical trials:

Phase 2 Trial to Evaluate the Efficacy and Safety of Leronlimab for Mild-to-Moderate Coronavirus Disease 2019 (COVID-19). This is a two-arm, randomized, double blind, placebo controlled multicenter study to evaluate the safety and efficacy of leronlimab in patients with mild-to-moderate symptoms of respiratory illness caused by the coronavirus 2019 infection completed in July 2020. Patients were randomized to receive weekly doses of 700 mg leronlimab, or placebo. Leronlimab and placebo were administered via subcutaneous injection. The study has three phases: Screening Period, Treatment Period and Follow-Up Period. A total of 84 subjects were randomized 2:1 (active drug to placebo) in this study. The primary outcome measures are clinical improvement as assessed by change in total symptom score (for fever, myalgia, dyspnea and cough). Secondary outcome measures include: (1) time to clinical resolution, (2) change from baseline in National Early Warning Score 2 (NEWS2), (3) change from baseline in pulse oxygen saturation, (4) change from baseline in the patient’s health status on a 7-category ordinal scale, (5) incidence of hospitalization, (6) duration (days) of hospitalization, (7) incidence of mechanical ventilation supply, (8) duration (days) of mechanical ventilation supply, (9) incidence of oxygen use, (10) duration (days) of oxygen use, (11) mortality rate, (12) time to return to normal activity. Enrollment was completed in July 2020 and the Company has recently reported positive safety results. The Top-line Report from the trial, including efficacy and safety data, is expected to be submitted to the FDA in August 2020.

Phase 3 Trial to Evaluate the Efficacy and Safety of Leronlimab for Patients With Severe or Critical Coronavirus Disease 2019 (COVID-19). This is a two-arm, randomized, double blind, placebo controlled, adaptive design multicenter study to evaluate the safety and efficacy of leronlimab in patients with severe or critical symptoms of respiratory illness caused by coronavirus 2019 infection. Patients will be randomized to receive weekly doses of 700 mg leronlimab, or placebo. Leronlimab and placebo will be administered via subcutaneous injection. The study will have three phases: Screening Period, Treatment Period, and Follow-Up Period. The primary outcome measured in this study is: all-cause mortality at Day 28. Secondary outcomes measured are: (1) all-cause mortality at Day 14, (2) change in clinical status of subject at Day 14, (3) change in clinical status of subject at Day 28, and (4) change from baseline in Sequential Organ Failure Assessment (SOFA) score at Day 14. Recently, the Data Safety Monitoring Committee for the ongoing Phase 3 trial completed its first safety review of patients with severe and critical COVID-19 and reported it saw no cause to modify the study. The DSMC reviewed compiled safety data from 149 of the 169 patients enrolled in the Phase 3 trial. The DSMC did not raise any concerns regarding safety and recommended that the trial continue. As such, the Company will conduct a full interim analysis once 195 patients are enrolled, as provided in the trial’s protocol.

Phase 2b Extension Study for HIV, as Monotherapy. Currently, there are four patients in this ongoing extension study and each has surpassed six years of suppressed viral load with PRO 140 as a single agent therapy. This extension study will be discontinued upon any FDA approval of leronlimab.

Rollover Study for HIV as Combination Therapy. This study is designed for patients who successfully completed the pivotal Phase 2b/3 Combination Therapy trial (which met its primary endpoint and serves as the

 

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basis for our current BLA filing) and for whom the treating physicians request a continuation of leronlimab therapy in order to maintain suppressed viral load. This extension study will be discontinued upon any FDA approval of leronlimab.

Phase 2b/3 Investigative Trial for HIV, as Long-term Monotherapy. Enrollment for this trial is now closed after reaching 500 patients. This trial assesses using leronlimab subcutaneously as a long-acting single-agent maintenance therapy for 48 weeks in patients with suppressed viral load with CCR5-tropic HIV-1 infection. The primary endpoint is the proportion of participants with a suppressed viral load to those who experienced virologic failure. The secondary endpoint is the length of time to virologic failure. We completed the evaluation two higher-dose arms, one with 525 mg dose (a 50% increase from the original dosage of 350 mg), as well as a 700 mg dose. We recently reported that interim data suggested that both the 525 mg and the 700 mg dosages are achieving a responder rate of approximately 90% after the initial 10 weeks. This trial has also been used to provide safety data for the BLA filing for leronlimab as a combination therapy. In view of the high responder rate at the increased dosage levels, coupled with the newly developed CCR5 occupancy test, we filed a pivotal trial protocol with the FDA for leronlimab as a monotherapy. Upon finalization with the FDA of the pivotal trial protocol for monotherapy, this Phase2b/3 investigative trial will likely be discontinued. In the interim, several patients are continuing in an extension study who have requested continued access to leronlimab.

Phase 1b/2 Trial for Triple-Negative Breast Cancer. This trial is to evaluate the feasibility of leronlimab combined with carboplatin in patients with CCR5+ metastatic triple negative breast cancer. The Phase 1b portion is a dose escalation phase with three dose levels (cohorts) of leronlimab in combination with a fixed dose of carboplatin. The Phase 2 portion is a single arm study with 30 patients to test the hypothesis that the combination of carboplatin intravenously and maximum tolerated dose of leronlimab subcutaneously will increase progression free survival. In May 2019, the FDA granted leronlimab Fast Track designation for use in combination with carboplatin. The change in circulating tumor cells (“CTCs”) number will be evaluated every 21 days during treatment and will be used as an initial prognostic marker for efficacy. The first patient was treated in September 2019.

Compassionate Use Study of Leronlimab in Breast Cancer. This is a single arm, compassionate use study with 30 patients for leronlimab (PRO 140) combined with a treatment of physician’s choice (TPC) in patients with CCR5+ mTNBC. Leronlimab (PRO 140) will be administered subcutaneously as weekly dose of 350 mg until disease progression or intolerable toxicity. Treatment of Physician’s Choice (TPC) is defined as one of the following single-agent chemotherapy drugs administrated according to local practice: eribulin, gemcitabine, capecitabine, paclitaxel, nab-paclitaxel, vinorelbine, ixabepilone, or carboplatin. In this study, patients will be evaluated for tumor response approximately every 3 months or according to institution’s standard practice by CT, PET/CT or MRI with contrast (per treating investigator’s discretion) using the same method as at baseline.

Basket Trial for 22 Solid Tumor Cancers. This is a Phase 2 study to test the safety and efficacy of leronlimab on 22 different solid tumor cancers, including brain-glioblastoma, melanoma, lung, breast, ovarian, pancreas, bladder, throat, stomach, colon, testicular, uterine, among other indications. The first patient was treated in April 2020.

Phase 2 Trial for Graft-versus-Host Disease. This Phase 2 multi-center100-day study with 60 patients is designed to evaluate the feasibility of the use of leronlimab as an add-on therapy to standard GvHD prophylaxis treatment for prevention of acute GvHD in adult patients with AML or MDS undergoing allogeneic hematopoietic stem cell transplantation (“HST”). Enrollment of the first patient was announced in May of 2017. On October 5, 2017, we announced that the FDA had granted orphan drug designation to leronlimab (PRO 140) for the prevention of GvHD. In March 2018, we announced that the Independent Data Monitoring Committee (“IDMC”) for leronlimab (PRO 140) Phase 2 trial in GvHD had completed a planned interim analysis of trial data on the first 10 patients enrolled. Following this review of data from the first 10 patients in the Phase 2 trial, we filed amendments to the protocol with the FDA. The amendments included switching the pretreatment conditioning regimen from aggressive myeloablative (“MA”) conditioning to a reduced intensity conditioning

 

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(“RIC”), and switching from a blinded one-for-one randomized placebo-controlled design to an open-label design under which all enrollees receive leronlimab. The amendments also provide for a 100% increase in the dose of leronlimab, to 700 mg, to more closely mimic pre-clinical dosing. The next review of data by the IDMC will occur following enrollment of 10 patients under the amended protocol after each patient has been dosed for 30 days. Due to the necessary prioritization of limited capital, enrollment under the amended protocol has been temporarily delayed.

PRO 140 Acquisition and Licensing Arrangements

We originally acquired PRO 140, as well as certain other related assets, including the existing inventory of PRO 140 bulk drug substance, intellectual property, and FDA regulatory filings, pursuant to an Asset Purchase Agreement, dated as of July 25, 2012 and effective October 16, 2012 (the “Progenics Purchase Agreement”), between CytoDyn and Progenics. Pursuant to the Progenics Purchase Agreement, we are required to pay Progenics a remaining milestone payment and royalties as follows: (i) $5,000,000 at the time of the first U.S. new drug application approval by the FDA or other non-U.S. approval for the sale of PRO 140; and (ii) royalty payments of up to 5% on net sales during the period beginning on the date of the first commercial sale of PRO 140 until the later of (a) the expiration of the last to expire patent included in the acquired assets, and (b) 10 years, in each case determined on a country-by country basis. To the extent that such remaining milestone payment and royalties are not timely made, under the terms of the Progenics Purchase Agreement, Progenics has certain repurchase rights relating to the assets sold to us thereunder.

Payments to Progenics are in addition to payments due under a Development and License Agreement, dated April 30, 1999 (the “PDL License”), between Protein Design Labs (now AbbVie Inc.) and Progenics, which was assigned to us in the Progenics Purchase Agreement, pursuant to which we have an exclusive worldwide license to develop, make, have made, import, use, sell, offer to sell or have sold products that incorporate the humanized form of the PRO 140 antibody developed under the agreement. Pursuant to the PDL License, we are required to pay AbbVie Inc. remaining milestone payments and royalties as follows: (i) $500,000 upon filing a Biologic License Application with the FDA or non-U.S. equivalent regulatory body; (ii) $500,000 upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iii) royalties of up to 3.5% of net sales for the longer of 10 years and the date of expiration of the last to expire licensed patent. Additionally, the PDL License provides for an annual maintenance fee of $150,000 until royalties paid exceed that amount. To the extent that such remaining milestone payments and royalties are not timely made, under the terms of the PDL License, AbbVie Inc. has certain termination rights relating to our license of PRO 140 thereunder.

Effective July 29, 2015, we entered into a License Agreement (the “Lonza Agreement”) with Lonza Sales AG (“Lonza”) covering Lonza’s “system know-how” technology with respect to our use of proprietary cell lines to manufacture new PRO 140 material. The Lonza Agreement provides for an annual license fee and future royalty payments, both of which varies based on whether Lonza, or we or our strategic partner manufactures PRO 140. We currently use two independent parties as contract manufacturers for PRO 140. Therefore, if this arrangement continues, an annual license fee of £600,000 (approximately USD785,000 given current exchange rate) would continue to apply, as well as a royalty, up to 2% of the net selling price upon commercialization of leronlimab (PRO 140), excluding value added taxes and similar amounts.

Patents, Proprietary Technology and Data Exclusivity

Protection of the Company’s intellectual property rights is important to our business. We may file patent applications in the U.S., Canada, China, and Japan, European countries that are party to the European Patent Convention and other countries on a selective basis in order to protect inventions we consider to be important to the development of our business.

Generally, patents issued in the U.S. are effective for either (i) 20 years from the earliest asserted filing date, if the application was filed on or after June 8, 1995, or (ii) the longer of 17 years from the date of issue or 20

 

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years from the earliest asserted filing date, if the application was filed prior to that date. A U.S. patent, to be selected by us upon receipt of FDA regulatory approval, may be subject to up to a five-year patent term extension in certain instances. While the duration of foreign patents varies in accordance with the provisions of applicable local law, most countries provide for a patent term of 20 years measured from the application filing date and some may also allow for patent term extension to compensate for regulatory approval delay. We pursue opportunities for seeking new meaningful patent protection on an ongoing basis. We currently anticipate, absent patent term extension, patent protection relating to the leronlimab (PRO 140) antibody itself will start to expire in 2023, certain methods of using leronlimab (PRO 140) for treatment of HIV-1 will start to expire in 2026, certain formulations comprising leronlimab (PRO 140) will start to expire in 2031, and certain methods of using small-molecule CCR5 antagonists for treatment of cancer metastasis will start to expire in 2032.

Patents do not enable us to preclude competitors from commercializing drugs in direct competition with our products that are not covered by granted and enforceable patent claims. Consequently, patents may not provide us with any meaningful competitive advantage. See related risk factors under the heading “Risk Factors” below. We may also rely on data exclusivity, trade secrets and proprietary know-how to develop and attempt to achieve a competitive position with our product candidates. We require our employees, consultants and partners who have access to our proprietary information to sign confidentiality agreements in an effort to protect our intellectual property.

Separate from and in addition to the patent rights noted above, we expect that leronlimab (PRO 140) will be subject to at least a 12-year data exclusivity period measured from the first date of FDA licensure, during which period no other applications referencing leronlimab (PRO 140) will be approved by FDA. Further, no other applications referencing leronlimab (PRO 140) will be accepted by FDA for a 4-year period measured from the first date of FDA licensure. Accordingly, this period of data exclusivity is expected to provide at least a 12-year term of protection against competing products shown to be biosimilar or interchangeable with leronlimab (PRO 140). Similar data exclusivity or data protection periods of up to about five years or more are provided in at least Australia, Canada, Europe, Japan, and New Zealand.

We note that data exclusivity is not an extension of patent rights, and it does not prevent the introduction of generic versions of the innovative drug during the data exclusivity period, as long as the marketing approval of the generic version does not use or rely upon the innovator’s test data. Patents and data exclusivity are different concepts, protect different subject matter, arise from different efforts, and have different legal effects over different time periods.

Information with respect to our current patent portfolio as of June 30, 2020, is set forth below.

 

     Number of Patents           Number of Patent
Applications
 
   U.S.      International     

Expiration

Dates(1)

   U.S.      International  

Leronlimab (PRO 140) product candidate(2)

     10        37      2018-2032      20        27  

Methods involving treatment of cancer metastasis and anti-CCR5 agents

     1        11      2032-2033      3        9  

Mouse model

              1        1  

 

(1) 

Patent term extensions and pending patent applications may extend periods of patent protection.

(2)

Leronlimab (PRO 140) patents and applications relate to the antibody, formulations, and HIV-1, COVID-19, Cancer, immunomodulation and GvHD treatments.

Research, development and commercialization of a biopharmaceutical product often require choosing between alternative development and optimization routes at various stages in the development process. Preferred routes depend upon current—and may be affected by subsequent—discoveries and test results, availability of financial resources, and other factors, and cannot be identified with certainty. There are numerous third-party

 

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patents in fields in which we work, and we may need to obtain licenses under patents of others in order to pursue a preferred development route of one or more of our product candidates. The need to obtain a license would decrease the ultimate value and profitability of an affected product. If we cannot negotiate such a license, we might have to pursue a less desirable development route or terminate the program altogether. See “Risk Factors” below.

Government Regulation

Regulation of Health Care Industry

The health care industry is highly regulated, and state and federal health care laws and regulations are applicable to certain aspects of our business. For example, there are federal and state health care laws and regulations that apply to the business relationships between health care providers and suppliers, the privacy and security of health information and the conduct of clinical research.

Regulation of Products

The design, testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products is regulated by numerous third parties, including the FDA, foreign governments, independent standards auditors and our customers.

In the United States, biological products and medical devices, including diagnostic products, have long been subject to regulation by various federal and state agencies, primarily as to product safety, efficacy, manufacturing, advertising, labeling, import, export and safety reporting. The exercise of broad regulatory powers by the FDA through its and its Center for Biological Evaluation and Research and its Center for Devices and Radiological Health continues to result in increases in the amounts of testing and documentation for FDA clearance of current and new biologic products and medical devices. The FDA can ban certain products; detain or seize adulterated or misbranded products; order repair, replacement or refund of these products; and require notification of health professionals and others with regard to products that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Federal Food, Drug, and Cosmetic Act, as amended, or the Public Health Service Act pertaining to certain products or initiate action for criminal prosecution of such violations.

The lengthy process of seeking approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Failure to comply with applicable regulations can result in refusal by the FDA to approve product license applications. The FDA also has the authority to revoke previously granted product approvals.

Pharmaceutical products such as leronlimab may not be commercially marketed without prior approval from the FDA and comparable agencies in foreign countries. In the United States, the process for obtaining FDA approval for products like leronlimab typically includes pre-clinical studies, the filing of an IND, human clinical trials and filing and approval of either a New Drug Application (“NDA”), for chemical pharmaceutical products, or a BLA for biological pharmaceutical products, such as leronlimab. The results of pre-clinical testing, which include laboratory evaluation of product chemistry and formulation, animal studies to assess the potential safety and efficacy of the product and its formulations, details concerning the drug manufacturing process and its controls, and a proposed clinical trial protocol and other information must be submitted to the FDA as part of an IND that must be reviewed and become effective before clinical testing can begin. The study protocol and informed consent information for patients in clinical trials must also be submitted to an independent institutional review board (“IRB”), for approval. Once a sponsor submits an IND, the sponsor must wait 30 calendar days before initiating any clinical trials, during which time the FDA has an opportunity to review the IND and raise concerns or questions relating to the proposed clinical trials outlined in the IND. If the FDA has comments or questions, they must be resolved to the satisfaction of the FDA before clinical trials can begin. In addition, the

 

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FDA, an IRB or we may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. Our non-clinical and clinical studies must conform to the FDA’s Good Laboratory Practice (“GLP”), and Good Clinical Practice (“GCP”), requirements, which are designed to ensure the quality and integrity of submitted data and protect the rights and well-being of study patients. Information for certain clinical trials also must be publicly disclosed within certain time limits on the clinical trial registry and results databank maintained by the National Institutes of Health (“NIH”).

The results of the pre-clinical and clinical testing, chemistry, manufacturing and control information and proposed labeling are then submitted to the FDA in the form of either an NDA or BLA for review and potential approval to commence commercial sales. In responding to an NDA or BLA, the FDA may grant marketing approval, request additional information in a complete response letter, or deny the approval if it determines that the NDA or BLA does not provide an adequate basis for approval. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of an NDA or BLA and may require additional testing. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter, which authorizes commercial marketing of the product with specific prescribing information for specific indications, and sometimes with specified post-marketing commitments. Any approval required from the FDA might not be obtained on a timely basis, if at all.

Among the conditions for an NDA or BLA approval is the requirement that the manufacturing operations conform on an ongoing basis with current Good Manufacturing Practices (“cGMPs”). In complying with cGMPs, we must expend time, money and effort in the areas of training, production and quality control within our own organization and at our contract manufacturing laboratories. A successful inspection of the manufacturing facility by the FDA is a prerequisite for final approval of a biological product like leronlimab (PRO140). Following approval of the NDA or BLA, we and our third-party manufacturers remain subject to periodic inspections by the FDA. We also face similar inspections coordinated by the European Medicines Agency by inspectors from particular European Union (“EU”) member countries that conduct inspections on behalf of the EU and from other foreign regulatory authorities. Any determination by the FDA or other regulatory authorities of manufacturing or other deficiencies could materially adversely affect our business.

Regulatory requirements and approval processes in EU countries are similar in principle to those in the United States and can be at least as costly and uncertain. The EU has established a unified centralized filing and approval system administered by the Committee for Medicinal Products for Human Use designed to reduce the administrative burden of processing applications for pharmaceutical products derived from new technologies. In addition to obtaining regulatory approval of products, it is generally necessary to obtain regulatory approval of the facility in which the product will be manufactured.

We use and plan to continue to use third-party manufacturers to produce our products in clinical and commercial quantities. Future FDA inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product, including new safety risks, or the failure to comply with requirements may result in restrictions on a product, manufacturer or holder of an approved NDA or BLA, including withdrawal or recall of the product from the market or other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety or efficacy data may require changes to an approved product’s approved labeling, including the addition of new warnings and contraindications, the imposition of additional mandatory post-market studies or clinical trials, or the imposition of or revisions to a risk evaluation mitigation strategies (“REMS “) program, including distribution and/or use restrictions.

Once a BLA is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission of periodic reports to the FDA, recordkeeping, product sampling and distribution, and, as discussed above, may be subject to mandatory post-market study and REMS requirements. In addition, the FDA strictly regulates the promotional claims that may be made about prescription

 

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drug products and biologics. In particular, a drug or biologic may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. The FDA also requires substantiation of any claims of superiority of one product over another, including the requirement that such claims be proven by adequate and well-controlled head-to-head clinical trials. The FDA also requires all promotional materials that discuss the use or effectiveness of a prescription drug or biologic to disclose in a balanced manner the risks and safety profile of the product.

Regulation of Laboratory Operations

Clinical laboratories that perform laboratory testing (except for research purposes only) on human patients are subject to regulation under Clinical Laboratory Improvement Amendments (“CLIA”). CLIA regulates clinical laboratories by requiring that the laboratory be certified by the federal government, licensed by the state and comply with various operational, personnel and quality requirements intended to ensure that clinical laboratory test results are accurate, reliable and timely. State law and regulations also apply to the operation of clinical laboratories.

State Governments

Most states in which we operate have regulations that parallel federal regulations. Most states conduct periodic unannounced inspections and require licensing under such state’s procedures. Our research and development activities and the manufacture and marketing of our products are and will be subject to rigorous regulations relating to product safety and efficacy by numerous governmental authorities in the United States and other countries.

Other Laws and Regulations

We are subject to various laws and regulations relating to safe working conditions, clinical, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research. The extent of government regulation applying to our business that might result from any legislative or administrative action cannot be accurately predicted.

Environmental

We are subject to a variety of federal, state and local environmental protection measures. We believe that our operations comply in all material respects with applicable environmental laws and regulations. Our compliance with these regulations did not have during the past year and is not expected to have a material effect upon our capital expenditures, cash flows, earnings or competitive position.

Registrational Clinical Trials Process

Described below is the traditional registrational drug development track. Our current business strategy is to focus on completing our BLA filing for leronlimab as a combination therapy for highly treatment experienced HIV patients, advance the regulatory process of the clinical outcomes from our two COVID-19 clinical trials, advance our Phase 1b/2 clinical trial metastatic triple-negative breast cancer, continue our Phase 2 basket trial for 22 solid tumor cancers and Phase 2 trial for GvHD, finalize with the FDA our submitted protocol for a pivotal Phase 3 clinical trial with leronlimab as a monotherapy for HIV patients and to concurrently explore other cancer and immunologic indications for leronlimab.

 

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Phase 1

Phase 1 includes the initial introduction of an investigational new drug or biologic into humans. These studies are closely monitored and may be conducted in patients, but are usually conducted in a small number of healthy volunteer patients. These studies are designed to determine the metabolic and pharmacologic actions of the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness. During Phase 1, sufficient information about the investigational product’s pharmacokinetics and pharmacological effects are obtained to permit the design of well-controlled, scientifically valid, Phase 2 studies. Phase 1 studies of PRO 140 have been conducted and completed by or on behalf of Progenics by certain principal investigators prior to our acquisition of PRO 140.

Phase 2

Phase 2 includes the early controlled clinical studies conducted to obtain some preliminary data on the effectiveness of the drug for a particular indication or indications in patients with the disease or condition. This phase of testing also helps determine the common short-term side effects and risks associated with the drug. Phase 2 studies are typically well-controlled, closely monitored, and conducted in a relatively small number of patients, often involving several hundred people. In some cases, depending upon the need for a new drug, a particular drug candidate may be licensed for sale in interstate commerce after a “pivotal” Phase 2 trial.

Phase 2 is often broken into Phase 2a, which can be used to refer to “pilot trials,” or more limited trials evaluating exposure response in patients, and Phase 2b trials that are designed to evaluate dosing efficacy and ranges.

Phase 3

Phase 3 studies are expanded controlled clinical studies. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained in Phase 2, and are intended to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit/risk relationship of the drug. Phase 3 studies also provide an adequate basis for extrapolating the results to the general population and transmitting that information in the physician labeling. Phase 3 studies usually involve significantly larger groups of patients, and considerable additional expense. We were required to pay significant fees to third parties upon the first patient dosing in a Phase 3 trial of leronlimab, and we may be required to make additional fee payments to third parties upon the completion of additional milestones. See the discussion under the subheading “PRO 140 Acquisition and Licensing Arrangements” above.

Competition

The pharmaceutical, biotechnology and diagnostic industries are characterized by rapidly evolving technology and intense competition. Our development efforts may compete with more established biotechnology companies that have significantly greater financial and managerial resources than we do.

Advancing leronlimab to commercialization is our highest priority. Leronlimab blocks a cell receptor called CCR5, which is the entry point for most strains of HIV virus. Pfizer’s Maraviroc (Selzentry®) is the only currently approved CCR5 blocking agent. Maraviroc, like all other HIV approved drugs, must be taken daily and is believed to have side effects and toxicity. For these reasons, we believe that our lead product, leronlimab, a monoclonal antibody, may prove to be useful in patients that cannot tolerate existing HIV therapies or desire a respite from those therapies. Nonetheless, manufacturers of current therapies, such as Pfizer, Gilead Sciences, Merck, Bristol-Myers Squibb and ViiV Healthcare, are very large, multi-national corporations with significant resources. We expect that these companies will compete fiercely to defend and expand their market share.

To construct a HAART regimen, three drugs from two classes of drugs are typically needed. Currently there are only five different classes of drugs from which four are primarily used to construct a HAART regimen. Each

 

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of these four classes of drugs has many drugs available in its respective class, except the entry inhibitor (“EI”) class, which has only two drugs available. The only two drugs in the EI class approved by the FDA are Maraviroc, a small molecule drug (which is taken orally once or twice a day) and Ibalizumab (which is an IV infusion administered once every two weeks). If approved, we believe that leronlimab will be only the second approved drug outside of the main four classes of drugs approved for HIV since 2007.

The only other monoclonal antibody that recently received FDA approval is TMB-335, also referred to as Ibalizumab, which was developed by TaiMed Biologics. Ibalizumab targets the CD4 receptor on T-cells which is one of the two co-receptors required for HIV entry into T-cells.

Our potential competitors include entities that develop and produce therapeutic agents. These include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs. Our competitors may succeed in developing potential drugs or processes that are more effective or less costly than any that may be developed by us or that gain regulatory approval prior to our potential drug candidates. Worldwide, there are many antiviral drugs for treating HIV. In seeking to manufacture, distribute and market the potential drugs we hope to have approved, we face competition from established pharmaceutical companies. Many of these potential competitors have substantially greater capital resources, management expertise, research and development capabilities, manufacturing and marketing resources and experience than we do.

We also expect that the number of our competitors and potential competitors will increase as more potential drugs receive commercial marketing approvals from the FDA or analogous foreign regulatory agencies. Any of these competitors may be more successful than us in manufacturing, marketing and distributing HIV treatments, as well as for new therapies for cancer and immunological disorders.

While we are encouraged from the clinical outcomes from over 60 Emergency Investigation New Drug (EIND) authorizations granted by the FDA and the preliminary results from our two COVID-19 trials, there are hundreds of companies concurrently exploring therapies for COVID-19, including clinical trials. Many of these potential competitors have substantially greater capital resources, management expertise, research and development capabilities, manufacturing and marketing resources and experience than we do.

As we evaluate leronlimab for potential indications in cancer and immunology, we will face competition from formidable global research-based pharmaceutical companies. Potential competitors such as Roche, Celgene, Bristol-Myers Squibb, Merck, AbbVie and many others have vast financial, managerial, technical, commercialization and marketing resources than we do than we do.

Manufacturing

We do not own or operate manufacturing facilities for the production of leronlimab. As such, we must depend on third-party manufacturing organizations and suppliers for all of our clinical trial quantities of leronlimab, in addition to previously manufactured supplies of commercial grade leronlimab. We continue to explore alternative manufacturing sources, in order to ensure that we have access to sufficient manufacturing capacity in order to meet potential demand for leronlimab in a cost-efficient manner.

We have engaged Samsung Biologics and AEC Biologics, two global contract manufacturing organizations (“CMOs”), to initiate the scale-up to commercial batch quantities of product, and develop the necessary controls and specifications to manufacture product on a consistent and reproducible manner. We have also contracted with suitable CMOs to fill, label, and package product into the final commercial package for commercial use. In order to commercialize product, this scaled-up material will need to be validated under best practices, and demonstrated to meet approved specifications on an ongoing basis. GMP material will be produced as needed to support clinical trials for all therapeutic indications and until commercial product is approved by the FDA. We will rely on CMO’s for all of our developmental and commercial needs.

 

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Regulation of Medical Devices, Including Diagnostics such as the PCa Test

Medical Device Classification

The FDA classifies medical devices into one of the following three classes on the basis of the amount of risk associated with the medical device and the controls deemed necessary to reasonably ensure their safety and effectiveness:

 

   

Class I, requiring general controls, including labeling, device listing, reporting and, for some products, adherence to good manufacturing practices through the FDA’s quality system regulations and pre-market notification;

 

   

Class II, requiring general controls and special controls, which may include performance standards and post-market surveillance; or

 

   

Class III, requiring general controls and approval of a premarket approval application (“PMA”), which may include post-market approval conditions and post-market surveillance.

As a result of the intended use of the PCa Test and the technology upon which it is based, we anticipate that the PCa test could be regulated by FDA as either a Class III or a Class II medical device.

US Regulatory Approval Process

Products that are regulated as medical devices and that require review by the FDA are subject to either a premarket notification, also known as a 510(k), which must be submitted to the FDA for clearance, or a PMA application, which the FDA must approve prior to marketing in the U.S. We believe that the PCa Test will be subject to the 510(k) premarket notification procedure, but the FDA will ultimately determine the appropriate regulatory path.

To obtain 510(k) marketing clearance for a medical device, an applicant must submit a premarket notification application to the FDA demonstrating that the device is “substantially equivalent” to a predicate device, which is typically a legally marketed Class II device in the United States. A device is substantially equivalent to a predicate device if it has the same intended use and (i) the same technological characteristics, or (ii) has different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. In some cases, the submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding substantial equivalence. While less onerous than the PMA process, the 510(k) process can be lengthy and expensive. The current average time between submission of a 510(k) application and FDA clearance is approximately six months. In addition, significant modifications to a cleared 510(k) device may require the submission of a new 510(k).

A PMA must be submitted to the FDA if a device cannot be cleared through another approval process or is not otherwise exempt from the FDA’s premarket clearance and approval requirements. A PMA is required for most Class III medical devices. A PMA must generally be supported by extensive data, including without limitation technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. During the review period, the FDA will typically request additional information or clarification of the information previously provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the PMA and provide recommendations to the FDA as to the approvability of the device, although the FDA may or may not accept any such panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the manufacturing facility or facilities involved with producing the device to ensure compliance with the cGMP regulations. Upon approval of a PMA, the FDA may require that certain conditions of approval, such as conducting a post-market approval clinical trial, be met.

The PMA approval process can be lengthy and expensive and requires an applicant to demonstrate the safety and efficacy of the device based, in part, on data obtained from clinical trials. The PMA process is

 

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estimated to take from one to three years or longer, from the time the PMA application is submitted to the FDA until an approval is obtained.

Further, if post-approval modifications are made that affect the safety or efficacy of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling or design, then new PMAs or PMA supplements would be required. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is typically limited to information needed to support the changes from the device covered by the original PMA and accordingly may not require as extensive clinical and other data. Further, if post-approval modifications are made that affect the safety or efficacy of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling or design, then new PMAs or PMA supplements would be required. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is typically limited to information needed to support the changes from the device covered by the original PMA and accordingly may not require as extensive clinical and other data.

Our plan for the PCa Test is to successfully advance its development to obtain a Section 510(k) clearance from the FDA for commercial use or to out-license the proprietary technology to a third-party. However, we have not submitted either a 510(k) application or a PMA, or commenced clinical trials. Even if we conduct successful preclinical and clinical studies and submit a 510(k) application or PMA, the FDA may not permit commercialization of the PCa Test for the desired indications, on a timely basis, or at all. Our inability to achieve regulatory approval for the PCa Test in the U.S. for the desired indication could materially adversely affect our ability to grow this aspect of our business.

Post-Approval Regulation

After a medical device obtains approval from the applicable regulatory agency and is launched in the market, numerous post-approval regulatory requirements apply, including:

 

   

product listing and establishment registration;

 

   

requirements that manufacturers, including third-party manufacturers, follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

 

   

labeling and other advertising regulations, including prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;

 

   

approval of product modifications that affect the safety or effectiveness of any of our devices that may achieve approval;

 

   

post-approval restrictions or conditions, including post-approval study commitments;

 

   

post-market surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety and effectiveness data for the device;

 

   

the recall authority of the applicable government agency and regulations pertaining to voluntary recalls; and

 

   

reporting requirements, including reports of incidents in which a product may have caused or contributed to a death or serious injury or in which a product malfunctioned, and notices of corrections or removals.

Failure by us or by our third-party manufacturers and other suppliers to comply with applicable regulatory requirements could result in enforcement action by various regulatory authorities, which may result in monetary fines, the imposition of operating restrictions, product recalls, criminal prosecution or other sanctions.

 

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Research and Development Costs

The Company’s research and development expenses totaled approximately $52.6 million, $42.5 million and $38.2 million for the fiscal years ended May 31, 2020, May 31, 2019 and May 31, 2018, respectively. We expect our research and development expenses to continue to increase in future periods as the activity within the Company’s clinical trials expands and the Company’s biologics manufacturing processes and related regulatory compliance activities increase.

Employees and Consultants

We currently have 19 full-time employees, as well as several independent consultants assisting us with the Company’s BLA preparation, manufacturing activities, regulatory matters and management of our clinical trials. There can be no assurances, however, that we will be able to identify or hire and retain additional employees or consultants on acceptable terms in the future.

 

Item 1A.

Risk Factors.

The risks enumerated below are not the only risks we face, and the listed risk factors are not intended to be an all-inclusive discussion of all of the potential risks relating to our business. Any of the risk factors described below could significantly and adversely affect our business, prospects, financial condition and results of operations. Additional risks and uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely affect our business.

Risks Related to Our Business

We are a clinical stage biotechnology company and have a history of significant operating losses; we expect to continue to incur operating losses, and we may never achieve or maintain profitability.

We have not generated any revenue from product sales, licensing, or other potential sales to date. Since our inception, we have incurred operating losses in each year due to costs incurred in connection with research and development activities and general and administrative expenses associated with our operations. Our current drug candidate, leronlimab, is in the later stages of clinical trials for multiple indications. The Company submitted a BLA for leronlimab as a combination therapy with highly active antiretroviral therapy (HAART) for HIV patients to the FDA for review in April 2020 and completed our submission on May 11, 2020. In July 2020, the Company received a Refusal to File letter from the FDA regarding the BLA filing, and we have requested a Type A meeting to discuss the FDA’s request for additional information. During the fiscal years ended May 31, 2020 and 2019, we incurred net losses of approximately $124.4 million and $56.2 million, respectively, and at May 31, 2020, we had an accumulated deficit of approximately $354.7 million and a stockholders’ deficit of $2.5 million. We expect to incur losses for the foreseeable future without any meaningful corresponding revenues as we continue development of, and seek regulatory approvals for, leronlimab. If leronlimab fails to gain regulatory approval, or if it or other candidates we acquire or license in the future do not achieve approval and market acceptance, we will not be able to generate any revenue, or explore other opportunities to enhance stockholder value, such as through a sale. If we fail to generate revenue and eventually become and remain profitable, or if we are unable to fund our continuing losses, our shareholders could lose all or part of their investments.

Our auditors have issued a going concern opinion, and we will not be able to achieve our objectives and will have to cease operations if we cannot adequately fund our operations.

Our auditors issued an opinion, which includes a going concern exception, in connection with the audit of our annual financial statements for the fiscal year ended May 31, 2020. A going concern exception to an audit opinion means that there is substantial doubt that we can continue as an ongoing business for the next 12 months. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive

 

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for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. In addition, the inclusion of an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern and our lack of cash resources may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third-parties. There is no assurance that we will be able to adequately fund our operations in the future.

Our business and operations could be adversely affected by the effects of health epidemics, including the ongoing COVID-19 pandemic.

We could be negatively affected by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. In December 2019, an outbreak of COVID-19 began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets.

Our operational and financial performance has already been affected by the impact of the COVID-19 pandemic. Our clinical trials have experienced delays in patient enrollment, potentially due to prioritization of hospital resources toward the COVID-19 pandemic, or concerns among patients about participating in clinical trials during a public health emergency. The COVID-19 pandemic is also affecting the operations of government entities, such as the FDA, as well as contract research organizations, third-party manufacturers, and other third-parties upon whom we rely. As a result of “shelter-in-place” orders, quarantines or similar orders or restrictions to control the spread of COVID-19, many companies, including our own, have implemented work-from-home policies for their employees. The effects of these stay at home orders and work-from-home policies may be negatively impacting productivity, resulting in delays in our clinical programs and timelines. The extent of the impact on our operations depends in part on the time these restrictions remain in place, and whether restrictions are reinstated as a result of a rising surge in COVID-19 cases. These and similar disruptions in our operations could negatively impact our business, operating results and financial condition.

The spread of COVID-19 has also led to disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases economic uncertainty. To the extent the COVID-19 pandemic adversely affects our business, financial results and value of our common stock, it may also affect our ability to access capital and obtain financing, which could in the future negatively affect our liquidity and ability to continue as a going concern.

The global pandemic of COVID-19 continues to evolve rapidly, and the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full impact of potential delays or effects on our business, our clinical trials, our ability to access the capital markets, or supply chains or on the global economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.

Our information technology systems could fail to perform adequately or we may fail to adequately protect such information technology systems against data corruption, cyber-based attacks, or network security breaches.

We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic information. In particular, we depend on our information technology infrastructure to effectively manage our business data, accounting, and other business processes and electronic communications between our personnel and corporate partners. If we do not allocate and effectively manage the resources necessary to build and sustain an appropriate technology infrastructure, our business, and financial condition therefore could be materially adversely affected. In addition, security breaches or system failures of this infrastructure can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. If we are unable to

 

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prevent such breaches or failures, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information.

The ongoing COVID-19 pandemic is introducing additional risk to our information technology systems as a result of employees, contractors and other corporate partners working remotely. As a result of the increased remote workforce, we must increasingly rely on information technology systems that are outside our direct control. These systems are potentially vulnerable to cyber-based attacks and security breaches. In addition, cyber criminals are increasing their attacks on individual employees, utilizing interest in pandemic-related information to increase business email compromise scams designed to trick victims into transferring sensitive data or funds, or steal credentials that compromise information systems. If one of our employees falls victim to these attacks, or our information technology systems or those of our partners are compromised, our operations could be disrupted, or we may suffer financial loss, loss or misappropriation of intellectual property or other critical assets, reputational loss or regulatory fines and intervention.

We may be at increased risk of becoming the target of cyber-attacks because of our research involving leronlimab for treatment of COVID-19.

Cybersecurity authorities in the United States are currently investigating a number of incidents in which hackers are targeting pharmaceutical companies, medical research organizations, and universities in order to steal sensitive research data and intellectual property related to efforts to contain and treat coronavirus. In July, the US Justice Department accused several different groups of hackers of targeting companies conducting COVID-19 vaccine development research on behalf of a foreign intelligence services. Because of leronlimab’s potential effect on the immune system, it has been administered to COVID patients under single patient Emergency Investigation New Drug (EIND) authorizations, and the Company has initiated two clinical trials for COVID-19, a Phase 2 randomized clinical trial for mild-to-moderate COVID-19 population in the U.S. and a Phase 2b/3 randomized clinical trial for severe and critically ill COVID-19 population in several hospitals throughout the country. As a result of our ongoing clinical trials for leronlimab to treat COVID-19, our information technology systems, employees, contractors and corporate partners may be at greater risk for cyber-based attacks.

Since our inception, we have been insolvent and have required debt and equity financing to maintain operations.

Since our inception, we have not achieved cash flows from revenues sufficient to cover basic operating costs. As a result, we have relied heavily on debt and equity financing. Equity financing, in particular, has created a dilutive effect on our common stock, which has hampered our ability to attract reasonable financing terms. If we issue additional equity or convertible debt securities, we will continue to reduce the percentage ownership of our then-existing stockholders. We may also be required to grant the holders of new securities rights, preferences or privileges senior to those possessed by our then-existing stockholders in order to induce them to invest in our company. The issuance of these senior securities may adversely affect the holders of our common stock by restricting dividends on the common stock, diluting the voting power of the common stock or subordinating the liquidation rights of the common stock. As a result of these or other factors, the issuance of additional equity or convertible debt securities could have an adverse impact on the market price of our common stock. For the foreseeable future, we will continue to rely upon debt and equity financing to maintain our operations and those of our subsidiaries.

 

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We will need substantial additional funding to resubmit our BLA filing for leronlimab as a combination therapy with highly active antiretroviral therapy (HAART) for HIV patients, and to complete our COVID-19 clinical trials and our Phase 1b/2 clinical trial for triple-negative breast cancer, to continue our Phase 2 clinical trial for GvHD, to fund development of leronlimab for other indications, such as cancer and immunologic indications, and to operate our business, and such funding may not be available or, if it is available, such financing is likely to substantially dilute our existing stockholders.

The discovery, development, and commercialization of new treatments, such as our leronlimab product candidate, entail significant costs. In addition, to the extent further development and clinical trials of leronlimab for other indications, such as COVID-19, cancer, and immunological disorders, continue to appear promising and we elect to fund its development and commercialization, we will need to raise substantial additional capital, or enter into strategic partnerships, to enable us to:

 

   

fund clinical trials and seek regulatory approvals;

 

   

access manufacturing and commercialization capabilities;

 

   

pay required license fees, milestone payments, and maintenance fees to Progenics, Lonza and AbbVie Inc.;

 

   

develop, test, and, if approved, market our product candidate;

 

   

acquire or license additional internal systems and other infrastructure;

 

   

hire and support additional management and scientific personnel; and

 

   

explore additional indications for leronlimab, such as in the area of cancer and immunology.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never achieve, we expect to finance our cash needs primarily through public or private equity offerings, debt financings or through strategic alliances. We cannot be certain that additional funding will be available on acceptable terms or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials, collaborative development programs or future commercialization initiatives. In addition, any additional funding that we do obtain will dilute the ownership held by our existing security holders. The amount of this dilution may be substantially increased if the trading price of our common stock is lower at the time of any financing, or if we issue new shares at a lower price per share than prior financings. For example, the terms of certain of our convertible notes provide for full-ratchet anti-dilution protection, pursuant to which the conversion price of the convertible note will be automatically reduced to equal the effective price per share in any new offering by the Company of equity securities that have registration rights, are registered or become registered under the Securities Act of 1933, as amended. Regardless, the economic dilution to stockholders will be significant if our stock price does not increase significantly, or if the effective price of any sale is below the price paid by a particular shareholder. Any debt financing could involve substantial restrictions on activities and creditors could seek a pledge of some or all of our assets. We have not identified potential sources for the additional financing that we will require, and we do not have commitments from any third-parties to provide any future financing. If we fail to obtain additional funding as needed, we may be forced to cease or scale back operations, and our results, financial condition and stock price would be adversely affected.

The amount of financing we require will depend on a number of factors, many of which are beyond our control. Our results of operations, financial condition and stock price are likely to be adversely affected if our funding requirements increase or are otherwise greater than we expect.

Our future funding requirements will depend on many factors, including, but not limited to:

 

   

the costs of our ongoing clinical trial programs and pre-clinical studies, including our Phase 2b/3 clinical trial for severe and critically ill COVID-19 patients, a Phase 2 randomized clinical trial in the

 

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mild-to-moderate COVID-19 population, a Phase 1b/2 clinical trial for triple-negative breast cancer, our Phase 2 clinical trial for GvHD, a potential pivotal Phase 3 monotherapy trial for HIV and other development activities conducted by us directly, and our ability to successfully conclude the studies and achieve favorable results;

 

   

our ability to attract strategic partners to pay for or share costs related to our product development efforts;

 

   

the costs and timing of seeking and obtaining regulatory approvals and making related milestone payments due to Progenics, Lonza and AbbVie Inc.;

 

   

the costs of filing, prosecuting, maintaining and enforcing patents and other intellectual property rights and defending against potential claims of infringement;

 

   

decisions to hire additional scientific or administrative personnel or consultants;

 

   

our ability to manage administrative and other costs of our operations; and

 

   

the presence or absence of adverse developments in our clinical trial and commercialization readiness programs.

If any of these factors cause our funding needs to be greater than expected, our operations, financial condition, ability to continue operations and stock price may be adversely affected.

Our future cash requirements may differ significantly from our current estimates.

Our cash requirements may differ significantly from our estimates from time to time, depending on a number of factors, including:

 

   

the time and costs involved in obtaining regulatory approvals;

 

   

the costs and results of our clinical trial programs and pre-clinical studies we are undertaking or may in the future pursue with leronlimab;

 

   

the time and costs involved in our CMC activities;

 

   

whether our outstanding convertible notes are converted into equity;

 

   

whether we receive additional cash upon the exercise of our outstanding warrants and options for common stock;

 

   

whether we are able to obtain funding under future licensing agreements, strategic partnerships, or other collaborative relationships, if any;

 

   

the costs of compliance with laws, regulations, or judicial decisions applicable to us; and

 

   

the costs of general and administrative infrastructure required to manage our business and protect corporate assets and stockholder interests.

If we underestimate our cash requirements, we may need to raise additional funds, which funding may not be available on acceptable terms or at all. If we fail to raise additional funds on a timely basis we may need to scale back our business plans, which may require us to delay, reduce the scope of, or eliminate one or more of our clinical trials, collaborative development programs or future commercialization initiatives, which would adversely affect our business, financial condition, and stock price. If we deplete our cash reserves, we may even be forced to discontinue our operations and liquidate our assets.

We are currently focused on the development of a single product candidate.

Our product development efforts are currently focused on a single product, leronlimab, for which we are researching multiple indications. If leronlimab fails to achieve clinical endpoints or exhibits unanticipated

 

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toxicity or if a superior product is developed by a competitor, our prospects for obtaining regulatory approval and commercialization may be negatively impacted. In the long-term, we hope to establish a pipeline of product candidates, and we have identified additional product candidates that we may be able to acquire or license in the future. However, at this time, we do not have any formal agreements granting us any rights to such additional product candidates.

If we are not able to obtain any required regulatory approvals for leronlimab, we will not be able to commercialize our primary product candidate, which would materially and adversely affect our business, financial condition and stock price.

Our clinical trials may be unsuccessful, which would materially harm our business. Even if our ongoing clinical trials are successful, we will be required to conduct additional clinical trials to establish the safety and efficacy of leronlimab, or any future drug candidates, before an NDA or BLA can be filed with the FDA for marketing approval.

Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize leronlimab, or any future drug candidates. The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market a drug candidate as prescription pharmaceutical products in the United States until we receive approval of an NDA or BLA from the FDA or in foreign markets until we receive the requisite approval from comparable regulatory authorities in such countries. In the United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before an NDA or BLA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of an NDA or BLA to the FDA and even fewer are eventually approved for commercialization. The Company filed a BLA for leronlimab as a combination therapy for highly treatment experienced HIV patients with the FDA on April 27, 2020, and submitted additional FDA requested clinical datasets on May 11, 2020. In July 2020, the FDA issued a Refusal to File the BLA stating that it needed additional information to complete its substantive review. The FDA’s request requires additional analysis of completed trials and does not require any additional clinical trials to be conducted, and the Company is working diligently to provide the information required by the FDA in order to resubmit its BLA for this combination therapy. However, even upon submission of the additional information to the FDA, there can be no assurance as to if or when the FDA will declare the filing complete.

Although the completion and resubmission of our BLA for leronlimab is in process, receipt of necessary regulatory approval is subject to a number of risks, including the following:

 

   

the FDA or comparable foreign regulatory authorities or IRBs may disagree with the design or implementation of our clinical trials;

 

   

we may not be able to provide acceptable evidence of the safety and efficacy of our drug candidates;

 

   

the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA, the European Medicines Agency (“EMA”), or other comparable foreign regulatory authorities for marketing approval;

 

   

the dosing of our drug candidates in a particular clinical trial may not be at an optimal level;

 

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patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to our drug candidates;

 

   

the data collected from clinical trials may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;

 

   

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

Failure to obtain regulatory approval for leronlimab for the foregoing or any other reasons will prevent us from commercializing such product candidate as a prescription product, and our ability to generate revenue will be materially impaired. We cannot guarantee regulators will agree with our assessment of the results of our clinical trials or that such trials will be considered by regulators to have shown safety or efficacy of our product candidate. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate.

We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to continue to rely on consultants and third-party contract research organizations, or CROs, with expertise in this area to assist us in this process. Securing FDA approval requires the submission of pre-clinical, clinical and/or pharmacokinetic data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish a product candidate’s safety and efficacy for each indication. Our drug candidates may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use with respect to one or all intended indications.

The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved, the jurisdiction in which regulatory approval is sought and the substantial discretion of regulatory authorities. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval in a different jurisdiction. Failure to obtain regulatory marketing approval for our drug candidate in any indication will prevent us from commercializing such product candidate, and our ability to generate revenue will be materially impaired.

Although leronlimab PRO 140 has been designated for fast track approval by the FDA, our ability to obtain accelerated approval may be lost.

The FDA designated PRO 140 for fast track consideration in 2006. The letter ascribing this designation stated that, if the clinical development program pursued for leronlimab PRO 140 did not continue to meet the criteria for fast track designation, the IND application would not be reviewed under the fast track program. There is no assurance that the FDA will ultimately consider leronlimab PRO 140 for approval on an accelerated basis. Failure to maintain eligibility for fast track review will likely result in requirements for longer or additional clinical trials and a slower approval process, resulting in additional costs and, therefore, additional capital, which will likely result in further delay in the potential realization of revenues from commercialization of leronlimab PRO 140.

 

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Although we have applied with the FDA for breakthrough therapy designation for leronlimab, for certain HIV-related treatments, such a designation may not lead to a faster development or regulatory review or approval process, and it may not increase the likelihood leronlimab will receive marketing approval in the United States.

We applied with the FDA for breakthrough therapy designation for leronlimab, for certain HIV-related treatments. The FDA, in its comments to us, requested additional trial data to support our request for such designation. We currently plan to submit additional data to the FDA as it becomes available to us from our pivotal Phase 2b/3 combination trial. A breakthrough therapy is defined as a product that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and for which preliminary clinical evidence indicates substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs and biologics that have been designated as breakthrough therapies, interaction and communication between the FDA and the applicant can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Products designated as breakthrough therapies by the FDA may, in some cases, also be eligible for accelerated approval.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe leronlimab PRO 140 meets the criteria for designation as a breakthrough therapy, the FDA may disagree. In any event, the receipt of a breakthrough therapy designation for leronlimab may not result in a faster development process, review or approval compared to products considered for approval under conventional FDA procedures and, in any event, does not assure ultimate approval by the FDA. In addition, even if leronlimab does qualify as a breakthrough therapy, the FDA may later decide that leronlimab no longer meet the conditions for qualification or decide that the time period for FDA review or approval will not be shortened. The foregoing considerations could result in additional costs and/or delay in the potential realization of revenues from commercialization of leronlimab.

Although the FDA has granted orphan drug designation for leronlimab for the prevention of GvHD, we may not be able to obtain or maintain orphan drug exclusivity for leronlimab.

We have received orphan drug designation by the FDA for leronlimab in connection with our Phase 2 trial for GvHD. We may not be able to obtain or maintain orphan drug exclusivity for leronlimab. Generally, a product with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first marketing approval for the indication for which it has such designation, in which case the FDA will be precluded from approving another marketing application for the same drug for that indication for the applicable exclusivity period. The applicable exclusivity period is seven years in the United States. Orphan drug exclusivity may be lost if the FDA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

Even with orphan drug exclusivity for leronlimab, such exclusivity may not effectively protect the product from competition, because FDA has taken the position that, under certain circumstances, another drug with the same active moiety can be approved for the same condition. Specifically, the FDA’s regulations provide that it can approve another drug with the same active moiety for the same condition, if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

The results of previous clinical trials may not be predictive of future results, and the results of our current and planned clinical trials may not satisfy the requirements of the FDA or non-U.S. regulatory authorities.

We must successfully initiate and complete a clinical trial for leronlimab as a monotherapy for HIV before we can apply for marketing approval. Although test results have been positive thus far, the process of obtaining approval of a drug product for use in humans is extremely lengthy and time-consuming, and numerous factors

 

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may prevent our successful development of leronlimab, including negative results in ongoing and future clinical trials, and inability to obtain sufficient additional funding to continue to pursue development. Our clinical trials may be unsuccessful, which would materially harm our business.

The results from the prior clinical trials of leronlimab may not necessarily be predictive of the results of future clinical trials or pre-clinical studies. Clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in prior clinical trials nonetheless have failed to obtain FDA approval. The development timeline and regulatory approval and commercialization prospects for leronlimab, including our business and financial prospects, could be adversely affected by unforeseen risks and events.

Further, leronlimab may not be approved even after if it achieved its primary endpoint in its pivotal Phase 3 clinical trial. In addition, any of these regulatory authorities may change its requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal clinical trial that, if successful, would potentially form the basis for an application for approval by the FDA or another regulatory authority. The FDA may require us to procure the development of a companion diagnostic test to help identify patients who may be more likely to respond to leronlimab for certain uses. Furthermore, any of these regulatory authorities may also approve leronlimab for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials.

The FDA and non-U.S. regulatory authorities retain broad discretion in evaluating the results of our clinical trials and in determining whether the results demonstrate that leronlimab is safe and effective. If prior to approval, we are required to conduct additional preclinical trials, clinical studies or other types of testing of leronlimab, including after the completion of our current and planned later phase clinical trials, we will need substantial additional funds, and there is no assurance that the results of any such additional clinical trials will be sufficient for approval.

Leronliamb may cause undesirable side effects or have other properties that delay or prevent its regulatory approval or limit their commercial potential.

Undesirable side effects caused by leronlimab or even competing products in development that utilize a common mechanism of action could cause regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities and expose the company to potential product liability claims. While leronlimab has been generally well tolerated and no drug-related serious adverse events or dose-proportional adverse events were reported, our understanding of the relationship between adverse events reported in future clinical trials of other product candidates may change as we gather more information, and unexpected adverse events may be observed. Routine review and analysis of post-marketing safety surveillance and clinical trials will provide additional information, for example, potential evidence of rare, population-specific or long-term adverse reactions, and may adversely affect the commercialization of the product, and even lead to the suspension or withdrawal of product marketing authorization.

If we or others identify undesirable side effects caused by leronlimab either before or after receipt of marketing approval, a number of potentially significant negative consequences could result, including:

 

   

our clinical trials may be put on hold;

 

   

we may be unable to obtain regulatory approval for our product candidate;

 

   

regulatory authorities may withdraw approvals of our products;

 

   

regulatory authorities may require additional warnings on the label;

 

   

a medication guide outlining the risks of such side effects for distribution to patients may be required;

 

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we could be sued and held liable for harm caused to patients; and

 

   

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining marketing approvals for and market acceptance of leronlimab and could have a material adverse effect on our business and financial results.

Clinical trials may fail to demonstrate the desired safety and efficacy of our product candidates, which could prevent or significantly delay completion of clinical development and regulatory approval.

Prior to receiving approval to commercialize leronlimab or any other product candidates, we must adequately demonstrate to the FDA and any foreign regulatory authorities in jurisdictions in which we seek approval that leronlimab or any other product candidate is sufficiently safe and effective with substantial evidence from well-controlled clinical trials, which we believe we have achieved in our Phase 3 combination therapy trial for leronlimab as a combination therapy for highly treatment experienced HIV patients.

In clinical trials, we will need to demonstrate efficacy for the treatment of specific indications and monitor safety throughout the clinical development process and following approval. If clinical work by us or others leads to undesirable adverse effects in patients, it could delay or prevent us from furthering the regulatory approval process or cause us to cease clinical trials with respect to any drug candidate. If our current or future preclinical studies or clinical trials are unsuccessful, our business will be significantly harmed and our stock price would be negatively affected.

Any product candidate, including leronlimab, is subject to the risks of failure inherent in drug-related product development. Preclinical studies may not yield results that adequately support our regulatory applications. Even if these applications are filed with respect to our product candidate, the results of preclinical studies do not necessarily predict the results of clinical trials. In addition, even if we believe the data collected from clinical trials of our product candidate are promising, these data may not be sufficient to support approval by the FDA or foreign regulatory authorities. If regulatory authorities do not approve our product, or if we fail to maintain regulatory compliance, we would be unable to commercialize our product, and our business, results of operations and financial condition would be harmed.

We may find it difficult to enroll patients in our clinical trials, which could delay or prevent clinical trials of our product candidate.

Identifying and qualifying patients to participate in clinical trials of our product candidate is critical to our success. The timing of our clinical trials depends on the rate at which we can recruit patients to participate in testing our product candidate. If patients are unwilling to participate in our trials because of concerns about participating in clinical trials during the COVID-19 pandemic or other public health emergency, negative publicity from adverse events in the biotechnology industries, public perception of vaccine safety issues or for other reasons, including competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential products may be delayed. These delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether.

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with the required enrollment criteria, to complete our clinical trials in a timely manner. Patient enrollment is affected by several factors, including:

 

   

severity of the disease under investigation;

 

   

design of the trial protocol;

 

   

size of the patient population;

 

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eligibility criteria for the trial in question;

 

   

perceived risks and benefits of the product candidate being tested;

 

   

proximity and availability of clinical trial sites for prospective patients;

 

   

availability of competing vaccines and/or therapies and related clinical trials;

 

   

efforts to facilitate timely enrollment in clinical trials;

 

   

patient referral practices of physicians; and

 

   

ability to monitor patients adequately during and after treatment.

We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible patients to participate in the clinical trials required by regulatory agencies.

Even if we enroll a sufficient number of eligible patients to initiate our clinical trials, we may be unable to maintain participation of these patients throughout the course of the clinical trial as required by the clinical trial protocol, in which event we may be unable to use the research results from those patients. If we have difficulty enrolling, and maintaining the enrollment of a sufficient number of patients to conduct our clinical trials as planned, we may need to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business.

Clinical trials are expensive, time-consuming and subject to delay.

Clinical trials are subject to rigorous regulatory requirements and are expensive and time-consuming to design, implement and manage. The length of time and number of trial sites and patients required for clinical trials vary substantially based on the type, complexity, novelty, intended use and any safety concerns relating to a drug candidate. Clinical trials for other indications for leronlimab may take significantly longer to complete than leronlimab’s HIV trial program, and, in some instances, we may decide not to pursue clinical trials for other indications.

The commencement and completion of clinical trials could be delayed or prevented by many factors, including, but not limited to:

 

   

periodic amendments to clinical trial protocols to address certain variables which arise during the course of a trial must be negotiated with and approved by the FDA;

 

   

slower than expected rates of patient recruitment and enrollment which has occurred in connection with certain of our trials, including as a result of COVID-19 fears, quarantines or other stay-at-home orders from government authorities, competition with other clinical trials for patients, limited numbers of patients that meet the enrollment criteria, or the introduction of alternative therapies or drugs by others;

 

   

our ability to obtain regulatory or other approvals to commence and conduct clinical trials in the manner we or our partners consider appropriate for timely development;

 

   

our ability to identify and reach agreement on acceptable terms with prospective clinical trial sites and entities involved in the conduct of our clinical trials;

 

   

unforeseen issues with our relationship with our contract clinical management services provider;

 

   

delays in paying third-party vendors of biopharmaceutical services;

 

   

lack of effectiveness of our drug candidates during clinical trials; or

 

   

unforeseen safety issues.

Product development costs for our products will increase if we have delays in testing or approval or if we need to perform more or larger clinical studies than planned. Additionally, changes in regulatory requirements

 

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and policies may occur and we may need to amend study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to the FDA and institutional review boards, or IRBs, for reexamination, which may impact the costs, timing or successful completion of that study. If we experience delays in completion of, or if we, the FDA or other regulatory authorities, any IRBs, or other reviewing entities, or any of our clinical study sites suspend or terminate any of our clinical studies of our drug candidates, our commercial prospects may be materially harmed and our ability to generate product revenues will be delayed. Any delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical studies may also ultimately lead to the denial of regulatory approval of our drug candidates. In addition, if one or more clinical studies are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of our drug candidates could be significantly reduced.

We depend on the Vyera License Agreement for the commercialization of leronlimab for the treatment of HIV in humans in the U.S. Vyera’s failure to successfully commercialize leronlimab for the treatment of HIV in the U.S. could have a material adverse effect on our business, financial condition and results of operations.

On December 17, 2019, we entered into the Vyera License Agreement under which we granted Vyera an exclusive royalty-bearing license to commercialize pharmaceutical preparations containing leronlimab for treatment of HIV in humans in the U.S. Pursuant to the terms of the Vyera License Agreement, Vyera is obligated to use commercially reasonable efforts (as defined in the Vyera License Agreement) to commercialize leronlimab for the treatment of HIV in humans in the U.S.

Under the terms of the Vyera License Agreement, Vyera will make payments to us of up to $87.0 million based upon the achievement of certain sales and regulatory milestones. In addition, Vyera will pay a royalty to us equal to fifty percent of Vyera’s gross profit margin from leronlimab sales (defined in the Vyera License Agreement as “Net Sales”) in the U.S. The right to potential future payments under the Vyera License Agreement represents a significant portion of the value of the Vyera License Agreement. We cannot be certain we will receive any future payments under the Vyera License Agreement, which would adversely affect the trading price of our common stock and have a material adverse effect on our business, financial condition and results of operations.

Vyera’s ability to successfully commercialize and generate revenues from leronlimab depends on a number of factors, including Vyera’s ability to:

 

   

develop and execute its sales and marketing strategies for leronlimab;

 

   

achieve, maintain and grow market acceptance of, and demand for, leronlimab;

 

   

obtain and maintain adequate coverage, reimbursement and pricing from managed care, government and other third- party payers;

 

   

maintain and manage the necessary sales, marketing, manufacturing, managed markets, and other capabilities and infrastructure that are required to successfully integrate and commercialize leronlimab; and

 

   

comply with applicable legal and regulatory requirements.

Additional factors that may affect the success of our commercialization arrangement with Vyera include the following:

 

   

we may not succeed in getting leronlimab approved or approved with commercially competitive labeling;

 

   

Vyera may prioritize the commercialization of its other products over leronlimab;

 

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Vyera may pursue higher-priority programs, or change the focus of its marketing programs;

 

   

Vyera may acquire or develop alternative products;

 

   

Vyera may in the future choose to devote fewer resources to leronlimab;

 

   

changes in laws and regulations applicable to, and scrutiny of, the pharmaceutical industry;

 

   

market acceptance of leronlimab may fail to materialize, increase or may decrease;

 

   

Vyera may experience financial difficulties; and

 

   

Vyera may fail to comply with its obligations under our Vyera License Agreement and related agreements.

Any of the preceding factors could affect Vyera’s commitment to, and ability to perform, its obligations under the Vyera License Agreement, which, in turn could adversely affect the commercial success of leronlimab for the treatment of HIV in humans in the U.S. Any failure by Vyera to successfully commercialize leronlimab for the treatment of HIV in humans in the U.S. could have a material adverse effect on our business, financial condition and results of operations.

If Vyera is not successful in commercializing leronlimab for the treatment of HIV in humans in the U.S., our revenues and our business will suffer.

The commercial success of leronlimab for the treatment of HIV in humans in the U.S. will depend almost entirely on Vyera’s commercialization efforts. Pursuant to the Vyera License Agreement, Vyera is responsible for marketing, pricing, promoting, selling and distributing leronlimab for the treatment of HIV in humans in the U.S. If the Vyera License Agreement is terminated in accordance with its terms, including due to a party’s failure to perform its obligations or responsibilities under the Vyera License Agreement, we would need to commercialize leronlimab ourselves, for which we currently have no infrastructure, or alternatively enter into a new agreement with another commercialization partner, of which no assurance can be given. If we are unable to build the necessary infrastructure to commercialize leronlimab ourselves, which would substantially increase our expenses and capital requirements, which we are currently unable to fund, or are unable to find a suitable replacement commercialization partner, we would be unable to generate any revenue from leronlimab. Even if we are successful at replacing the commercialization capabilities of Vyera, potential revenues and/or royalties from leronlimab could be adversely affected.

Vyera may market other products, for which leronlimab will vie for Vyera’s, promotional, marketing, and selling resources. If Vyera fails to commit sufficient promotional, marketing and selling resources to leronlimab, our potential royalties and receipt of milestone payments could be adversely impacted. Additionally, there can be no assurance that Vyera will commit the resources required for the successful commercialization of leronlimab.

If Vyera prices leronlimab inappropriately, fails to position and sell leronlimab properly, targets inappropriate physician specialties, or otherwise does not provide sufficient promotional support, potential product revenue and our potential royalties and milestone payments could be materially adversely affected.

Vyera’s promotional, marketing and sales activities in connection with leronlimab are subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program. The federal False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. If Vyera’s activities are found to be in violation of these laws or any other federal and state fraud and abuse laws, Vyera may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from federal healthcare programs and

 

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the curtailment or restructuring of its activities with regard to the commercialization of leronlimab, which could harm the commercial success of leronlimab and have a material adverse effect on our business, financial condition and results of operations.

We will depend on Vyera and any other future licensees and royalty-agreement counterparties for the determination of royalty and milestone payments. While we typically have primary or back-up rights to audit our licensees and royalty-agreement counterparties, the independent auditors may have difficulty determining the correct royalty calculation, we may not be able to detect errors and payment calculations may call for retroactive adjustments. We may have to exercise legal remedies, if available, to resolve any disputes resulting from the audit.

The royalty and milestone payments we may receive pursuant to the Vyera License Agreement and any future license or commercialization agreements are dependent on our licensees based on their reported achievement of regulatory milestones and product sales. Each licensee’s calculation of the royalty payments is subject to and dependent upon the adequacy and accuracy of its sales and accounting functions, and errors may occur from time to time in the calculations made by a licensee and/or a licensee may fail to report the achievement of royalties or milestones in whole or in part. Our license and royalty agreements typically provide us the primary or back-up right to audit the calculations and sales data for the associated royalty payments; however, such audits may occur many months following our recognition of the royalty revenue, may require us to adjust our royalty revenues in later periods and may require expense on the part of the Company. Further, our licensees and royalty-agreement counterparties may be uncooperative or have insufficient records, which may complicate and delay the audit process.

Although we intend to regularly exercise our royalty audit rights as necessary and to the extent available, we rely in the first instance on our licensees and royalty-agreement counterparties to accurately report the achievement of milestones and royalty sales and calculate and pay applicable milestones and royalties and, upon exercise of such royalty and other audit rights, we rely on licensees’ and royalty-agreement counterparties’ cooperation in performing such audits. In the absence of such cooperation, we may be forced to exercise legal remedies, if available, to enforce our agreements.

Any failure of any of our upstream suppliers to deliver necessary quantities of leronlimab could result in delays in our commercialization schedule and adversely affect our ability to meet our supply obligations to Vyera. In addition, we may still be obligated to satisfy obligations to our upstream suppliers and/or licensors even if Vyera’s commercialization achievements are insufficient to enable us to fully satisfy such obligations.

We depend on our upstream supply agreements with various partners to satisfy our obligations under the Vyera Supply Agreement to supply leronlimab to Vyera for commercialization. A failure in our upstream supply chain could adversely impact our ability to meet our supply obligations under the Vyera Supply Agreement and could impact Vyera’s ability to successfully commercialize leronlimab. We have obligations to our upstream suppliers and licensors that are independent of Vyera’s obligations to us. Therefore, if Vyera is not able to successfully commercialize leronlimab, we may still be obligated to meet certain of our obligations to our upstream suppliers. There can be no assurances that Vyera’s commercialization of leronlimab will be sufficient to enable us to meet the obligations to our upstream suppliers and/or licensors.

We anticipate being able to provide to Vyera, in satisfaction of our supply obligations thereto, certain inventory of product that we have on hand in connection with the launch and initial commercialization period of leronlimab. If we are unable to do so due to dating restrictions at the time of regulatory approval of leronlimab,

 

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the launch of leronlimab may be delayed and we will likely incur additional costs in order to provide Vyera with sufficient product for the launch and the initial commercialization period of leronlimab.

The commercialization of leronlimab is subject to several risks.

Regulatory approval of leronlimab is no guarantee of commercial success. The sale and marketing of drug products is a complicated and multifaceted process, and many approved drugs are not commercially successful.

If approved for marketing, the commercial success of leronlimab will depend upon its acceptance by customers and other stakeholders, including physicians, patients and health care payors. The degree of market acceptance of leronlimab will depend on a number of factors, including:

 

   

demonstration of clinical safety and efficacy;

 

   

relative convenience and ease of administration;

 

   

the prevalence and severity of any adverse effects;

 

   

the willingness of physicians to prescribe leronlimab and of the target patient population to try new therapies;

 

   

safety, tolerability and efficacy of leronlimab compared to competing products;

 

   

the introduction of any new products that may in the future become available to treat indications for which leronlimab PRO 140 may be approved;

 

   

new procedures or methods of treatment that may reduce the incidences of any of the indications in which our drug candidates may show utility;

 

   

pricing and cost-effectiveness;

 

   

the inclusion or omission of leronlimab in applicable treatment guidelines;

 

   

the effectiveness of our or any future collaborators’ sales and marketing strategies;

 

   

limitations or warnings contained in FDA approved labeling;

 

   

our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors; and

 

   

the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement.

If leronlimab, or any of our drug candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party payors on the benefits of our drug candidates may require significant resources and may never be successful.

In addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our drug candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render our drug candidates not commercially viable. For example, regulatory authorities may approve our drug candidates for fewer or more limited indications than we request, may not approve the prices we intend to charge for our drug candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve our drug candidates with labels that do not include the labeling claims necessary or desirable for the successful commercialization of a particular indication.

 

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Further, the FDA or comparable foreign regulatory authorities may place conditions on approvals, such as risk management plans and a Risk Evaluation and Mitigation Strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA may also require a REMS for an approved product when new safety information emerges. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our drug candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of our drug candidates.

Certain agreements and related license agreements require us to make significant milestone, royalty, and other payments, which will require additional financing and, in the event we do commercialize our leronlimab product, decrease the revenues we may ultimately receive on sales. To the extent that such milestone, royalty and other payments are not timely made, the counterparties to such agreements in certain cases have repurchase and termination rights thereunder with respect to leronlimab.

Under the Progenics Purchase Agreement, the PDL License and the Lonza Agreement, we must pay to Progenics, AbbVie Inc. and Lonza significant milestone payments, license fees for “system know-how” technology, and royalties. In order to make the various milestone and license payments that are required, we will need to raise additional funds. In addition, our royalty obligations will reduce the economic benefits to us of any future sales if we do receive regulatory approval and seek to commercialize leronlimab. To the extent that such milestone payments and royalties are not timely made, under each their respective agreements, Progenics has certain repurchase rights relating to the assets sold to us, and AbbVie Inc. has certain termination rights relating to our license of leronlimab under the PDL License. For more information, see “Business—PRO 140 Acquisition and Licenses,” as well as the Progenics Purchase Agreement, the PDL License and the Lonza Agreement, each of which are incorporated by reference, respectively, as Exhibits 2.1, 10.3 and 10.4 to this Form 10-K.

Any failure to attract and retain skilled directors, executives, employees and consultants could impair our drug development and commercialization activities.

Our business depends on the skills, performance, and dedication of our directors, executive officers and key scientific and technical advisors. All of our current scientific advisors are independent contractors and are either self-employed or employed by other organizations. As a result, they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, which may affect their ability to provide services to us in a timely manner. We may need to recruit additional directors, executive management employees, and advisers, particularly scientific and technical personnel, which will require additional financial resources. In addition, there is currently intense competition for skilled directors, executives and employees with relevant scientific and technical expertise, and this competition is likely to continue. We compete for these qualified personnel against companies with greater financial resources than ours. In order to successfully recruit qualified employees, we will likely need to offer a combination of base salary and equity compensation. These future issuances of our equity securities will dilute existing stockholders’ ownership interests. If we are unable to attract and retain persons with sufficient scientific, technical and managerial experience, we may be forced to limit or delay our product development activities or may experience difficulties in successfully conducting our business, which would adversely affect our operations and financial condition.

The loss or transition of any member of our senior management team or any key employee could adversely affect our business.

Our success depends significantly on the continued individual and collective contributions of our senior management team and key employees. The individual and collective efforts of these employees will be important as we continue to develop our tests and services, and as we expand our commercial activities. The loss of the

 

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services of any member of our senior management team or the inability to hire and retain experienced management personnel could harm our operating results.

We have experienced significant turnover among our senior executives over the past two years. Our Chief Medical Officer was terminated in July 2019, after joining the company in November 2018, and our Chief Financial Officer left the Company in April 2020, after being promoted to this role in November 2019. The complexity inherent in integrating a new key member of the senior management team with existing senior management may limit the effectiveness of any such successor or otherwise adversely affect our business. Leadership transitions can be inherently difficult to manage and may cause uncertainty or a disruption to our business or may increase the likelihood of turnover of other key officers and employees. Specifically, a leadership transition in the commercial team may cause uncertainty about or a disruption to our commercial organization, which may impact our ability to achieve sales and revenue targets. Further, we may incur significant expenses related to any executive transition costs that may impact our operating results. Finding suitable replacements for senior management and other key employees can be difficult, and there can be no assurance we will continue to be successful in retaining or attracting qualified personnel in the future.

We have a very limited number of internal research and development personnel, making us dependent on consulting relationships and strategic alliances with industry partners.

We currently have five employees dedicated to Chemistry, Manufacturing, and Controls, or CMC activities and quality control. We rely and intend to continue to rely on third-parties to supplement many of these functions. We contract with Amarex, a full service contract research organization, to manage our clinical trials. As a result, we are dependent on consultants and strategic partners in our development and commercialization activities, and it may be administratively challenging to monitor and coordinate these relationships. If we do not appropriately manage our relationships with third-parties, we may not be able to successfully manage development, testing, and preparation of our BLA filings for our product or commercialize any product approved, which would have a material and adverse effect on our business, financial condition and stock price.

Our competitors may develop drugs that are more effective, safer and less expensive than ours.

We are engaged in the HIV treatment sector of the biopharmaceutical industry, which is intensely competitive. There are current treatments that are quite effective at controlling the effects of HIV, and we expect that new developments by other companies and academic institutions in the areas of HIV treatment will continue. If approved for marketing by the FDA, depending on the approved clinical indication, our product candidate may be competing with existing and future antiviral treatments for HIV.

Our competitors may:

 

   

develop drug candidates and market drugs that increase the levels of safety or efficacy that our product candidate will need to show in order to obtain regulatory approval;

 

   

develop drug candidates and market drugs that are less expensive or more effective than ours;

 

   

commercialize competing drugs before we or our partners can launch any products we are working to develop;

 

   

hold or obtain proprietary rights that could prevent us from commercializing our products; and/or

 

   

introduce therapies or market drugs that render our product candidate obsolete.

We expect to compete against large pharmaceutical and biotechnology companies and smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research organizations. These competitors, in nearly all cases, operate

 

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research and development programs that have substantially greater financial resources than we do. Our competitors also have significantly greater experience in:

 

   

developing drug and other product candidates;

 

   

undertaking preclinical testing and clinical trials;

 

   

building relationships with key customers and opinion-leading physicians;

 

   

obtaining and maintaining FDA and other regulatory approvals;

 

   

formulating and manufacturing drugs;

 

   

launching, marketing and selling drugs; and

 

   

providing management oversight for all of the above-listed operational functions.

If we fail to achieve superiority over other existing or newly developed treatments, we may be unable to obtain regulatory approval. If our competitors market drugs that are less expensive, safer or more effective than our product candidate, or that gain or maintain greater market acceptance, we may not be able to compete effectively.

We will need to outsource and rely on third-parties for the clinical development and manufacture, sales and marketing of product candidate, and our future success will be dependent on the timeliness and effectiveness of the efforts of these third-parties.

We are dependent on third-parties for important aspects of our product development strategy. We do not have the required financial and human resources to carry out independently the pre-clinical and clinical development for our product candidate, and do not have the capability or resources to manufacture, market or sell our current product candidate. As a result, we contract with and rely on third-parties for important functions, including testing, storing, and manufacturing our products and managing and conducting clinical trials from which we may obtain a benefit. We have recently entered into several agreements with third-parties for such services. If problems develop in our relationships with third-parties, or if such parties fail to perform as expected, it could lead to delays or lack of progress, significant cost increases, changes in our strategies, and even failure of our product initiatives.

Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by problems at suppliers could delay shipment of our drug candidates, increase our cost of goods sold and result in lost sales.

We expect to rely on third-party manufacturers and will be dependent on their quality and effectiveness.

Our primary product candidate leronlimab and potential drug candidates require precise, high-quality manufacturing. The failure to achieve and maintain high manufacturing standards, including failure to detect or control unexpected events or unanticipated manufacturing errors or the frequent occurrence of such errors, could result in patient injury or death, discontinuance or delay of ongoing or planned clinical trials, delays or failures in product testing or delivery, cost overruns, product recalls or withdrawals and other problems that could seriously hurt our business. Contract manufacturers of biopharmaceutical drugs can encounter difficulties involving manufacturing processes, facilities, operations, production yields, quality control, compliance and shortages of qualified personnel. These manufacturers are subject to stringent regulatory requirements, including the FDA’s current good-manufacturing-practices (cGMP) regulations and similar foreign laws and standards. If our contract manufacturers fail to maintain ongoing compliance at any time, we may be unable to obtain regulatory approval for our products. In addition, the production of our product candidate could be interrupted, resulting in delays or discontinuance of our clinical trials, disruption in our release of commercial supplies, or other factors that could cause increases in costs and loss of potential revenues.

 

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If for any reason, these third-parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them, nor can we be certain that any such third-parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing processes for our active pharmaceutical ingredient, or API, or our finished products, or should these manufacturers cease doing business with us, we could experience significant interruptions in the supply of our drug candidates or may not be able to create a supply of our drug candidates at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of our drug candidates might be negatively affected. Our inability to coordinate the efforts of our third-party manufacturing partners, or the lack of capacity available at our third-party manufacturing partners, could impair our ability to supply our drug candidates at required levels. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new bulk or finished product manufacturer, if we face these or other difficulties with our current manufacturing partners, we could experience significant interruptions in the supply of our drug candidates if we decided to transfer the manufacture of our drug candidates to one or more alternative manufacturers in an effort to deal with the difficulties.

We cannot guarantee our manufacturing and supply partners will be able to manufacture our drug candidates at commercial scale on a cost-effective basis. If the commercial-scale manufacturing costs of our drug candidates are higher than expected, these costs may significantly impact our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over time.

We may not be able to identify, negotiate and maintain the strategic alliances necessary to develop and commercialize our products and technologies, and we will be dependent on our corporate partners if we do.

We may seek to enter into a strategic alliance with a pharmaceutical company for the further development and approval of one or more of our product candidates. Strategic alliances potentially provide us with additional funds, expertise, access, and other resources in exchange for exclusive or non-exclusive licenses or other rights to the technologies and products that we are currently developing or may explore in the future. We cannot give any assurance we will be able to enter into strategic relationships with a pharmaceutical company or others in the near future or at all, or maintain our current relationships. In addition, we cannot assure you any agreements we do reach will achieve our goals or be on terms that prove to be economically beneficial to us. When we do enter into strategic or contractual relationships, we become dependent on the successful performance of our partners or counterparties. If they fail to perform as expected, such failure could adversely affect our financial condition, lead to increases in our capital needs, or hinder or delay our development efforts.

We currently have no sales and marketing organization. If we are unable to secure a sales and marketing partner or establish satisfactory sales and marketing capabilities, we may not successfully commercialize leronlimab.

Approval of leronlimab is no guarantee of commercial success. The sale and marketing of drug products is a complicated and multifaceted process, and many approved drugs are not commercially successful.

At present, we have no sales or marketing personnel. In order to commercialize products that are approved for commercial sales, we must either collaborate with third-parties that have such commercial infrastructure or develop our own sales and marketing infrastructure. If we are not successful in entering into appropriate collaboration arrangements, or recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing leronlimab, which would adversely affect our business, operating results and financial condition.

 

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We may have limited or no control over the sales, marketing and distribution activities of third-parties in connection with current and future collaboration agreements. Our future revenues may depend heavily on the success of the efforts of these third- parties. If we elect to establish a sales and marketing infrastructure we may not realize a positive return on this investment. In addition, we will have to compete with established and well-funded pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel. Factors that may inhibit our efforts to commercialize our drug candidates without strategic partners or licensees include:

 

   

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

   

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our drug candidates;

 

   

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

   

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

Even if we obtain marketing approval for leronlimab, we will be subject to ongoing regulatory obligations and oversight.

Even if we obtain marketing approval for leronlimab, we will be subject to ongoing obligations and continued regulatory review, which will result in significant risks and significant additional expenses. Additionally, leronlimab could be subject to labeling and other restrictions and withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience unanticipated problems with leronlimab.

Even if we obtain FDA approval of leronlimab for an indication, the FDA may still impose significant restrictions on its indicated uses or marketing or the conditions of approval, or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Leronlimab will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current cGMPs, which are requirements relating to quality control, quality assurance and corresponding maintenance of records and documents.

With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.

In addition, if any of our drug candidates are approved for an indication, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly

 

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regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for any of our drug candidates, physicians may nevertheless legally prescribe such products to their patients in a manner that is inconsistent with the approved label. However, if we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.

If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency or problems with the facility where the product is manufactured, or if we or our manufacturers fail to comply with applicable regulatory requirements, we may be subject to the following administrative or judicial sanctions:

 

   

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

   

issuance of warning letters or untitled letters;

 

   

injunctions or the imposition of civil or criminal penalties or monetary fines;

 

   

suspension of any ongoing clinical trials;

 

   

refusal to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals;

 

   

suspension of, or imposition of restrictions on, operations, including costly new manufacturing requirements; and/or

 

   

product seizure or detention or refusal to permit the import or export of product.

The occurrence of any event or penalty described above may inhibit our ability to commercialize our drug candidates and generate revenue. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.

Our future growth depends, in part, on our ability to enter into and succeed in markets outside of the United States, where we may choose to rely on third-party collaborations and will be subject to additional regulatory and commercial burdens, risks and other uncertainties.

Our future profitability will depend, in part, on our ability to gain approval of and commercialize our drug candidates in non-U.S. markets. In some or all of these non-U.S. markets, we intend to enter into licensing and contractual collaborations with third-parties to handle some or all of the tasks and responsibilities necessary to succeed. Our activities in non-U.S. markets are subject to additional risks and uncertainties, including:

 

   

our ability to enter into favorable licensing and contractual arrangements with our partners;

 

   

our ability to select partners who are capable of achieving success at the tasks they agree to perform;

 

   

obtaining timely and sufficient favorable approval terms for our drug candidates;

 

   

obtaining favorable pricing and reimbursement;

 

   

our inability to directly control commercial activities because we are relying on third-parties;

 

   

the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

 

   

different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

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import or export licensing requirements;

 

   

longer accounts receivable collection times;

 

   

longer lead times for shipping;

 

   

language barriers for technical training;

 

   

reduced protection of intellectual property rights in some foreign countries;

 

   

foreign currency exchange rate fluctuations; and

 

   

the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

International sales of our drug candidates could also be adversely affected by the imposition of governmental controls, political and economic instability, and trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.

We may not be able to successfully manufacture our product candidate in sufficient quantities for late-stage clinical development, and scale-up manufacturing processes for commercial production, which would delay or prevent us from developing our product candidate and commercializing approved product, if any.

In order to conduct larger-scale or late-stage clinical trials, we need to maintain sufficient product inventory. A failure to manufacture a product candidate in a timely manner or unexpected failure of product in inventory due to unacceptable test results may lead to significant delays in clinical development. For commercialization of any resulting product, if that candidate is approved for sale, we will need to manufacture it in larger quantities while preserving its quality. Our CMOs may not be able to successfully increase the manufacturing capacity for our product candidate in a timely or cost-effective manner, or at all. In addition, quality issues may arise during development, scale-up and validation of commercial manufacturing processes. If we are unable to successfully develop robust, commercial-scale processes to manufacture our product candidate in sufficient quality and quantity, the regulatory approval or commercial launch of our product candidate may be delayed, which could significantly harm our business.

We may be subject to potential product liability and other claims that could materially affect our business and financial condition.

The development and sale of medical products exposes us to the risk of significant damages from product liability and other claims, and the use of our product candidate in clinical trials may result in adverse effects. We cannot predict all the possible harms or adverse effects that may result. We maintain a modest amount of product liability insurance to provide some protections from claims. Nonetheless, we may not have sufficient resources to pay for any liabilities resulting from a personal injury or other claim, even if it is partially covered by insurance. In addition to the possibility of direct claims, we may be required to indemnify third-parties against damages and other liabilities arising out of our development, commercialization and other business activities, which would increase our liability exposure. If third-parties that have agreed to indemnify us fail to do so, we may be held responsible for those damages and other liabilities as well.

If we market our drug candidates in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.

The FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved prescribing information. While physicians may prescribe an approved product for a so-called “off label” use, it is unlawful for a pharmaceutical company to promote its products in a manner that is inconsistent with its approved label and any company which engages in such conduct may be subject to significant liability. Similarly, industry codes in the European Union and other foreign jurisdictions prohibit companies from engaging in off-label promotion and regulatory agencies in various countries enforce violations

 

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of the code with civil penalties. While we intend to ensure our promotional materials are consistent with our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute other civil or criminal enforcement proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include the U.S. Anti-Kickback Statute, U.S. False Claims Act and similar state laws. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible some of our business activities could be subject to challenge under one or more of these laws.

The U.S. Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted broadly to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, recent health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent requirement of the U.S. Anti-Kickback Statute and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the U.S. Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act. Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid.

Over the past few years, pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicare or Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the U.S. Anti-Kickback Statute and the U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include substantial civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, substantial criminal fines and imprisonment.

Legislative, regulatory, or medical cost reimbursement changes may adversely affect our business.

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to the health care system in the U.S. and in other jurisdictions may change the nature of and regulatory requirements relating to drug discovery, clinical testing and regulatory approvals, limit or eliminate payments for medical procedures and treatments, or subject the pricing of pharmaceuticals to government control. Outside the U.S., and particularly in the EU, the pricing of prescription pharmaceuticals is subject to governmental control. In addition, third-party payers in the U.S. are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of newly approved health care products. Significant changes in the health care system in the U.S. or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could have a material adverse effect on our projected future operating results and our ability to raise capital, commercialize products, and remain in business.

 

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Third-party coverage and reimbursement and health care cost containment initiatives and treatment guidelines may constrain our future revenues.

Our ability to successfully market our product candidate will depend in part on the level of reimbursement that government health administration authorities, private health coverage insurers and other organizations provide for the cost of our product and related treatments. Countries in which our product candidate is expected to be sold through reimbursement schemes under national health insurance programs frequently require that manufacturers and sellers of pharmaceutical products obtain governmental approval of initial prices and any subsequent price increases. In certain countries, including the United States, government-funded and private medical care plans can exert significant indirect pressure on prices. We may not be able to sell our drug candidates profitably if adequate prices are not approved or coverage and reimbursement is unavailable or limited in scope. Increasingly, third-party payors attempt to contain health care costs in ways that are likely to impact our development of products including:

 

   

failing to approve or challenging the prices charged for health care products;

 

   

introducing reimportation schemes from lower priced jurisdictions;

 

   

limiting both coverage and the amount of reimbursement for new therapeutic products;

 

   

denying or limiting coverage for products that are approved by the regulatory agencies but are considered to be experimental or investigational by third-party payors; and

 

   

refusing to provide coverage when an approved product is used in a way that has not received regulatory marketing approval.

If we are unable to effectively maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our financial results and our stock price could be adversely affected.

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 year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K for that fiscal year. Management determined that as of May 31, 2020, our disclosure controls and procedures and internal control over financial reporting were effective. Prior to the fiscal year ended May 31, 2017, our disclosure controls and procedures and internal control over financial reporting were not effective, due to material weaknesses in our internal control over financial reporting related to inadequate segregation of duties over authorization, review and recording of transactions, as well as the financial reporting of such transactions. Any failure to maintain our controls or operation of these controls, could harm our operations, decrease the reliability of our financial reporting, and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.

We may not be able to attract or retain a majority of independent directors.

The Company’s Board of Directors (the “Board”) may not be comprised of a majority of independent directors in the future. Currently our Board consists of six members; four of whom are independent and two of whom are members of management. It is difficult to retain and recruit independent directors. If the Board is not made up of a majority of independent directors, there may be a lower level of oversight on executive management, and the Board may be influenced by the concerns, issues or objectives of management, including compensation and governance issues, to a greater extent than would occur with a majority of independent directors. As a result, the composition of the Board may afford less protection to our stockholders than if the Board were composed of a majority of independent directors.

A lack of independent directors may also make it difficult to create appropriately sized board committees meeting the requirements of the charters of the Board Committees and the listing standards of The Nasdaq Stock Market, pursuant to which we evaluate director independence. Historically, we have strived to have each of our

 

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Board Committees comprised solely of independent directors. Currently, our Audit Committee has only two members, one of whom is an audit committee financial expert, and our Compensation and Nominating & Corporate Governance Committees also consist of two independent directors. Due to the fact that we currently only have four independent directors, it is difficult to establish appropriately sized and effective operating board committees comprised of independent members to oversee committee functions without overburdening our existing directors.

As we attempt to identify new board members, we may find that highly-qualified individuals are not available or willing to serve as directors or on a committee. There can be no assurance that we will be able to identify, recruit and ultimately secure the services of such individuals in a timely manner or at all. If we are unable to attract and retain qualified individuals who possess the necessary technical, scientific and financial expertise and management and operational experience, our ability to successfully develop, test and commercialize our product candidate and generate revenues may be negatively affected.

Our success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our product candidates and research technologies.

Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the claim scope of patents, our ability to enforce our existing patents and to obtain and enforce patents that may issue from any pending or future patent applications is uncertain and involves complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology and pharmaceutical patents.We have pending patents for certain indications for our core product candidate, and continue to seek patent coverage for various potential therapeutic applications for leronlimab. However, we cannot be sure that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims of these patents will be held valid or enforceable by a court of law, will provide us with any significant protection against competing products, or will afford us a commercial advantage over competitive products. If one or more products resulting from our product candidates is approved for sale by the FDA and we do not have adequate intellectual property protection for those products, competitors could duplicate them for approval and sale in the United States without repeating the extensive testing required of us or our partners to obtain FDA approval.

Known third-party patent rights could delay or otherwise adversely affect our planned development and sale of leronlimab. We have identified but not exhaustively analyzed other patents that could relate to our proposed products.

We are aware of patent rights held by a third-party that may cover certain compositions within our leronlimab candidate. The patent holder has the right to prevent others from making, using, or selling a drug that incorporates the patented compositions, while the patent remains in force. While we believe that the third-party’s patent rights will not affect our planned development, regulatory clearance, and eventual marketing, commercial production, and sale of leronlimab, there can be no assurance that this will be the case. The relevant patent expires before we expect to commercially introduce leronlimab. In addition, the Hatch-Waxman exemption to U.S. patent law permits all uses of compounds in clinical trials and for other purposes reasonably related to obtaining FDA clearance of drugs that will be sold only after patent expiration, so our use of leronlimab in those FDA-related activities does not infringe the patent holder’s rights. However, were the patent holder to assert its rights against us before expiration of the patent for activities unrelated to FDA clearance, the development and ultimate sale of a leronlimab product could be significantly delayed, and we could incur the expense of defending a patent infringement suit and potential liability for damages for periods prior to the patent’s expiration.

In connection with our acquisition of rights to leronlimab, our patent counsel conducted a freedom-to-operate search that identified other patents that could relate to our proposed leronlimab candidate. Sufficient research and analysis is currently being conducted to enable us to reach the conclusion that leronlimab likely does not infringe those patent rights. If any of the holders of the identified patents were to assert patent

 

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rights against us, the development and sale of leronlimab could be delayed, we could be required to spend time and money defending patent litigation, and we could incur liability for infringement or be enjoined from producing our products if the patent holders prevailed in an infringement suit.

If we are sued for infringing on third-party intellectual property rights, it will be costly and time-consuming, and an unfavorable outcome would have a significant adverse effect on our business.

Our ability to commercialize our product candidate depends on our ability to use, manufacture and sell that product without infringing the patents or other proprietary rights of third-parties. Numerous U.S. and foreign issued patents and pending patent applications owned by third-parties exist in the monoclonal antibody therapeutic area in which we are developing our product candidate and seeking new potential product candidates. There may be existing patents, unknown to us, on which our activities with our product candidate could infringe.

If a third-party claims our actions or products or technologies infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including, but not limited to:

 

   

infringement and other intellectual property claims that, even if meritless, can be costly and time-consuming, delay the regulatory approval process and divert management’s attention from our core business operations;

 

   

substantial damages for infringement, if a court determines that our products or technologies infringe a third-party’s patent or other proprietary rights;

 

   

a court prohibiting us from selling or licensing our products or technologies unless the holder licenses the patent or other proprietary rights to us, which it is not required to do; and

 

   

even if a license is available from a holder, we may have to pay substantial royalties or grant cross-licenses to our patents or other proprietary rights.

If any of these events occur, it could significantly harm our operations and financial condition and negatively affect our stock price.

Although no third-party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent our product candidate from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating to our product candidate or our processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market leronlimab or any other product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign leronlimab or any other product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing leronlimab or another product candidate, which could harm our business, financial condition and operating results.

We may undertake infringement or other legal proceedings against third-parties, causing us to spend substantial resources on litigation and exposing our own intellectual property portfolio to challenge.

We may come to believe that third-parties are infringing on our patents or other proprietary rights. To prevent infringement or unauthorized use, we may need to file infringement and/or misappropriation suits, which are very expensive and time-consuming and would distract management’s attention. Also, in an infringement or misappropriation proceeding a court may decide that one or more of our patents is invalid, unenforceable, or both, in which case third-parties may be able to use our technology without paying license fees or royalties. Even if the validity of our patents is upheld, a court may refuse to stop the other party from using the technology at issue on the ground that the other party’s activities are not covered by our patents.

 

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We may become involved in disputes with our present or future contract partners over intellectual property ownership or other matters, which would have a significant effect on our business.

Inventions discovered in the course of performance of contracts with third-parties may become jointly owned by our strategic partners and us, in some cases, and the exclusive property of one of us, in other cases. Under some circumstances, it may be difficult to determine who owns a particular invention or whether it is jointly owned, and disputes could arise regarding ownership or use of those inventions. Other disputes may also arise relating to the performance or alleged breach of our agreements with third-parties. Any disputes could be costly and time-consuming, and an unfavorable outcome could have a significant adverse effect on our business.

We are involved in a number of legal proceedings and, while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes could adversely affect our business and financial condition.

We are, or may become, involved in legal proceedings, government and agency investigations, and derivative litigation (see discussion of Legal Proceedings in Item 1 of this Report). We have faced and will continue to face allegations by securities litigation law firms claiming our disclosures are misleading, incomplete, or that we or our officers and directors have violated securities laws. We cannot predict with certainty the outcomes of these legal proceedings. The outcome of some of these legal proceeding could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money adversely affecting our financial condition and results of operations. Additionally, defending against lawsuits and legal proceedings may involve significant expense and diversion of management’s attention and resources. Negative publicity surrounding such legal proceedings may also harm our reputation and adversely impact our business and financial condition.

We are subject to the oversight of the SEC and other regulatory agencies. Investigations by those agencies could divert management’s focus and could have a material adverse effect on our reputation and financial condition.

We are subject to the regulation and oversight of the SEC and state regulatory agencies, in addition to the FDA. As a result, we may face legal or administrative proceedings by these agencies. We are unable to predict the effect of any investigations on our business, financial condition or reputation. In addition, publicity surrounding any investigation, even if ultimately resolved in our favor, could have a material adverse effect on our business.

If the FDA or comparable foreign regulatory authorities approve generic or biosimilar versions of any product candidate that receive marketing approval, or if any product approval we obtain does not provide us with the exclusivity periods we hope to achieve, sales of our product could be adversely affected.

As part of the ongoing efforts of governmental authorities to lower health care costs by facilitating generic competition to pharmaceutical products, the Biologics Price Competition and Innovation Act (“BPCIA”) enacted as part of the Health Care Reform Law, created a new abbreviated regulatory approval pathway in the United States for biological products that are found to be “biosimilar” to or “interchangeable” with a biological “reference product” previously licensed under a BLA. This abbreviated approval pathway is intended to permit a biosimilar to come to market more quickly and less expensively by relying to some extent on the data generated by the reference product’s sponsor and the FDA’s previous review and approval of the reference product. Under the BPCIA, a biosimilar sponsor’s ability to seek or obtain approval through the abbreviated pathway is limited by periods of exclusivity granted by the FDA to the holder of the reference product’s BLA, and no biosimilar application may be accepted by the FDA for review until four years after the date the reference product was first licensed by the FDA, and no biosimilar application, once accepted, may receive final approval until 12 years after the reference product was first licensed by the FDA.

Once approved, biosimilars likely would compete with, and in some circumstances may be deemed under applicable laws to be “interchangeable with,” the previously approved reference product. The extent to which a

 

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biosimilar, once approved, will be substituted for any one of our product candidates, if approved, in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. Although there is uncertainty regarding the impact of this new program, it seems likely that if any of our product candidates are approved by the FDA, there is risk that the approval of a biosimilar competitor to one of our products could have an adverse impact on our business. In particular, a biosimilar could be significantly less costly to bring to market and priced significantly lower than our product, if approved by the FDA.

We may also be subject to competition from biosimilar products in Europe. To date a number of biosimilar products have been authorized by the EMA. As in the United States the regulatory approval pathway for biosimilar products in Europe is abbreviated. A biosimilar sponsor must however still provide all of the preclinical and clinical data required to demonstrate the similarity of their product with the reference product. The level of data required is assessed on a case by case basis but it will be less than that required for an original biological product. The pathway is more complex than the abridged procedure that may be followed to obtain authorization of a generic version of a non-biological product but it would still allow the biosimilar product to be brought to market more quickly and less expensively than our original product. That said, in Europe applications for marketing authorizations in relation to biosimilar products are subject to the same data and market exclusivity as apply to generic non-biologic products so no biosimilar product could be approved or placed on the market during the periods such exclusivity applies to our product. Marketing authorization of a biosimilar product in Europe does not guarantee that the biosimilar product may be substituted for the reference product. Interchangeability of a biosimilar product with the reference product is not assessed by the EMA but this determination is left to each of the member states. We cannot know at this stage the extent to which any biosimilar product would be interchangeable with our reference product, and this may vary between member states.

Our business success partially depends on our ability to successfully commercialize novel diagnostic tests and services, which is time consuming and complex, and our development efforts may fail.

Part of our business strategy is to develop and commercialize the PCa Test. We have not yet applied for clearance or approval from the FDA for the PCa Test, and would need to complete additional validations before we are ready to apply. We believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval from the FDA to commercially launch the PCa Test. Once we do apply, we may not receive FDA clearance or approval for the commercial use of our test on a timely basis, or at all. We believe the long-term success of our business partially depends on our ability to fully validate, develop and commercialize the PCa Test. Research, development and commercialization of diagnostic tests is time-consuming, uncertain and complex.

Our diagnostic test may not succeed in reliably diagnosing or predicting cancer with the sensitivity and specificity necessary to be clinically useful, and thus may not succeed commercially. Prior to commercializing our diagnostic test, we must undertake time-consuming and costly development activities, including clinical studies, and obtain regulatory clearance or approval, which may be denied. This development process involves a high degree of risk, substantial expenditures and will occur over several years. Our development efforts may fail for many reasons, including:

 

   

failure of the test at the research or development stage;

 

   

difficulty in accessing archival tissue samples, especially tissue samples with known clinical results; or

 

   

lack of sufficient clinical validation data to support the effectiveness of the test.

Tests that appear promising in early development may fail to be validated in subsequent studies, and even if we achieve positive results, we may ultimately fail to obtain the necessary regulatory clearances or approvals. There is substantial risk that our research and development projects will not result in commercial tests, and that

 

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success in early clinical trials will not be replicated in later studies. At any point, we may abandon development of a test or be required to expend considerable resources repeating clinical trials, which would adversely impact the timing for generating potential revenues from the test. In addition, as we develop our test, we will have to make significant investments in research, development and marketing resources. If a clinical validation study of a particular test then fails to demonstrate the outlined goals of the study, we might choose to abandon the development of that test. Further, our ability to develop and launch any diagnostic tests will likely depend on our receipt of additional funding. Additionally, if the supply of reagents or equipment on which our test in development or commercial test relies becomes unavailable and we have to source replacement reagents or equipment for our test, additional validation activities will be required and we may need to obtain regulatory clearances or approvals for the modified test.

The diagnostic business is heavily regulated, and if we are unable to obtain regulatory clearance or approvals in the United States, if we experience delays in receiving clearance or approvals, or if we do not gain acceptance from customers, our diagnostics growth strategy may not be successful.

In the United States, diagnostic tests and services are regulated under CLIA, the Federal Food, Drug, and Cosmetic Act, and various state laws. Diagnostic tests offered solely for use within a proprietary laboratory may be marketed as laboratory developed tests (“LDTs”). LDTs are regulated by the Center for Medicare and Medicaid Services (“CMS”) under CLIA, but, under the FDA’s enforcement framework, are not currently regulated by FDA. Although the FDA has statutory authority to assure that medical devices, including LDTs, are safe and effective for their intended uses, the FDA has generally exercised its enforcement discretion and not enforced applicable regulations with respect to LDTs. Specifically, under current FDA enforcement policies and more recent draft guidance, LDTs generally do not require FDA premarket clearance or approval before commercialization.

Under our current strategy, the PCa Test would be subject to the FDA’s applicable medical device regulations. For example, this test could become subject to the FDA’s requirements for premarket review. Unless an exemption applies, generally, before a new medical device or a new use for a medical device may be sold or distributed in the United States, the medical device must receive premarket marketing authorization from the FDA, which is generally either FDA clearance of a 510(k) premarket notification or premarket approval of a Premarket Approval application. As a result, before we can market or distribute our test in the United States for use by other clinical testing laboratories, we must first obtain premarket marketing authorization (generally referred to as premarket clearance or premarket approval throughout this document) from the FDA. We have not yet applied for clearance or approval from the FDA, and would need to complete additional validations before we are ready to apply. We believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval from the FDA to commercially launch the PCa Test. Once we do apply, we may not receive FDA clearance or approval for the commercial use of our test on a timely basis, or at all. If we are unable to obtain clearance or approval or if clinical diagnostic laboratories do not accept our test, our ability to grow our business by deploying our test could be compromised.

The commercial success of our prospective diagnostic business could be compromised if third-party payors, including insurance companies, managed care organizations and Medicare, do not provide coverage and reimbursement, refuse to enter into contracts with us, or delay payments for our diagnostic tests.

Pathologists and oncologists may not order our diagnostic test unless third-party payors, such as insurance companies, managed care organizations and government payors, such as Medicare and Medicaid, pay a substantial portion of the test price. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize our diagnostic test. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment. Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that tests using our technologies are:

 

   

not experimental or investigational;

 

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medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective;

 

   

supported by peer-reviewed publications; and

 

   

included in clinical practice guidelines.

Uncertainty surrounds third-party payor coverage and reimbursement of any test incorporating new technology, including the PCa Test. Even if we obtain marketing clearance or approval to market diagnostic tests, our future revenues will depend upon the size of any markets in which our product candidate has received clearance or approval, and our ability to achieve sufficient market acceptance, reimbursement from third-party payors and adequate market share for our product candidate in those markets.

Because each payor generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to reimburse a diagnostic test, seeking payor approvals is a time-consuming and costly process. We cannot be certain that coverage for our tests (FDA-cleared/approved or LDT) will be provided in the future by third-party payors. If we cannot obtain coverage and reimbursement from private and governmental payors such as Medicare and Medicaid for our new tests or test enhancements we may develop in the future, our ability to generate revenues from our diagnostic tests and clinical services could be limited, which may have a material adverse effect on our financial condition, results of operations and cash flow. Further, we may likely experience in the future, delays and temporary interruptions in the receipt of payments from third-party payors due to missing documentation and other issues, which could cause delay in collecting our future revenue.

If we are unable to successfully validate our laboratory tests and services, we will not be able to increase revenues.

Prospective customers such as physicians may not order our proprietary test, and third-party payors may not reimburse for our test, unless we are able to provide compelling evidence that the test is useful and produces actionable information with respect to diagnosis and prognosis. We believe that we will need to finance and successfully complete additional and more powerful studies, and then effectively disseminate the results of those studies, to drive widespread adoption of our test.

If the market for our test and services does not experience significant growth or if our test and services do not achieve broad acceptance, our operations will suffer.

We cannot accurately predict the future growth rate or the size of the market for our prospective test and services. The expansion of this market depends on a number of factors, such as:

 

   

the results of clinical trials;

 

   

the cost, performance and reliability of our test and services, and the tests and services offered by competitors;

 

   

customers’ perceptions regarding the benefits of our test and services;

 

   

customers’ satisfaction with our test and services; and

 

   

marketing efforts and publicity regarding our test and services.

If we are unable to execute our marketing strategy for our test and our test is unable to gain acceptance in the market, we may be unable to generate sufficient revenue to sustain our business.

Although we believe our prospective diagnostic test represents promising commercial opportunities, our tests may never gain significant acceptance in the marketplace and therefore may never generate substantial

 

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revenue or profits for us. We need to develop a market for our test through physician education and awareness programs. Gaining acceptance in medical communities requires that we perform additional studies after validating the efficacy of our test and services for the diagnosis, prognosis and treatment of cancer, and that we obtain acceptance of the results of those studies using our tests for publication in leading peer-reviewed medical journals. The results of any studies are always uncertain and even if we believe such studies demonstrate the value of our tests, the process of publication in leading medical journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel or worthy of publication. Failure to have our studies published in peer-reviewed journals would limit the adoption of our tests. Our ability to successfully market the tests that we may develop will depend on numerous factors, including:

 

   

whether health care providers believe our diagnostic test provides clinical utility;

 

   

whether the medical community accepts that our diagnostic test is sufficiently sensitive and specific to be meaningful in-patient care and treatment decisions; and

 

   

whether health insurers, government health programs and other third-party payors will cover and pay for our diagnostic test and, if so, whether they will adequately reimburse us.

Failure to achieve widespread market acceptance of our diagnostic test would materially harm our business, financial condition and results of operations.

If we cannot develop tests to keep pace with rapid advances in technology, medicine and science, our operating results and competitive position could be harmed.

In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There are several new cancer drugs under development that may increase patient survival time. There have also been advances in methods used to analyze very large amounts of genomic information. We must continuously develop new tests to keep pace with evolving standards of care. Our tests could become obsolete unless we continually innovate and expand them to demonstrate benefit in patients treated with new therapies. If we cannot adequately demonstrate the applicability of our tests to new treatments, sales of our tests and services could decline, which would have a material adverse effect on our business, financial condition and results of operations.

The 2017 comprehensive tax reform bill could adversely affect our business and financial condition.

On December 22, 2017, President Trump signed into law new tax legislation, the Tax Cuts and Jobs Act (TCJA), which significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses); limitation of the deduction of net operating losses generated in tax years beginning after December 31, 2017 to 80% of taxable income, indefinite carryforward of net operating losses generated in tax years after 2018 and elimination of net operating loss carrybacks; changes in the treatment of offshore earnings regardless of whether they are repatriated; current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, mandatory capitalization of research and development expenses beginning in 2022; immediate deductions for certain new investments instead of deductions for depreciation expense over time; further deduction limits on executive compensation; and modifying, repealing and creating many other business deductions and credits, including the reduction in the orphan drug credit from 50% to 25% of qualifying expenditures. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain and our business and financial condition could be adversely affected.

Any impairment of our intangible assets could negatively impact our results of operations and financial condition.

We evaluate assets on our balance sheet, including intangible assets, in connection with our fiscal year end reporting or whenever events or changes in circumstances indicate that their carrying value may not be

 

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recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying value, the asset is considered impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. We may experience unforeseen events that could adversely affect the value of our intangible assets and trigger an impairment evaluation. Future determinations of significant impairments of intangible assets as a result of an impairment test or any accelerated amortization of intangible assets could have a negative impact on the Company’s results of operations and financial condition.

The manufacture of pre-launch inventories involves the risk that the FDA may not approves such products for marketing on a timely basis or at all.

Pre-launch inventories consist primarily of our product candidate prior to the date that we anticipate that such products will receive FDA final marketing approval. Approval may require additional or different testing and/or specifications than what was performed in the manufacture of such pre- launch inventory. If any of these risks were to materialize with respect to a given product or if the launch of such product is significantly postponed, we may have to write-off the pre-launch inventories, which could be material.

Risks Relating to Our Common Stock

The significant number of shares of common stock issuable upon the exercise of outstanding common stock options and warrants could adversely affect the trading price of our common stock.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline significantly. In addition, as of July 31, 2020, we have 15,423,661 shares subject to outstanding options under our stock option plans, 299,354 shares reserved for future issuance under our equity compensation plan and 72,737,302 shares issuable upon exercise of outstanding warrants. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

We are subject to variable conversion prices and adjustments related to certain of our convertible notes and our convertible preferred stock which could cause significant dilution to stockholders and adversely impact the price of our common stock.

We have currently outstanding shares of Series B, Series C and Series D Preferred Stock, as well as convertible secured promissory notes, all of which is convertible into common stock at variable conversion prices and adjustments. As a result, future conversion of debt and or convertible preferred shares or issuance of new convertible debt may result in significant dilution to our stockholders. As of July 31, 2020, we have reserved 37,902,576 shares of common stock that is potentially issuable upon conversion of our outstanding shares of preferred stock and convertible notes.

Although we have filed an application to list our securities on Nasdaq, there can be no assurance that our securities will be so listed or, if listed, that we will be able to comply with the continued listing standards.

On July 15, 2020, we announced that we had filed a comprehensive listing application package with The Nasdaq Stock Market to request an uplisting of the Company’s common stock. Although we believe we satisfy the initial listing requirements for The Nasdaq Capital Market,® the Nasdaq has not approved our application, and there can be no assurance that Nasdaq will agree, approve us for listing on the Nasdaq and, even if our

 

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securities are listed, we cannot assure you that we will be able to maintain such listing. In addition, if after listing, Nasdaq delists our securities from trading on its exchange for failure to meet the continued listing standards, our Company and our shareholders could face significant material adverse consequences including a limited availability of market quotations for our common stock, confirmation that our stock is “penny stock” and subject to increased regulations, and a decreased ability to issue additional securities or obtain additional financing in the future.

The price of our common stock has been and could remain volatile, and the market price of our common stock may decrease.

The market price of our common stock has historically experienced and may continue to experience significant volatility. From June 1, 2019 through May 31, 2020, the market price of our common stock has fluctuated from a high of $3.84 per share to a low of $0.26 per share, and our stock price reached a 52 week high of $10.01 on June 30, 2020. The volatile nature of our common share price may cause investment losses for our stockholders. In addition, the market price of stock in small capitalization biotech companies is often driven by investor sentiment, expectation and perception, all of which may be independent of fundamental, objective and intrinsic valuation metrics or traditional financial performance metrics, thereby exacerbating volatility. In addition, our common stock is quoted on the OTCQB of the OTC Markets marketplace, which may increase price quotation volatility and could limit liquidity, all of which may adversely affect the market price of our shares.

If we implement a reverse stock split, there can be no assurances that the price per share of our common stock will increase proportionately with the reverse stock split, or at all.

Reducing the number of outstanding shares of our common stock through a reverse stock split is intended, absent other factors, to increase the per share market price of our common stock, including in preparation for a potential uplisting to a national securities exchange. However, other factors, such as our financial results, market conditions and the market perception of our business, may adversely affect the market price of our common stock. As a result, there can be no assurance that a reverse stock split, if completed, will result in making our common stock more attractive to a broader range of institutional and other investors, that the per share market price of our common stock will increase following a reverse stock split or that the per share market price of our common stock will not decrease in the future. Additionally, we cannot assure shareholders that the per share market price per share of our common stock after a reverse stock split, if completed, will increase in proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split. Accordingly, the total market capitalization of our common stock after a reverse stock split may be lower than the total market capitalization before the reverse stock split.

If the beneficial ownership of our stock becomes highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions.

Our significant stockholders may exercise substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets, or any other significant corporate transactions. These stockholders may also vote against a change of control, even if such a change of control would benefit our other stockholders. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below.

Our common stock is classified as “penny stock” and trading of our shares may be restricted by the SEC’s penny stock regulations.

Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) impose sales practice and disclosure requirements on certain brokers-dealers who engage in transactions involving a “penny stock.” The SEC has adopted regulations which generally define “penny stock” to be any

 

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equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock that is not otherwise exempt, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules may discourage investor interest in and limit the marketability of our common stock.

Future sales of our securities could adversely affect the market price of our common stock and our future capital-raising activities could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading price of our common stock.

We may sell securities in the public or private equity markets if and when conditions are favorable, or at prices per share below the current market price of our common stock, even if we do not have an immediate need for additional capital at that time. Sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our shares and our ability to raise capital. We may issue additional shares of common stock in future financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock. Moreover, sales of substantial amounts of shares in the public market, or the perception that such sales could occur, may adversely affect the prevailing market price of our common stock and make it more difficult for us to raise additional capital.

Purchasers in future offerings may experience immediate and substantial dilution.

The current trading price of the common stock is higher than the current net tangible book value per share of our common stock. Therefore, if you purchase shares of common stock in future offerings, if any, you may incur immediate and substantial dilution in the pro forma net tangible book value per share of common stock from the price per share that you pay for the common stock. In addition, you will experience dilution when we issue additional shares of common stock that we are permitted or required to issue under convertible notes, outstanding options and warrants and under our equity incentive plan or other compensation plans.

Our certificate of incorporation allows for our Board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

Our Board has the authority to fix and determine the relative rights and preferences of preferred stock. Currently, our Board has the authority to designate and issue up to 5,000,000 shares of our preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.

 

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We do not expect any cash dividends to be paid on our common shares in the foreseeable future.

We have never declared or paid a cash dividend on our common shares and we do not anticipate declaring or paying dividends on our common shares for the foreseeable future. We expect to use future financing proceeds and earnings, if any, to fund operating expenses. Consequently, common stockholders’ only opportunity to achieve a return on their investment is if the price of our stock appreciates and they sell their shares at a profit. We cannot assure common stockholders of a positive return on their investment when they sell their shares or that stockholders will not lose the entire amount of their investment.

Anti-takeover provisions of our certificate of incorporation, our bylaws and Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our Board and management.

Certain provisions of our amended and restated certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for shares of common stock. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove members of our Board. These provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Among other things, these provisions:

 

   

allow us to designate and issue shares of preferred stock, without stockholder approval, that could adversely affect the rights, preferences and privileges of the holders of our common stock and could make it more difficult or less economically beneficial to acquire or seek to acquire us.

 

   

provide that special meetings of stockholders may be called only by the Board of Directors acting pursuant to a resolution approved by the affirmative majority of the entire Board of Directors.

 

   

provide that stockholders may, at a special stockholders meeting called for the purpose of removing directors, remove the entire Board or any lesser number, but only with cause, by a majority vote of the shares entitled to vote at an election of directors.

 

   

do not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in our Board of Directors.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for a prescribed period of time.

 

Item 1B.

Unresolved Staff Comments.

None.

 

Item 2.

Properties.

Our principal office location is 1111 Main Street, Suite 660, Vancouver, Washington 98660. We lease 4,969 square feet in a commercial office building pursuant to a lease that expires on April 30, 2026 at a current cost of $9,901 per month, plus modest annual increases. We also lease 1,911 square feet of office space in Fort Lauderdale, Florida pursuant to a lease that expires on March 31, 2022 at a cost of approximately $8,300 per month, plus modest annual increase. Such space is currently being marketed for a subtenant.

 

Item 3.

Legal Proceedings.

As of May 31, 2020, we were not a party to any material pending legal proceeds except as described below. From time to time, we may become involved in claims and suits that arise in the ordinary course of our business.

 

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Management currently believes that the resolution of any such claims against us, if any, will not have a material adverse effect on our business, financial condition or results of operations.

On April 24, 2020, certain stockholders of the Company, including two former directors and a company controlled by a former director filed a derivative stockholder complaint in the Court of Chancery of the State of Delaware, alleging claims for breach of fiduciary duty and unjust enrichment against the Company’s CEO, current and former CFO, CMO, and current and former members of the Company’s board of directors in connection with certain equity grant awards to these individuals in December 2019 and January 2020. The Company was named as a nominal defendant. The plaintiffs seek the rescission of the awards, a finding that the named directors breached their fiduciary duty to the Company, and an unnamed amount of damages. The Company has appointed a special litigation committee, consisting solely of independent directors not named in the complaint, to investigate the allegations in the complaint. The litigation has been stayed by the court pending resolution of the investigation by the special litigation committee.

On July 25, 2019, the Company’s Board terminated the employment of Dr. Richard G. Pestell, the Company’s former Chief Medical Officer. On August 22, 2019, Dr. Pestell filed a lawsuit naming the Company and its Chief Executive Officer and the Chairman of the Board in the U.S. District Court for the District of Delaware, and has amended his complaint several times since its initial filing. The complaint alleges a breach of Dr. Pestell’s employment agreement, wage and hour claims, and seeks damages in the amount of certain severance entitlements thereunder pertaining to non-cause termination, among other relief. The treatment of those entitlements and of certain previously granted unvested stock options and shares of restricted common stock, which were subject to a repurchase option, are expected to be determined by the outcome of this litigation. The Company has filed counterclaims as well a motion to dismiss the action, which was partially granted as to certain wage and hour claims in June 2020. The Company disputes Pestell’s claims and intends to vigorously defend the action.

 

Item 4.

Mine Safety Disclosures.

Not applicable.

Part II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is presently quoted on the OTCQB of the OTC Markets marketplace under the trading symbol CYDY. Historically, trading in our stock has been very limited and the trades that have occurred cannot be characterized as amounting to an established public trading market. As a result, the trading prices of our common stock may not reflect the price that would result if our stock was actively traded.

The following are high and low bid prices quoted on the OTCQB during the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:

 

     High      Low  

Fiscal Year Ended May 31, 2020:

     

First quarter ended August 31, 2019

   $ 0.55      $ 0.38  

Second quarter ended November 30, 2019

   $ 0.41      $ 0.26  

Third quarter ended February 28, 2020

   $ 1.65      $ 0.26  

Fourth quarter ended May 31, 2020

   $ 3.84      $ 0.81  

 

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     High      Low  

Fiscal Year Ended May 31, 2019:

     

First quarter ended August 31, 2018

   $ 0.71      $ 0.40  

Second quarter ended November 30, 2018

   $ 0.70      $ 0.50  

Third quarter ended February 28, 2019

   $ 0.62      $ 0.46  

Fourth quarter ended May 31, 2019

   $ 0.55      $ 0.37  

Holders

The number of record holders of our common stock on July 31, 2020 was approximately 910.

Dividends

Holders of our common stock are entitled to receive dividends as may be declared from time to time by our Board. While we have no restrictions on our ability to pay dividends, other than the preferential rights provided to the holders of our outstanding preferred stock, as described below, we have not paid any cash dividends since inception on our common stock and do not anticipate paying any in the foreseeable future. Our current policy is to retain earnings, if any, for use in our operations.

Holders of 8,452 shares of Series D Convertible Preferred Stock are entitled to receive, at the option of the holder, cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series D Preferred Stock, to be paid per share of Series D Preferred Stock. Any dividends paid by us will first be paid to the holders of Series D Preferred Stock prior and in preference to any payment or distribution to holders of Common Stock. Dividends on the Series D Preferred Stock are mandatory and cumulative and there are no sinking fund provisions applicable to the Series D Preferred Stock. The Series D Preferred Stock does not have redemption rights. The stated value per share for the Series D Preferred Stock is $1,000 (the “Stated Value”). Dividends payable to holders of Series D are payable on December 31 of each year and the holder can elect to be paid in cash or in common stock. If all holders elected to receive the 2020 dividend in the form of common stock, approximately 960,000 shares of common stock would be issued in the form of dividend. If such 2020 dividends were to be paid in the form of cash, such cash dividends would total approximately $768,000 at December 31, 2019.

Holders of 8,203 shares of Series C Convertible Preferred Stock are entitled to receive, at the option of the holder, cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series C Preferred Stock, to be paid per share of Series C Preferred Stock. Any dividends paid by us will first be paid to the holders of Series C Preferred Stock prior and in preference to any payment or distribution to holders of Common Stock. Dividends on the Series C Preferred Stock are mandatory and cumulative and there are no sinking fund provisions applicable to the Series C Preferred Stock. The Series C Preferred Stock does not have redemption rights. The stated value per share for the Series C Preferred Stock is $1,000 (the “Stated Value”). Dividends payable to holders of Series C are payable on December 31 of each year and the holder can elect to be paid in cash or in common stock. If all holders elected to receive the 2020 dividend in the form of common stock, approximately 2,381,000 shares of common stock would be issued in the form of dividend. If such 2020 dividends were to be paid in the form of cash, such cash dividends would total approximately $1,191,000 at December 31, 2019.

Holders of 92,100 shares of Series B Convertible Preferred Stock are entitled to receive, in preference to the common stock, annual cumulative dividends equal to $0.25 per share per annum from the date of issuance, which shall accrue, whether or not declared. At the time shares of Series B Preferred Stock are converted into common shares, accrued and unpaid dividends will be paid, at the election of the Company, in cash or with common shares. In the event we elect to pay dividends with common shares, the shares issued will be valued at $0.50 per share. On July 30, 2020, the Board declared a dividend and elected to pay such dividend in the form of cash in the aggregate amount of approximately $243,000 to all Series B Convertible Preferred stockholders.

 

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Unregistered Sales of Equity Securities

From June 3, 2019 to July 26, 2019, we received four redemption notices from the holder of our convertible note issued on June 26, 2018 requesting the redemptions of $655,000 of the outstanding balance thereof. In satisfaction of the redemption notices, we issued 1,984,769 shares of Common Stock to the note holder in accordance with the terms of the convertible note. Following the redemptions, the outstanding balance of the convertible note, including accrued but unpaid interest, was approximately $4.2 million. We relied on the exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933 in connection with the issuance and sale of the convertible promissory note and underlying shares of Common Stock.

The information required regarding our equity compensation plans will be contained in, and is incorporated herein by reference to our 2020 Proxy Statement under the caption “Equity Compensation Plan Information.”

 

Item 6.

Selected Financial Data

As a smaller reporting company we are not required to provide the information required by this Item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the other sections of this Annual Report, including our consolidated financial statements and related notes set forth in Item 8. This discussion and analysis contains 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.

Business Highlights

During the past fiscal year ending May 31, 2020, we commenced several initiatives to advance our lead product candidate, leronlimab. The following is a brief summary of key accomplishments during the most recent fiscal year:

 

   

Raised approximately $85 million in capital through offerings of equity and convertible debt securitities, combined with proceeds from the exercise of warrants and stock options;

 

   

Filed with the FDA the final two sections of our first BLA, which is now subject to our submission of additional requested information before the FDA will confirm the filing is complete;

 

   

Entered into our first commercialization and supply agreements for the distribution and sale of leronlimab in the U.S. for HIV, upon FDA approval, with Vyera Pharmaceuticals, LLC;

 

   

Our drug candidate, leronlimab, received over 60 Emergency Investigational New Drug (EIND) authorizations from the FDA to treat COVID-19 patients;

 

   

Initiated negotiations for a distribution and supply agreement with American Regent, Inc. for distribution of leronlimab for the treatment of COVID-19 in the U.S. (the definitive agreement was executed in July 2020);

 

   

Initiated two double-blinded, placebo controlled clinical trials for COVID-19, a Phase 2 for patients with mild to moderate indications and a Phase 3 for patients with severe to critical symptoms

 

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Advanced the clinical trials to evaluate the safety and efficacy of leronlimab for several cancer indications by treating the first patients in metatstatic triple-negative breast cancer, metastatic breast cancer and a basket trial for 22 solid tumor cancers

 

   

Initiated a Phase 2 trial for colon cancer; and

 

   

Initiated a Phase 2 clinical trial with leronlimab for the treatment of non-alcoholic steatohepatitis (NASH).

Results of Operations

Clinical Trials Update

Phase 2b Extension Study for HIV, as Monotherapy

Currently, there are four patients in this ongoing extension study and each has surpassed six years of suppressed viral load with leronlimab0 as a single agent therapy. This extension study will be discontinued upon any FDA approval of leronlimab.

Phase 2b/3 Pivotal Trial for HIV, as Combination Therapy

This trial was successfully completed and is the basis for our current BLA, for which the remaining two sections were submitted to the FDA in April and May of 2020. The completion of the filing is subject to the Company providing additional information requested by the FDA. This trial for leronlimab as a combination therapy to existing HAART drug regimens for highly treatment experienced HIV patients achieved its primary endpoint with a p-value of 0.0032. Nearly all patients who have completed this trial have transitioned to a FDA-cleared rollover study, as requested by the treating physicians to enable the patients to have continued access to leronlimab.

Rollover Study for HIV as Combination Therapy

This study is designed for patients who successfully completed the pivotal Phase 2b/3 Combination Therapy trial and for whom the treating physicians request a continuation of leronlimab therapy in order to maintain suppressed viral load. This extension study will be discontinued upon any FDA approval of leronlimab.

Phase 2b/3 Investigative Trial for HIV, as Long-term Monotherapy

Enrollment for this trial is now closed after reaching 500 patients. This trial assesses the subcutaneous use of leronlimab as a long-acting single-agent maintenance therapy for 48 weeks in patients with suppressed viral load with CCR5-tropic HIV-1 infection. The primary endpoint is the proportion of participants with a suppressed viral load to those who experienced virologic failure. The secondary endpoint is the length of time to virologic failure. We completed the evaluation two higher-dose arms, one with 525 mg dose (a 50% increase from the original dosage of 350 mg), as well as a 700 mg dose. We recently reported that interim data suggested that both the 525 mg and the 700 mg dosages are achieving a responder rate of approximately 90% after the initial 10 weeks. This trial has also been used to provide safety data for the BLA filing for leronlimab as a combination therapy. In view of the high responder rate at the increased dosage levels, coupled with the newly developed CCR5 occupancy test, we filed a pivotal trial protocol with the FDA for leronlimab as a monotherapy. Upon finalization with the FDA of the pivotal trial protocol for monotherapy, the Phase2b/3 investigative trial will likely be discontinued. In the interim, several patients are continuing in an extension study who have requested continued access to leronlimab.

Cancer and Immunological Applications for Leronlimab

We are continuing to explore opportunities for clinical applications for leronlimab involving the CCR5 receptor, other than HIV-related treatments, such as inflammatory conditions, autoimmune diseases and cancer.

 

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The target of leronlimab is the immunologic receptor CCR5. We believe that the CCR5 receptor is more than the door for HIV to enter T-cells: it is also a crucial component in inflammatory responses. This could open the potential for multiple pipeline opportunities for leronlimab.

The CCR5 receptor is a protein located on the surface of white blood cells that serves as a receptor for chemical attractants called chemokines. 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 T-cells to these sites promoting further inflammation. The mechanism of action of PRO 140 has the potential to block the movement of T-cells to inflammatory sites, which could be instrumental in diminishing or eliminating inflammatory responses. Some disease processes that could benefit from CCR5 blockade include transplantation rejection, autoimmunity and chronic inflammation such as rheumatoid arthritis and psoriasis.

Due to leronlimab’s MOA, we believe leronlimab may have significant advantages in terms of reduced side effects over other CCR5 antagonists. Prior studies have demonstrated that leronlimab does not cause direct activation of T-cells. We have reported encouraging human safety data for our clinical trials with leronlimab in HIV-infected patients.

We have initiated our first clinical trial with leronlimab in an immunological indication – a Phase 2 clinical trial with leronlimab for GvHD in reduced intensity conditioning (“RIC”) patients with acute myeloid leukemia (“AML”) or myelodysplastic syndrome (“MDS”) who are undergoing bone marrow stem cell transplantation. GvHD represents an unmet medical need, with patients who contract GvHD during stem cell transplant having a significantly decreased 1-year survival rate with relapsed GvHD as the leading cause of death. Our pre-clinical study in GvHD has been published in the peer-reviewed journal Biology of Blood and Marrow Transplantation. The FDA has granted orphan drug designation to leronlimab for the prevention of acute GvHD.

GvHD is a risk when patients receive bone marrow stem cells donated from another person. GvHD is a serious complication that limits the use of Bone Marrow Stem Cell (“BMSC”) transplantation in patients with blood cancers. GvHD occurs when the donor’s immune cells attack the patient’s normal tissues (skin, liver, gut). GvHD can be acute or chronic. Its severity depends on the differences in tissue type between patient and donor. Acute GvHD can occur soon after the transplanted cells begin to appear in the recipient and can range from mild to severe and can be life-threatening.

The CCR5 receptor, the target for leronlimab, appears to be an important mediator of GvHD, especially in the organ damage that is the usual cause of death. We believe that the CCR5 receptor on engrafted cells is critical for the development of acute GvHD and by blocking this receptor from recognizing certain immune signaling molecules could be a viable approach to mitigating acute GvHD. The potential of leronlimab to prevent this life-threatening condition could help extend the use of BMSC transplantation to effectively treat more patients.

COVID-19

Phase 2 Trial to Evaluate the Efficacy and Safety of Leronlimab for Mild to Moderate Coronavirus Disease 2019 (COVID-19).

This is a two-arm, randomized, double blind, placebo controlled multicenter study to evaluate the safety and efficacy of leronlimab in patients with mild-to-moderate symptoms of respiratory illness caused by coronavirus 2019 infection was completed in July 2020. Patients were randomized to receive weekly doses of 700 mg leronlimab, or placebo. Leronlimab and placebo were administered via subcutaneous injection. The study has three phases: Screening Period, Treatment Period and Follow-Up Period. A total of 75 subjects were randomized 2:1 (active drug to placebo) in this study. The primary outcome measures are clinical improvement as assessed by change in total symptom score (for fever, myalgia, dyspnea and cough). Secondary outcome measures include: (1) time to clinical resolution, (2) change from baseline in National Early Warning Score 2 (NEWS2), (3) change from baseline in pulse oxygen saturation, (4) change from baseline in the patient’s health status on a 7-category ordinal scale, (5) incidence of hospitalization, (6) duration (days) of hospitalization,

 

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(7) incidence of mechanical ventilation supply, (8) duration (days) of mechanical ventilation supply, (9) incidence of oxygen use, (10) duration (days) of oxygen use, (11) mortality rate, (12) time to return to normal activity. Enrollment was completed in July 2020 and the Company has recently reported positive safety results. The topline report from the trial, including efficacy and complete safety data, is expected to be submitted to the FDA in August 2020.

Phase 3 Trial to Evaluate the Efficacy and Safety of Leronlimab for Patients With Severe or Critical Coronavirus Disease 2019 (COVID-19).

This is a two-arm, randomized, double blind, placebo controlled, adaptive design multicenter study to evaluate the safety and efficacy of leronlimab in patients with severe or critical symptoms of respiratory illness caused by coronavirus 2019 infection. Patients will be randomized to receive weekly doses of 700 mg leronlimab, or placebo. Leronlimab and placebo will be administered via subcutaneous injection. The study will have three phases: Screening Period, Treatment Period, and Follow-Up Period. The primary outcome measured in this study is: all-cause mortality at Day 28. Secondary outcomes measured are: (1) all-cause mortality at Day 14, (2) change in clinical status of subject at Day 14, (3) change in clinical status of subject at Day 28, and (4) change from baseline in Sequential Organ Failure Assessment (SOFA) score at Day 14. Recently, the Data Safety Monitoring Committee for the ongoing Phase 3 trial completed its first safety review of patients with severe and critical COVID-19 and reported it saw no cause to modify the study. The DSMC reviewed compiled safety data from 149 of the 169 patients enrolled in the Phase 3 trial. The DSMC did not raise any concerns regarding safety and recommended that the trial continue. As such, the Company will conduct a full interim analysis once 195 patients are enrolled, as provided in the trial’s protocol.

Phase 2 Trial for Graft-versus-Host Disease

This Phase 2 multi-center 100-day study with 60 patients is designed to evaluate the feasibility of the use of leronlimab as an add-on therapy to standard GvHD prophylaxis treatment for prevention of acute GvHD in adult patients with AML or MDS undergoing allogeneic hematopoietic stem cell transplantation (“HST”). Enrollment of the first patient was announced in May of 2017. On October 5, 2017, we announced that the FDA had granted orphan drug designation to leronlimab (PRO 140) for the prevention of GvHD. In March 2018, we announced that the Independent Data Monitoring Committee (“IDMC”) for leronlimab (PRO 140) Phase 2 trial in GvHD had completed a planned interim analysis of trial data on the first 10 patients enrolled. Following this review of data from the first 10 patients in the Phase 2 trial, we filed amendments to the protocol with the FDA. The amendments included switching the pretreatment conditioning regimen from aggressive myeloablative (“MA”) conditioning to a reduced intensity conditioning (“RIC”), and switching from a blinded one-for-one randomized placebo-controlled design to an open-label design under which all enrollees receive leronlimab. The amendments also provide for a 100% increase in the dose of leronlimab, to 700 mg, to more closely mimic pre-clinical dosing. The next review of data by the IDMC will occur following enrollment of 10 patients under the amended protocol after each patient has been dosed for 30 days. Due to the necessary prioritization of limited capital, enrollment under the amended protocol has been temporarily delayed.

Phase 1b/2 Trial for Triple-Negative Breast Cancer

This trial is to evaluate the feasibility of leronlimab combined with carboplatin in patients with CCR5+ metastatic triple negative breast cancer. The Phase 1b portion is a dose escalation phase with three dose levels (cohorts) of leronlimab in combination with a fixed dose of carboplatin. The Phase 2 portion is a single arm study with 30 patients to test the hypothesis that the combination of carboplatin intravenously and maximum tolerated dose of leronlimab subcutaneously will increase progression free survival. In May 2019, the FDA granted leronlimab Fast Track designation for use in combination with carboplatin. The change in circulating tumor cells (“CTCs”) number will be evaluated every 21 days during treatment and will be used as an initial prognostic marker for efficacy. The first patient was treated in September 2019.

 

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Compassionate Use Study of Leronlimab in Breast Cancer

This is a single arm, compassionate use study with 30 patients for leronlimab (PRO 140) combined with a treatment of physician’s choice (TPC) in patients with CCR5+ mTNBC. Leronlimab (PRO 140) will be administered subcutaneously as weekly dose of 350 mg until disease progression or intolerable toxicity. Treatment of Physician’s Choice (TPC) is defined as one of the following single-agent chemotherapy drugs administrated according to local practice: eribulin, gemcitabine, capecitabine, paclitaxel, nab-paclitaxel, vinorelbine, ixabepilone, or carboplatin. In this study, patients will be evaluated for tumor response approximately every 3 months or according to institution’s standard practice by CT, PET/CT or MRI with contrast (per treating investigator’s discretion) using the same method as at baseline.

Basket Trial for 22 Solid Tumor Cancers

This is a Phase 2 study to test the safety and efficacy of leronlimab on 22 different solid tumor cancers, including brain-glioblastoma, melanoma, lung, breast, ovarian, pancreas, bladder, throat, stomach, colon, testicular, uterine, among other indications. The first patient was treated in April 2020.

Licensing Opportunities

We continue to evaluate strategic licensing opportunities and conduct exploratory discussions with third parties with respect to our assets, including pre-clinical and clinical findings for leronlimab for a wide array of clinical indications. As recently completed license agreements demonstrate, such agreements are country or region specific and are limited to a specific clinical indication for leronlimab.

 

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Results of operations for the years ended May 31, 2020, 2019 and 2018, are as follows:

For the years ended May 31, 2020, May 31, 2019 and 2018, we had no activities that produced revenues from operations. The following schedule sets forth the percentage of total expenses as a percent of net loss for the years ended May 31, 2020, 2019 and 2018.

 

     Percentage of Total Net Loss  
     Years Ended May 31,  
     2020     2019     2018  

Operating expenses:

            

General and administrative

   $ 19,972,804       (0.16 )%    $ 12,116,743       (0.22 )%    $ 7,340,605       (0.15 )% 

Research and development

     52,639,981       (0.42     42,490,144       (0.76     38,222,580       (0.76

Amortization and depreciation

     2,034,440       (0.02     1,245,167       (0.02     356,128       (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     74,647,225       (0.73     55,852,054       (0.99     45,919,313       (0.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (74,647,225     (0.60     (55,852,054     (0.99     (45,919,313     (0.92

Other income (expense):

            

Other income

     500,000       0.00       —         —         —         —    

Interest income

     5,318       0.00       4,306       0.00       3,620       0.00  

Legal settlement

     (22,500,000     0.18       —         —         —         —    

Loss on extinguishment of convertible notes

     —         —         (1,519,603     (0.03            

Change in fair value of derivative liability

     (9,541,704     0.08       1,666,469       0.03       1,690,935       0.03  

Interest expense:

            

Finance charges

     (935,630     0.01       —         —         —         —    

Amortization of discount on convertible notes

     (1,644,625     0.01       (1,707,068     (0.03     (1,666,017     (0.03

Amortization of debt issuance costs

     (404,340     0.00       (459,085     (0.01     (435,609     (0.01

Interest related to derivative liability

     —         —         —         —         —         —    

Inducement interest – warrant exercises and debt conversion

     (7,904,353     0.06       —         —         —         —    

Inducement interest related to warrant extension

     —         —         —         —         (826,252     (0.02

Inducement interest related to warrant tender offer

     —         —         (195,927     (0.00     (393,685     (0.01

Inducement interest related to convertible notes

     —         —         —         —         (2,352,045     (0.05

Interest on convertible notes payable

     (7,330,843     0.06       (950,617     (0.02     (251,315     (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (18,219,791     0.15       (3,312,697     (0.06     (5,924,923     (0.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (124,403,402     1.00       (59,013,579     (1.05     (50,149,681     (1.00

Income tax benefit

     —         —         2,826,919       0.05       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (124,403,402     (1.00 )%    $ (56,186,660     (1.00 )%    $ (50,149,681     (1.00 )% 
  

 

 

     

 

 

     

 

 

   

Basic and diluted loss per share

   $ (0.30     $ (0.21     $ (0.29  
  

 

 

     

 

 

     

 

 

   

Basic and diluted weighted average common shares outstanding

     421,077,605         272,040,933         174,885,422    
  

 

 

     

 

 

     

 

 

   

 

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Results of operations for the years ended May 31, 2020 and 2019

For the years ended May 31, 2020 and 2019, we had a net loss of approximately $124.4 million and $56.2 million, respectively. The increase in net loss of approximately $68.2 million for fiscal 2020 over 2019 was primarily attributable to increased R&D expenses of approximately $10.1 million, an increase in G&A expenses of approximately $7.9 million, a non-cash legal settlement charge of $22.5 million an increase in interest expense of approximately $14.9 million, and an increase of approximately $11.2 million in the change in fair value of derivative liability. The loss per share for the fiscal year ended May 31, 2020 was $(0.30) compared to $(0.21) for the prior fiscal year.

Total operating expenses for the years ended May 31, 2020 and 2019 were approximately as follows:

 

     2020      2019  

General and administrative:

     

Salaries and other compensation

   $ 5,488,000      $ 3,781,000  

Stock-based compensation

     6,548,000        3,388,000  

Other

     7,937,000        4,948,000  
  

 

 

    

 

 

 

Total general and administrative

     19,973,000        12,117,000  
  

 

 

    

 

 

 

Research and development

     52,640,000        42,490,000  

Amortization and depreciation

     2,034,000        1,245,000  
  

 

 

    

 

 

 

Total operating expenses

   $ 74,647,000      $ 55,852,000  
  

 

 

    

 

 

 

For the fiscal year ended May 31, 2020 and May 31, 2019, operating expenses totaled approximately $74.6 million and $55.9 million, respectively, consisting primarily of research and development (“R&D”) expenses of $52.6 million, general and administrative expenses of approximately $20.0 million and amortization and depreciation of approximately $2.0 million. The increase in operating expenses over the comparable 2019 period was attributable to an increase in R&D expenses of approximately $10.1 million owing to higher clinical trial and scale-up manufacturing related expenses and to an increase in general and administrative expenses of approximately $7.9 million, or 64.8% over the prior fiscal year.

General and administrative expenses, totaled approximately $20.0 million and $12.1 million, respectively, for fiscal 2020 and 2019. General and administrative expenses were comprised of salaries and benefits, non-cash stock-based compensation expense, professional fees, insurance and various other expenses. The increase in general and administrative expenses of approximately $7.9 million, or 64.8%, for the fiscal year ended May 31, 2020 over the comparable 2019 period was primarily due to increased non-cash stock-based compensation, employee compensation and related expenses, along with higher professional services fees.

We record research and development expenses where directly identifiable, which approximated the following for the years ended May 31, 2020 and 2019:

 

     2020      2019  

Research and development:

     

Clinical

   $ 29,553,000      $ 25,264,000  

Non-Clinical

     2,999,000        155,000  

CMC

     19,392,000        16,353,000  

Licenses and patent fees

     696,000        718,000  
  

 

 

    

 

 

 

Total research and development

   $ 52,640,000      $ 42,490,000  
  

 

 

    

 

 

 

R&D expenses totaled approximately $52.6 million for the fiscal year ended May 31, 2020 and increased approximately $10.1 million, or 23.9%, over the same 2019 period. This increase was attributable to higher clinical trial expenses associated with the Phase 2b/3 investigative monotherapy trial and various oncology

 

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studies, offset in part by lower expenses for the completed Phase 3 combination therapy trial. Higher CMC-related expenses in connection with the preparation of the Company’s BLA filing also contributed to the increase in R&D expenses over the prior fiscal year. The future trend of R&D expenses will be dependent on the timing of resubmission of and FDA approval of our BLA filing, the timing of FDA clearance of our pivotal trial protocol for leronlimab as a monotherapy for HIV patients, the clinical progression of the triple-negative breast cancer and GvHD trials, along with the outcome of the pre-clinical studies for several cancer indications. R&D expenses will also increase due to CMC scale-up manufacturing related activities in preparation for approval and commercialization of leronlimab.

Amortization and depreciation expense of approximately $2.0 million rose by approximately $0.8 million due in part to the increased amortization attributable to recording a full year of amortization expense related to the intangible assets acquired in the November 2018 transaction with ProstaGene LLC.

For the fiscal year ended May 31, 2020, the Company recognized non-cash charges from the increase in the fair value of derivative liabilities of approximately $9.5 million, as compared to a non-cash benefit of approximately $1.7 million in the comparable 2019 period. Certain warrants and two convertible note instruments that each contain a contingent cash settlement provision giving rise to a derivative liability were issued in September 2016, June 2018 and January 2019, respectively. For each reporting period, the Company determines the fair value of the derivative liabilities and records a corresponding non-cash benefit or non-cash charge, as a consequence of a decrease or increase, respectively, in the calculated derivative liabilities.

Legal settlement expense (non-cash) for the fiscal year ended May 31, 2020 of $22.5 million related to the issuance of shares of common stock as a settlement for a claim filed by the note holder of the January 2019 Note alleging that the note holder was owed additional shares upon conversion of the note. The $22.5 million increase over the 2019 fiscal year was attributable to no legal settlement expense in the prior year.

Interest expense for the fiscal year ended May 31, 2020 of approximately $18.2 million increased approximately $14.9 million from the 2019 fiscal year due primarily to an increase in interest accrued on convertible notes payable of approximately $6.4 million, inducement interest expense related to warrant exercises and debt extensions of $7.7 million, and vendor finance charges of $0.9 million.

The future trends of all expenses will be driven, in large part, by the future outcomes of clinical trials and the corresponding effect on research and development expenses, as well as general and administrative expenses, in addition to the manufacturing of new commercial leronlimab upon any FDA approval. We 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. See in particular, “Liquidity and Capital Resources” below and Item 1A “Risk Factors” above.

Results of operations for the years ended May 31, 2019 and 2018

For the years ended May 31, 2019 and 2018, the Company had a net loss of approximately $56.2 million and $50.1 million, respectively. The increase in net loss of approximately $6.1 million for fiscal 2019 over 2018 was primarily attributable to increased R&D expenses of approximately $4.3 million and an increase in G&A expenses of approximately $4.8 million, offset by a decreased interest expense of $2.6 million. The loss per share for the fiscal year ended May 31, 2019 was $(0.21) compared to $(0.29) for the prior fiscal year.

 

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Total operating expenses for the years ended May 31, 2019 and 2018 were approximately as follows:

 

     2019      2018  

General and administrative:

     

Salaries and other compensation

   $ 3,781,000      $ 2,454,000  

Stock-based compensation

     3,388,000        1,291,000  

Other

     4,948,000        3,596,000  
  

 

 

    

 

 

 

Total general and administrative

     12,117,000        7,341,000  

Research and development

     42,490,000        38,223,000  

Amortization and depreciation

     1,245,000        356,000  
  

 

 

    

 

 

 

Total operating expenses

   $ 55,852,000      $ 45,920,000  
  

 

 

    

 

 

 

For the fiscal year ended May 31, 2019 and May 31, 2018, operating expenses totaled approximately $55.9 million and $45.9 million, respectively, consisting primarily of R&D expenses of $42.5 million, general and administrative expenses of approximately $12.1 million and amortization and depreciation of approximately $1.2 million. The increase in operating expenses over the comparable 2018 period was attributable to an increase in R&D expenses of approximately $4.3 million owing to higher clinical trial and manufacturing related expenses and to an increase in general and administrative expenses of approximately $4.8 million, or 65.1% over the prior fiscal year.

General and administrative expenses, totaled approximately $12.1 million and $7.3 million, respectively, for fiscal 2019 and 2018. General and administrative expenses were comprised of salaries and benefits, non-cash stock-based compensation expense, professional fees, insurance and various other expenses. The increase in general and administrative expenses of approximately $4.8 million, or 65.1%, for the fiscal year ended May 31, 2019 over the comparable 2018 period was primarily due to increased non-cash stock-based compensation, employee compensation and related expenses, along with higher professional services fees.

We record research and development expenses where directly identifiable, which approximated the following for the years ended May 31, 2019 and 2018:

 

     2019      2018  

Research and development:

     

Clinical

   $ 25,264,000      $ 22,543,000  

Non-Clinical

     155,000      $ 887,000  

CMC

     16,353,000      $ 14,240,000  

Licenses and patent fees

     718,000      $ 553,000  
  

 

 

    

 

 

 

Total research and development

   $ 42,490,000      $ 38,223,000  
  

 

 

    

 

 

 

R&D expenses totaled approximately $42.5 million for the fiscal year ended May 31, 2019 and increased approximately $4.3 million, or 11.2%, over the same 2018 period. This increase was attributable to higher clinical trial expenses associated with the Phase 2b/3 investigative monotherapy trial and various oncology studies, offset in part by lower expenses for the completed Phase 3 combination therapy trial. Higher CMC-related expenses in connection with the preparation of our BLA filing also contributed to the increase in R&D expenses over the prior fiscal year.

Amortization and depreciation expense of approximately $1.2 million rose by approximately $0.9 million due in part to the increased amortization attributable to the intangible assets acquired in the November 2018 transaction with ProstaGene LLC.

For the fiscal year ended May 31, 2019, the Company recognized an unrealized non-cash benefit from the decrease in derivative liability of approximately $1.7 million, as compared to a similar non-cash benefit in the

 

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comparable 2018 period. The total net change in derivative liability is attributable to three underlying financial instruments: (i) certain warrants that contain a contingent cash settlement provision, which originated in September 2016, accounted for approximately $0.9 million, (ii) a certain long-term convertible note payable, originating in June 2018, which was subsequently amended to provide for variable rate redemptions by the holder and (iii) a certain long-term convertible note payable, which originated in January 2019. The combined change in derivative liability ascribed to the two long-term convertible notes contributed approximately $0.8 million to the unrealized non-cash benefit for the fiscal year ended May 31, 2019. For each reporting period, the Company determines the fair value of the derivative liabilities and records a corresponding non-cash benefit or non-cash charge, as a consequence of a decrease or increase, respectively, in the calculated derivative liabilities.

Interest expense for the fiscal year ended May 31, 2019 of approximately $3.3 million decreased approximately $2.6 million from the 2018 fiscal year due primarily to lower non-cash inducement interest on a private warrant tender offer that was completed in May 2019, and no comparable inducement interest expense related to warrant extensions and convertible notes, which were in incurred in the 2018 fiscal year, offset by an increase in interest accrued on convertible notes payable of approximately $0.7 million.

Fluctuations in Quarterly Operating Results

The Company has historically experienced significant fluctuations in our quarterly operating results and such fluctuations are expected to continue in the future. The Company’s operating results may fluctuate due to a number of factors, such as the timing of product manufacturing activities, patient enrollment or completion rates in various trials, coupled with potential amendments to clinical trial protocol. As a non-revenue generating company, we are regularly conducting offerings to raise capital, which can create various forms of amortization of issuance costs or non-cash interest expense. In addition, a portion of the aforementioned derivative liabilities is tied to certain securities which include a contingent cash settlement provision, which can vary substantially from quarter to quarter, thereby creating a non-cash charge or benefit.

Liquidity and Capital Resources

The Company’s cash position of approximately $14.3 million at May 31, 2020 increased approximately $10.8 million as compared to a balance of approximately $3.5 million at May 31, 2019. The increase was attributable to net cash provided by financing activities of approximately $79.7 million exceeding net cash used in operating activities of approximately $68.8 million by approximately $10.9 million. Despite the Company’s negative working capital position, vendor relations remain accommodative and we do not currently anticipate delays in our business initiatives schedule due to liquidity constraints.

Cash Flows

Net cash used in operating activities totaled approximately $68.8 million during the fiscal year ended May 31, 2020, which reflects an increase of approximately $18.3 million of net cash used in operating activities over the approximate $50.5 million in fiscal 2019. The increase in net cash used in operating activities was due to an increase in net loss of approximately $68.2 million, attributable to an increase in non-cash legal settlement expense of $22.5 million, an increase in interest related expenses of approximately $13.8 million, an increase in losses from change in fair value of derivative liabilities of approximately $11.2 million, an increase in stock-based compensation of approximately $3.2 million, an increase in deferred tax benefit of approximately $2.8 million, and a net change in the components of net working capital of approximately $2.8 million.

The Company made nominal investments in equipment and website development costs totaling approximately $61,000 during the fiscal year ended May 31, 2020.

Net cash provided by financing activities of approximately $79.7 million for the year ended May 31, 2020 increased approximately $27.0 million over $52.7 million of net cash provided by financing activities during

 

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fiscal year ended May 31, 2019. The increase in net cash provided from financing activities was primarily attributable to an increase in proceeds from warrant exercises of approximately $38.4 million, an increase of approximately $10.3 million in proceeds from the sale of preferred stock and increase of approximately $5.6 million in proceeds from stock option exercises, coupled with a decrease to proceeds received from the sale of common stock and warrants of $25.6 million during the 2020 fiscal year.

Capital Requirements

The Company has not generated revenue to date, and does not expect to generate product revenue until after it receives approval from the FDA for its BLA for leronlimab as a combination therapy with HAART for highly treatment experienced HIV patients. The Company expects it will continue to incur operating losses as expenses continue to increase as we proceed with completion of our BLA, prepare for commercialization of leronlimab and continue our clinical trial programs. The future trends of all expenses will be driven, in large part, by the timing of the anticipated approval of the Company’s BLA, the magnitude of our commercialization readiness, future clinical trial strategy and timing of the commencement of our future revenue stream. The Company will require a significant amount of additional capital in the future in anticipation of a fully commercialized leronlimab product.

Contract Manufacturing

During the fourth quarter of fiscal 2019, the Company entered into a Master Services Agreement and Product Specific Agreement (collectively, the “Samsung Agreement”) with Samsung BioLogics Co., Ltd. (“Samsung”), pursuant to which Samsung will perform technology transfer, process validation, manufacturing and supply services for the commercial supply of leronlimab. During fiscal year 2020, the Company delivered to Samsung purchase orders totaling $28 million related to the manufacture of leronlimab and payments totaling $14 million with additional payments scheduled to be made throughout calendar 2020.

Under the Samsung Agreement, a purchase order is binding and the Company is obligated to pay the full amount of the purchase order. Under the terms of the Samsung Agreement, the Company is obligated to make specified minimum purchases of leronlimab from Samsung pursuant to forecasted requirements, which the Company is required to provide to Samsung. The first forecast schedules 11 manufacturing batches all beginning in the first quarter of fiscal year 2021, setting forth the total quantity of commercial grade leronlimab that the Company expects to require in the following years. The Company estimates that initial ramp-up costs to manufacture commercial grade leronlimab at scale could total approximately $116 million, with approximately $69 million payable over the course of calendar 2020, of which $30 million has been paid as of the date of this filing, and approximately $23 million payable during calendar 2021, and approximately $24 million payable in January of 2022. Thereafter, the Company will pay Samsung per 15,000L batch according to the pricing terms specified in the Samsung Agreement.

The Samsung Agreement has an initial term ending in December 2027 and will be automatically extended for additional two-year periods unless either party gives notice of termination at least six months prior to the then-current term. Either party may terminate the Samsung Agreement in the event of the other party’s insolvency or uncured material breach, and the Company may terminate the agreement in the event of a voluntary or involuntary complete market withdrawal of leronlimab from commercial markets, with one and half year’s prior notice. Neither party may assign the agreement without the consent of the other, except in the event of a sale of all or substantially all of the assets of a party to which the agreement relates.

On May 22, 2020, the Company entered into a Drug Product Manufacturing Services Agreement with Samsung (the “Samsung Vial Filling 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. Under the terms of the Samsung Vial Filling Agreement, the Company is obligated to have specified minimum quantities of vials filed with leronlimab by Samsung pursuant to forecasted requirements which the Company is required to provide to Samsung. The Company has not provided a forecast to Samsung, however, based on set-up related costs and manufacturing commitments pursuant to the Samsung Agreement, the

 

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Company expects to deliver commitments of approximately $2.3 million in the form of purchase orders related to the Samsung Vial Filling Agreement through January 2021.

In addition to the Samsung Agreement, we have also previously entered into an arrangement with another third-party contract manufacturer to provide process transfer, validation and manufacturing services for leronlimab. In the event that we terminate the agreement with this manufacturer, we may incur certain financial penalties which would become payable to the manufacturer. Conditioned upon the timing of termination, the financial penalties may total approximately $2.1 million. These amount and timing of the financial commitments under an agreement with our secondary contract manufacturer will depend on the timing of the anticipated approval of our BLA and the initial product demand forecast, which is critical to align the timing of capital resources in order to ensure availability of sufficient quantities of commercial product.

Management believes two contract manufacturers may best serve our strategic objectives for the anticipated BLA filing and, if approved, the long-term commercial manufacturing capabilities for leronlimab. Management will continue to assess manufacturing capacity requirements as new market information becomes available regarding anticipated demand, subject to FDA approval.

Distribution

On July 2, 2020, the Company entered into an exclusive Distribution and Supply Agreement (the “Distribution Agreement”) with American Regent, Inc. (“American Regent”) with respect to the distribution of the Company’s leronlimab (PRO140) drug for the treatment of COVID-19 in the United States. Under the Distribution Agreement, the Company appointed American Regent as the sole and exclusive authorized distributor in the United States of any subcutaneous injectable biopharmaceutical drug product labeled for treating COVID-19 that contains CytoDyn’s leronlimab as the only active pharmaceutical ingredient (the “Product”). The grant of exclusive distribution rights to American Regent does not extend to any intravenous or infusible biopharmaceutical drug product, or any other product of CytoDyn containing leronlimab that is not labeled for treating COVID-19. Under the Distribution Agreement, American Regent shall, at its cost, use commercially reasonable efforts to market the Product in the United States, and the Company remains responsible, at its cost, to pursue, own and maintain the applicable regulatory approvals necessary to market and manufacture the Product. As described above, the Company is currently conducting a Phase 2b/3 clinical trial for 390 severe-to-critically ill COVID-19 patients, and a Phase 2 randomized clinical trial with 75 patients in the mild-to-moderate COVID-19 population. If results from these trials indicate positive clinical outcomes for the COVID-19 patients to sufficiently meet the primary and secondary endpoints for the trials, the Company expects to seek approval from the U.S. Food and Drug Administration.

Contract Research

The Company entered into project work orders for each of our clinical trials with our CRO and related laboratory vendors. Under the terms of these agreements, the Company prepaid certain execution fees for direct services costs. In connection with its clinical trials, the Company has entered into separate project work orders for each trial with its CRO. In the event the Company terminates any trial, it may incur certain financial penalties which would become payable to the CRO. Conditioned upon the form of termination of any one trial, the financial penalties may range up to $0.8 million. In the remote circumstance the Company terminates all clinical trials, the collective financial penalties may range from an approximate low of $1.6 million to an approximate high of $3.6 million.

Licensing

Under the Progenics Purchase Agreement, we are required to pay Progenics the following ongoing milestone payments and royalties: (i) $5.0 million at the time of the first U.S. new drug application approval by the FDA or other non-U.S. approval for the sale of leronlimab (PRO 140); and (ii) royalty payments of up to five percent (5%) on net sales during the period beginning on the date of the first commercial sale of leronlimab

 

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(PRO 140) until the later of (a) the expiration of the last to expire patent included in the acquired assets, and (b) 10 years, in each case determined on a country-by country basis. In addition, under a Development and License Agreement, dated April 30, 1999 (the “PDL License”), between Protein Design Labs (now AbbVie Inc.) and Progenics, which was previously assigned to us, we are required to pay AbbVie Inc. additional milestone payments and royalties as follows: (i) $0.5 million upon filing a BLA with the FDA or non-U.S. equivalent regulatory body; (ii) $0.5 million upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iii) royalties of up to 3.5% of net sales for the longer of 10 years and the date of expiration of the last to expire licensed patent. Additionally, the PDL License provides for an annual maintenance fee of $150,000 until royalties paid exceed that amount.

On December 17, 2019, the Company entered into a Commercialization and License Agreement and a Supply Agreement with Vyera Pharmaceuticals, LLC. Pursuant to the License Agreement, the Company granted Vyera an exclusive royalty-bearing license to commercialize pharmaceutical preparations containing leronlimab for treatment of HIV in humans in the United States.

Pursuant to the terms of the License Agreement, and subject to the conditions set forth therein, Vyera will bear the cost of, and be responsible for, among other things, commercializing the product in the territory and will use commercially reasonable efforts to commercialize the product in the field in the territory. Under the terms of the License Agreement, CytoDyn is permitted to license the product outside of the territory for uses in the field or outside the field or inside the territory for uses outside of the field.

In consideration of the license and other rights granted by the Company, Vyera has agreed to pay the Company, within three business days of the effective date of the License Agreement, a $0.5 million license issue fee, with additional payments totaling up to approximately $87.0 million to be made upon the achievement of certain sales and regulatory milestones. Certain milestones are subject to reduction if not achieved within an agreed-upon timeframe. Vyera may also pay the Company additional potential milestone payments upon the regulatory approval of the Product for certain subsequent indications in the field. Whether a particular subsequent indication qualifies for an additional milestone payment shall be determined in good faith by the parties. In addition, during the Royalty Term (as defined below), Vyera is obligated to pay the Company a royalty equal to 50% of Vyera’s gross profit margin from product sales (defined in the License Agreement as “Net Sales”) in the territory. The royalty is subject to reduction during the Royalty Term after patent expiry and expiry of regulatory exclusivity. Following expiration of the Royalty Term, Vyera will continue to maintain non-exclusive rights to commercialize the Product.

The Company appointed American Regent as the sole and exclusive authorized distributor in the United States of any subcutaneous injectable biopharmaceutical drug product labeled for treating COVID-19 that contains CytoDyn’s leronlimab (a humanized monoclonal antibody (also known as PRO 140) targeting against the CCR5 receptor) as the only active pharmaceutical ingredient (the “Product”). The grant of exclusive distribution rights to American Regent does not extend to any intravenous or infusible biopharmaceutical drug product, or any other product of CytoDyn containing leronlimab that is not labeled for treating COVID-19.

Under the Agreement, American Regent shall, at its cost, use commercially reasonable efforts to market the Product in the United States, including, without limitation, directing the methods of sale and distribution, organization and management of sales and marketing and pricing in accordance with the terms and conditions of the Agreement. American Regent shall solely set the resale prices for the Product in accordance with applicable law. Pursuant to the Agreement, the Company remains responsible, at its cost, to pursue, own and maintain the applicable regulatory approvals necessary to market the Product in the United States, and for manufacturing the Product once regulatory approvals have been received.

The term of the Agreement extends for three years after the date of the first commercial sale of the Product, and will renew by mutual agreement of the parties for one additional one-year term, unless American Regent notifies the Company of its intention to have the Agreement terminate at the end of the initial term at least six (6) months prior to the end of the initial term. Either party is entitled to terminate the Agreement at any time in

 

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the event of material breach by the other party that remains uncured after thirty (30) calendar days following written notice thereof, and either party may terminate the Agreement immediately, at its option, upon written notice in the event that a court of competent jurisdiction declares the other party insolvent or bankrupt, or a bankruptcy proceeding is commenced against the other party or the other party files a proposal, assignment for the benefit of creditors, arrangement, composition or seeks similar relief under any applicable law, or the other party is in receivership. The Company is also entitled to terminate the Agreement at any time after the first Commercial Sale upon six (6) months advance written notice to American Regent, or upon ninety (90) days written notice to American Regent following American Regent’s change of control. American Regent is entitled to terminate the Agreement upon six (6) months advance written notice to the Company if, following due diligence and/or a quality inspection of the manufacturing facility associated with the Product, it determines that the distribution of the Product by American Regent should not be pursued, or if there is an unresolved supply interruption as described in the Agreement. In addition, American Regent may terminate the Agreement immediately upon written notice to the Company if (a) American Regent determines there is an unacceptable risk of using American Regent’s NDC Number on the Product labeling, (b) if the parties fail to execute a quality agreement and safety data exchange agreement within forty five (45) days of July 2, 2020, (c) if American Regent is named in any patent or trade secret infringement matter filed by a third party (with certain exceptions) resulting from American Regent’s marketing of the Product and such matter survives a motion to dismiss or has not been resolved within six (6) months after American Regent first receives written notice of the alleged infringement, (d) if any regulatory authority in the United States requires the cessation of sale or distribution of the Product, (e) if the Company materially impedes American Regent’s efforts to implement a recall, market withdrawal or field correction of the Product, or (f) if there is a negative net profit from American Regent’s sales of the Product for two (2) consecutive calendar quarters.

As of the date of this filing, the Company had filed all three portions of its BLA, however, in July 2020, the Company received a Refusal to File letter from the FDA requesting additional information. The Company has requested a Type A meeting and plans to supply the additional information in a timely manner.

Going Concern

As reported in the accompanying financial statements, during the year ended May 31, 2020, May 31, 2019 and May 31, 2018, the Company incurred net losses of approximately $124.4 million, $56.2 million and $50.1 million, respectively. The Company has no activities that produced revenue in the periods presented and have sustained operating losses since inception.

The Company currently requires and will continue to require a significant amount of additional capital to fund operations, pay its accounts payables, and its ability to continue as a going concern is dependent upon its ability to raise such additional capital, commercialize its 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 or slow CMC-related activities, which could materially delay commercialization initiatives, thereby deferring its ability to achieve profitability. The Company’s failure to raise additional capital could also affect its relationships with key vendors, disrupting its ability to timely execute its business plan. In extreme cases, it could be forced to file for bankruptcy protection, discontinue its operations or liquidate its assets.

Since inception, the Company has financed its activities principally from the sale of public and private 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 financing sources. As of the date of this filing, the Company has approximately 105 million shares of common stock authorized and available for issuance under our certificate of incorporation, as amended, and approximately $135 million available for future registered offerings of securities under our universal shelf registration statement on Form S-3, which was declared effective on March 7, 2018 and expires March 7, 2021 (assuming the full exercise of outstanding warrants, at the currently applicable exercise prices, that were previously issued in registered transactions thereunder).

 

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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 additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these activities or other debt could contain covenants that would restrict its operations. On March 31, 2020 and July 29, 2020, the Company entered into long-term convertible notes, which are secured by all of our assets, except for our intellectual property, and also include certain restrictive provisions, such as a limitation on additional indebtedness and future dilutive issuances of securities, any of which could impair our ability to raise additional capital on acceptable terms and conditions. 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. Please refer to the matters discussed under the heading “Risk Factors” above.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses for all periods presented and has a substantial accumulated deficit. As of May 31, 2020, these factors, among several others, could raise substantial doubt about our ability to continue as a going concern.

The consolidated financial statements do not include any adjustments relating to the recoverability 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 a significant amount of additional operating capital, complete development of its product candidate, obtain FDA approval, outsource manufacturing of its product, and ultimately to attain profitability. The Company intends to seek additional funding through equity or debt offerings, licensing agreements or strategic alliances to implement our business plan. There are no assurances, however, that it will be successful in these endeavors.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.

We follow the provisions of FASB ASC 815-Derivatives and Hedging (“ASC 815”), FASB ASC 480-Distinguishing liabilities from equity (“ASC 480”), ASC 470- Debt and debt with conversion and other options (“ASC 470”). We have issued instruments that meet the criteria of derivative liabilities. Derivative financial instruments consist of financial instruments that contain a notional amount and one or more underlying variable (e.g., contingent cash settlement provision), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. We have induced conversion of certain instruments with bifurcated conversion options. We have followed the general extinguishment model to record certain conversion and the extinguishment of derivative liabilities. We utilized a Binomial Lattice Model to value the conversion options, which utilizes assumptions that market participants would likely consider in negotiating the transfer of the convertible options, including early conversions. The assumptions in the model are subject to estimates and judgement.

 

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We value inventory at the lower of cost or net realizable value using the average cost method. Inventories currently consist solely of specialized raw materials to be used for commercial production of the Company’s biologic, leronlimab, which is awaiting regulatory approval. Inventory purchased in preparation for product launches is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory, in light of the status of the product within the regulatory approval process. The Company evaluates its inventory levels on a quarterly basis and writes down inventory that has become obsolete, or has a cost in excess of its expected net realizable value, and inventory quantities in excess of expected requirements. In assessing the lower of cost or net realizable value to pre-launch inventory, the Company relies on independent analysis provided by a third-party knowledgeable of the range of likely commercial prices comparable to current comparable commercial product.

We capitalize 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 we have determined it is probable that these capitalized costs will provide some 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 the compilation of the regulatory application. We closely monitor the status of the product within the regulatory review and approval process, including all relevant communication with regulatory authorities. If we are 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.

For inventories we capitalize in preparation of product launch anticipated future sales, shelf lives, and expected approval date are taken into account when evaluating realizability. The shelf-life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory, the Company considers the product stability data of all of the pre-approval inventory procured or produced to date to determine whether it has an adequate shelf life.

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant utilizing certain assumptions that require judgments and estimates. These assumptions include estimates for volatility, expected term and risk-free interest rates in determining the fair value of the stock-based awards.

We periodically issue stock options and warrants to consultants for various services. Costs for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily measurable. This determination requires judgment in terms of the consideration being measured.

We have historically issued convertible promissory notes with detachable warrants to purchase common stock. The conversion options are fixed, but may be beneficial to the note holders at the respective commitment dates. The valuation of the beneficial conversion feature of the notes and of the warrants gives rise to the recognition of a debt discount, which requires the use of certain assumptions inherent in the Black-Scholes option pricing model, including various judgments and estimates.

As discussed in Notes 8 and 9 to the consolidated financial statements, we have significant license and contingent milestone and royalty liabilities. We must estimate the likelihood of paying these contingent liabilities periodically based on the progress of our clinical trials.

 

Item 7A.

Quantitative and Qualitative Disclosure about Market Risk

As a smaller reporting company we are not required to provide the information required by this Item.

 

Item 8.

Financial Statements and Supplementary Data.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

CytoDyn Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of CytoDyn Inc. (the Company) as of May 31, 2020 and 2019 and the related consolidated statements of operations, changes in stockholders’ (deficit) equity, and cash flows for each of the years in the three-year period ended May 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended May 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company incurred a net loss of approximately $124,403,000 for the year ended May 31, 2020 and has an accumulated deficit of approximately $354,711,000 through May 31, 2020, which raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Warren Averett, LLC

We have served as the Company’s auditor since 2007.

Birmingham, Alabama

August 14, 2020

 

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CytoDyn Inc.

Consolidated Balance Sheets

 

     May 31, 2020     May 31, 2019  

Assets

    

Current assets:

    

Cash

   $ 14,281,830     $ 2,612,910  

Restricted cash

     10,000       853,599  

Inventories

     19,146,678       —    

Miscellaneous receivables

     —         90,824  

Prepaid expenses

     498,005       107,211  

Prepaid service fees

     2,890,519       1,704,876  
  

 

 

   

 

 

 

Total current assets

     36,827,032       5,369,420  

Operating lease right-of-use assets

     175,743       —    

Property, plant and equipment

     55,488       29,251  

Intangibles, net

     13,455,872       15,475,454  
  

 

 

   

 

 

 

Total assets

   $ 50,514,135     $ 20,874,125  
  

 

 

   

 

 

 

Liabilities and Stockholders’ (Deficit) Equity

    

Current liabilities:

    

Accounts payable

   $ 29,479,313     $ 16,239,434  

Accrued liabilities and compensation

     6,866,003       1,588,552  

Accrued license fees

     12,500       208,600  

Accrued interest on convertible notes

     292,178       212,777  

Accrued dividends on convertible preferred stock

     981,438       37,351  

Convertible notes payable, net

     —         3,586,035  

Current portion of operating leases payable

     114,790       —    

Current portion of long-term convertible notes payable

     6,744,444       4,200,000  

Warrant exercise proceeds held in trust

     10,000       853,599  
  

 

 

   

 

 

 

Total current liabilities

     44,500,666       26,926,348  
  

 

 

   

 

 

 

Long-term liabilities:

    

Convertible notes payable, net

     8,430,556       454,568  

Operating lease liability

     63,391       —    

Derivative liability

     —         2,407,269  
  

 

 

   

 

 

 

Total long-term liabilities

     8,493,947       2,861,837  
  

 

 

   

 

 

 

Total liabilities

     52,994,613       29,788,185  
  

 

 

   

 

 

 

Commitments and Contingencies (Note 10)

    

Stockholders’ (Deficit) equity

    

Preferred Stock, $0.001 par value; 5,000,000 shares authorized

    

Series D convertible preferred stock, $0.001 par value; 11,737 authorized; 8,452 and 0 issued and outstanding at May 31, 2020 and May 31, 2019, respectively

     8       —    

Series C convertible preferred stock, $0.001 par value; 8,203 authorized; 8,203 and 3,246 issued and outstanding at May 31, 2020 and May 31, 2019, respectively

     8       3  

Series B convertible preferred stock, $0.001 par value; 400,000 shares authorized, 92,100 shares issued and outstanding at May 31, 2020 and May 31, 2019, respectively

     92       92  

Common stock, $0.001 par value; 700,000,000 shares authorized, 519,261,580 and 329,554,763 issued and 518,975,572 and 329,395,752 outstanding at May 31, 2020 and May 31, 2019, respectively

     519,262       329,555  

Additional paid-in capital

     351,711,333       220,119,856  

Accumulated (deficit)

     (354,710,895     (229,363,407

Less: treasury stock, $.001 par value (286,008 and 159,011 shares at May 31, 2020 and May 31, 2019, respectively)

     (286     (159
  

 

 

   

 

 

 

Total stockholders’ (deficit)

     (2,480,478     (8,914,060
  

 

 

   

 

 

 

Total liabilities and stockholders' (deficit) equity

   $ 50,514,135     $ 20,874,125  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CytoDyn Inc.

Consolidated Statements of Operations

 

     May 31, 2020     May 31, 2019     May 31, 2018  

Operating expenses:

      

General and administrative

   $ 19,972,804     $ 12,116,743     $ 7,340,605  

Research and development

     52,639,981       42,490,144       38,222,580  

Amortization and depreciation

     2,034,440       1,245,167       356,128  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     74,647,225       55,852,054       45,919,313  
  

 

 

   

 

 

   

 

 

 

Operating loss

     (74,647,225     (55,852,054     (45,919,313

Other income (expense):

      

Other income

     500,000       —         —    

Interest income

     5,318       4,306       3,620  

Change in fair value of derivative liabilities

     (9,541,704     1,666,469       1,690,935  

Loss on extinguishment of convertible note

     —         (1,519,603     —    

Legal settlement

     (22,500,000     —         —    

Interest expense:

      

Finance charges

     (935,630     —         —    

Amortization of discount on convertible notes

     (1,644,625     (1,707,068     (1,666,017

Amortization of debt issuance costs

     (404,340     (459,085     (435,609

Inducement interest

     (7,904,353     (195,927     (3,571,982

Interest on convertible note payable

     (7,330,843     (950,617     (251,315
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (18,219,791     (3,312,697     (5,924,923
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (124,403,402     (59,013,579     (50,149,681

Income tax benefit

     —         2,826,919       —    
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (124,403,402   $ (56,186,660   $ (50,149,681
  

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.30   $ (0.21   $ (0.29
  

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average common shares outstanding

     421,077,605       272,040,933       174,885,422  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CytoDyn Inc.

Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

 

     Preferred Stock      Common Stock      Treasury Stock  
     Shares      Amount      Shares      Amount      Shares      Amount  

Balance May 31, 2017

     92,100      $ 92        149,468,244      $ 149,468        —        $ —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation

     —          —          —          —          —          —    

Stock issued for board compensation

     —          —          —          —          —          —    

Stock issued for bonuses and tendered for income tax

     —          —          310,526        311        159,011        (159

Proceeds from private equity offering ($0.50/share)

     —          —          35,286,904        35,286        —          —    

Offering costs related to private equity offering

     —          —          —          —          —          —    

Proceeds from registered direct offering ($0.50/share)

     —          —          25,493,853        25,494        —          —    

Offering costs related to registered direct offering

     —          —          —          —          —          —    

Legal fees in connection with equity offerings

     —          —          —          —          —          —    

Proceeds from warrant exercise ($0.50/share)

     —          —          6,322,263        6,322        —          —    

Offering costs related to warrant tender offer

     —          —          —          —          —          —    

Debt discount related to convertible notes payable

     —          —          —          —          —          —    

Interest expense related to warrant extension

     —          —          —          —          —          —    

Interest expense related to warrant tender offer

     —          —          —          —          —          —    

Interest expense related to conversion of notes payable

     —          —          —          —          —          —    

Net (loss) for the year ended May 31, 2018

                 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance May 31, 2018

     92,100      $ 92        216,881,790      $ 216,881        159,011      $ (159
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquisition of ProstaGene LLC

     —          —          18,658,000        18,658        —          —    

Issuance of stock payment shares

     —          —          8,342,000        8,342        —          —    

Issuance of stock for note payable redemption

     —          —          3,756,406        3,757        —          —    

Proceeds from registered direct offering ($0.50/share)

     —          —          23,629,480        23,629        —          —    

Offering costs related to registered direct offering

     —          —          —          —          —          —    

Proceeds from private equity offering ($0.50/share)

     —          —          46,975,170        46,976        —          —    

Offering costs related to private equity offering

     —          —          —          —          —          —    

Offering costs related to debt offering

     —          —          —          —          —          —    

Debt discount and issuance costs related to offering

     —          —          —          —          —          —    

Beneficial conversion feature on note payable and relative fair value associated with warrants

     —          —          —          —          —          —    

Proceeds from private warrant exchange

     —          —          11,311,917        11,312        —          —    

Offering costs related to private warrant exchange

     —          —          —          —          —          —    

Inducement interest expense on private warrant exchange

     —          —          —          —          —          —    

Proceeds from Series C Convertible Preferred offering

     3,246        3        —          —          —          —    

Dividends on Series C Convertible Preferred shares

     —          —          —          —          —          —    

Legal fees in connection with equity offerings

     —          —          —          —          —          —    

Stock-based compensation

     —          —          —          —          —          —    

Net (loss) for the year ended May 31, 2019

                 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance May 31, 2019

     95,346      $ 95        329,554,763      $ 329,555        159,011      $ (159
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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CytoDyn Inc.

Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

 

     Preferred Stock      Common Stock      Treasury Stock  
     Shares      Amount      Shares      Amount      Shares      Amount  

Issuance of stock for note payable redemptions and conversions

     —        $ —          22,967,227      $ 22,967        —        $ —    

Note conversion and extension fees

     —          —          8,232,006        8,232        —          —    

Proceeds from registered direct offering

     —          —          38,856,094        38,857        —          —    

Offering costs related to registered direct offering

     —          —          —          —          —          —    

Proceeds from warrant exercises

     —          —          42,023,872        42,024        —          —    

Relative fair market value associated with warrants exercised

     —          —          —          —          —          —    

Proceeds from public warrant tender offers

     —          —          45,375,923        45,376        —          —    

Offering costs related to public warrant tender offers

     —          —          —          —          —          —    

Inducement interest expense—tender offers and debt conversions

     —          —          —          —          —          —    

Proceeds from private warrant exchange

     —          —          20,528,745        20,527        —          —    

Offering costs related to private warrant exchange

     —          —          —          —          —          —    

Inducement interest expense—private warrant exchange

     —          —          —          —          —          —    

Proceeds from Series C Preferred offering

     4,957        5        —          —          —          —    

Offering costs related to Series C Preferred offering

     —          —          —          —          —          —    

Exercise of option to repurchase common stock

     —          —          —          —          —          —    

Dividends on Series C Preferred shares

     —          —          —          —          —          —    

Proceeds from Series D Preferred offering

     8,452        8        —          —          —          —    

Offering costs related to Series D Preferred offering

     —          —          —          —          —          —    

Dividends on Series D Preferred shares

     —          —          —          —          —          —    

Legal fees in connection with equity offerings

     —          —          —          —          —          —    

Stock issued for services

     —          —          2,620,000        2,620        —          —    

Stock issued for bonuses and tendered for income tax

     —          —          379,880        380        126,997        (127

Exercise of stock options

     —          —          8,723,070        8,724        —          —    

Stock-based compensation

     —          —          —          —          —          —    

Legal settlement

     —          —          —          —          —          —    

Net Loss for May 31, 2020

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance May 31, 2020

     108,755      $ 108        519,261,580      $ 519,262        286,008      $ (286
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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CytoDyn Inc.

Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

 

     Additional
Paid-In

Capital
    Accumulated
Deficit
    Total  

Balance May 31, 2017

   $ 121,736,921     $ (122,989,715   $ (1,103,234

Stock-based compensation

     1,290,777       —         1,290,777  

Stock issued for board compensation

     260,190       —         260,190  

Stock issued for bonuses and tendered for income tax

     104,394       —         104,546  

Proceeds from private equity offering ($0.50/share)

     17,608,165       —         17,643,451  

Offering costs related to private equity offering

     (1,717,597     —         (1,717,597

Proceeds from registered direct offering ($0.50/share)

     13,585,925       —         13,611,419  

Offering costs related to registered direct offering

     (857,149     —         (857,149

Legal fees in connection with equity offerings

     (533,436     —         (533,436

Proceeds from warrant exercise ($0.50/share)

     3,154,809       —         3,161,131  

Offering costs related to warrant tender offer

     (85,381     —         (85,381

Debt discount related to convertible notes payable

     1,645,011       —         1,645,011  

Interest expense related to warrant extension

     826,252       —         826,252  

Interest expense related to warrant tender offer

     393,685       —         393,685  

Interest expense related to conversion of notes payable

     2,352,045       —         2,352,045  

Net (loss) for the year ended May 31, 2018

     —         (50,149,681     (50,149,681
  

 

 

   

 

 

   

 

 

 

Balance May 31, 2018

   $ 159,764,611     $ (173,139,396   $ (13,157,971
  

 

 

   

 

 

   

 

 

 

Acquisition of ProstaGene LLC

     11,539,342       —         11,558,000  

Issuance of stock payment shares

     (8,342     —         —    

Issuance of stock for note payable redemption

     1,451,243       —         1,455,000  

Proceeds from registered direct offering ($0.50/share)

     11,791,110       —         11,814,739  

Offering costs related to registered direct offering

     (1,129,516     —         (1,129,516

Proceeds from private equity offering ($0.50/share)

     23,440,608       —         23,487,584  

Offering costs related to private equity offering

     (2,697,149     —         (2,697,149

Offering costs related to debt offering

     260,636       —         260,636  

Debt discount and issuance costs related to offering

     3,059,159       —         3,059,159  

Beneficial conversion feature on note payable and relative fair value associated with warrants

     3,534,992       —         3,534,992  

Proceeds from private warrant exchange

     2,955,200       —         2,966,512  

Offering costs related to private warrant exchange

     (266,986     —         (266,986

Inducement interest expense on private warrant exchange

     195,927       —         195,927  

Proceeds from Series C Convertible Preferred offering

     3,083,697       —         3,083,700  

Dividends on Series C Convertible Preferred shares

     —         (37,351     (37,351

Legal fees in connection with equity offerings

     (242,771     —         (242,771

Stock-based compensation

     3,388,095       —         3,388,095  

Net (loss) for the year ended May 31, 2019

     —         (56,186,660     (56,186,660
  

 

 

   

 

 

   

 

 

 

Balance May 31, 2019

   $ 220,119,856     $ (229,363,407   $ (8,914,060
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CytoDyn Inc.

Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

 

     Additional
Paid-In Capital
    Accumulated
Deficit
    Total  

Issuance of stock for note payable redemptions and conversions

   $ 10,799,221     $ —       $ 10,822,188  

Note conversion and extension fees

     3,890,973       —         3,899,205  

Proceeds from registered direct offering

     12,626,942       —         12,665,799  

Offering costs related to registered direct offering

     (377,859     —         (377,859

Proceeds from warrant exercises

     20,458,091       —         20,500,115  

Relative fair market value associated with warrants exercised

     11,948,972       —         11,948,972  

Proceeds from public warrant tender offers

     11,854,884       —         11,900,260  

Offering costs related to public warrant tender offers

     (1,058,466     —         (1,058,466

Inducement interest expense—tender offers and debt conversions

     2,713,014       —         2,713,014  

Proceeds from private warrant exchange

     6,000,566       —         6,021,093  

Offering costs related to private warrant exchange

     (197,253     —         (197,253

Inducement interest expense—private warrant exchange

     5,191,338       —         5,191,338  

Proceeds from Series C Preferred offering

     4,956,995       —         4,957,000  

Offering costs related to Series C Preferred offering

     (432,368     —         (432,368

Exercise of option to repurchase common stock

     (8,342     —         (8,342

Dividends on Series C Preferred shares

     —         (671,971     (671,971

Proceeds from Series D Preferred offering

     8,451,992       —         8,452,000  

Offering costs related to Series D Preferred offering

     (4,645     —         (4,645

Dividends on Series D Preferred shares

           (272,115     (272,115

Legal fees in connection with equity offerings

     (15,877     —         (15,877

Stock issued for services

     (2,620     —         —    

Stock issued for bonuses and tendered for income tax

     154,299       —         154,552  

Exercise of stock options

     5,593,817       —         5,602,541  

Stock-based compensation

     6,547,803       —         6,547,803  

Legal settlement

     22,500,000       —         —    

Net Loss for May 31, 2020

     —         (124,403,402     (124,403,402
  

 

 

   

 

 

   

 

 

 

Balance May 31, 2020

   $ 351,711,333     $ (354,710,895   $ (2,480,478
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CytoDyn Inc.

Consolidated Statements of Cash Flows

 

     Year Ended  
     May 31, 2020     May 31, 2019     May 31, 2018  

Cash flows from operating activities:

      

Net loss

   $ (124,403,402   $ (56,186,660   $ (50,149,681

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

      

Amortization and depreciation

     2,034,440       1,245,167       356,128  

Amortization of debt issuance costs

     404,340       459,085       435,609  

Amortization of discount on convertible notes

     1,644,625       1,707,068       1,666,017  

Legal settlement

     22,500,000       —         —    

Inducement interest

     7,904,353       195,927       —    

Interest expense associated with warrant extension

     —         —         826,252  

Interest expense associated with warrant tender offer

     —         —         393,685  

Interest expense associated with conversion of notes

     —         —         2,352,045  

Interest expense associated with accretion of convertible notes payable

     6,615,146       512,594       —    

Change in fair value of derivative liabilities

     9,541,704       (1,666,469     (1,690,935

Stock-based compensation

     6,547,803       3,388,095       1,290,777  

Loss on extinguishment of convertible note

     —         1,519,603       —    

Deferred income tax benefit

     —         (2,826,919     —    

Changes in current assets and liabilities:

      

(Increase) in inventories

     (19,146,678     —         —    

Decrease in miscellaneous receivables

     90,824       (90,824     —    

Decrease (increase) in prepaid expenses

     (1,576,437     (464,201     2,256,173  

Increase (decrease) in accounts payable and accrued expenses

     19,039,667       1,741,370       12,365,959  
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (68,803,615     (50,466,164     (29,897,971
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Intangibles

     —         (19,553     —    

Furniture and equipment purchases

     (41,095     (25,731     —    
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (41,095     (45,284     —    
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from sale of common stock and warrants

     12,665,799       38,268,839       25,224,212  

Proceeds from sale of preferred stock

     13,409,000       3,083,700       —    

Proceeds from stock option excercises

     5,602,541       —         —    

Proceeds from warrant exercises

     38,421,468       —         3,161,131  

Principal paid on maturity of short-term convertible notes

     (460,000     —         —    

Convertible note redemptions paid in cash

     (1,725,000     —         —    

Exercise of option to repurchase shares held in escrow

     (8,342     —         —    

Payment of bonuses and payroll taxes related to tender of common stock for income tax withholding

     (88,568     —         (102,064

(Release) proceeds of funds held in trust for warrant tender offer

     (843,599     853,599       —    

Proceeds from convertible note payable, net

     15,000,000       15,460,000       4,888,500  

Payment of debt issuance costs

     —         (583,200     —    

Repayment of principal and interest on convertible note

     —         —         (259,157

Payment of offering costs

     (2,303,268     (4,336,426     (3,558,789
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     79,670,031       52,746,512       29,353,833  
  

 

 

   

 

 

   

 

 

 

Net change in cash

     10,825,321       2,235,064       (544,138

Cash, beginning of period

     3,466,509       1,231,445       1,775,583  
  

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 14,291,830     $ 3,466,509     $ 1,231,445  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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     Year Ended  
     May 31, 2020      May 31, 2019      May 31, 2018  

Supplemental disclosure of cash flow information:

 

Cash paid during the period for interest

   $ 242,817      $ —        $ 9,157  
  

 

 

    

 

 

    

 

 

 

Non-cash investing and financing transactions:

 

Derivative liability associated with warrants

   $ 11,948,972      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Common stock issued for accrued bonus compensation

   $ 154,552      $ —        $ 214,263  
  

 

 

    

 

 

    

 

 

 

Accrued dividends on Series D Convertible Preferred stock

   $ 272,115      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Common stock issued for services

   $ 2,620      $ 8,342      $ 260,190  
  

 

 

    

 

 

    

 

 

 

Accrued dividends on Series C Convertible Preferred stock

   $ 671,971      $ 37,351      $ —    
  

 

 

    

 

 

    

 

 

 

Issuance of stock for note payable redemption and conversions

   $ 14,938,193      $ 1,455,000      $ 5,788,500  
  

 

 

    

 

 

    

 

 

 

Accrued interest converted into note payable

   $ 153,876      $ 225,245      $ —    
  

 

 

    

 

 

    

 

 

 

Common stock issued for acquisition of ProstaGene, LLC

   $ —        $ 11,558,000      $ —    
  

 

 

    

 

 

    

 

 

 

Beneficial conversion feature and fair value of warrant issued with note payable

   $ —        $ 3,534,992      $ —    
  

 

 

    

 

 

    

 

 

 

Debt discount associated with convertible notes payable

   $ —        $ 3,059,159      $ 1,574,628  
  

 

 

    

 

 

    

 

 

 

Derivative liability associated with a convertible note payable

   $ —        $ 2,750,006      $ —    
  

 

 

    

 

 

    

 

 

 

Financing costs associated with placement agent warrants

   $ —        $ 260,635      $ 70,383  
  

 

 

    

 

 

    

 

 

 

Common stock issued for accrued interest payable

   $ —        $ —        $ 242,158  
  

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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CYTODYN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MAY 31, 2020

Note 1 – Organization

CytoDyn Inc. (the “Company”) was originally incorporated under the laws of Colorado on May 2, 2002 under the name RexRay Corporation (its previous name) and, effective August 27, 2015, reincorporated under the laws of Delaware. The Company is a late-stage biotechnology company developing innovative treatments for multiple therapeutic indications based on leronlimab, a novel humanized monoclonal antibody targeting the CCR5 receptor. Leronlimab is in a class of therapeutic monoclonal antibodies designed to address unmet medical needs in the areas of Human Immunodeficiency Virus (“HIV”), Cancer, and Immunology.

With respect to HIV, the CCR5 receptor appears to play a key role in the ability of HIV to enter and infect healthy T-cells. The Company’s lead product candidate, leronlimab, belongs to a class of HIV therapies known as entry inhibitors. These therapies block HIV from entering into and infecting certain cells.

With respect to Cancer and Immunology, the CCR5 receptor also appears to be implicated in human metastasis and in immune-mediated illnesses such as triple-negative breast cancer, other metastatic solid tumor cancers, graft-vs-host disease (“GvHD”), and Non-Alcoholic Steatohepatitis (“NASH”).

More recently, the Company is expanding the clinical focus with leronlimab to include evaluating its effectiveness in multiple other autoimmune indications where CCR antagonism has shown initial promise, as well as the novel coronavirus disease (“COVID-19”). The Company targets leronlimab treatment as a therapy for patients who experience respiratory complications as a result of contracting COVID-19. The Company believes leronlimab provides therapeutic benefit by enhancing the immune response while mitigating the “cytokine storm” that leads to morbidity and mortality in patients experiencing this syndrome.

Note 2 – Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of CytoDyn Inc. and its wholly owned subsidiaries, CytoDyn Operations Inc., Advanced Genetic Technologies, Inc. (“AGTI”) and CytoDyn Veterinary Medicine LLC (“CVM”), of which both AGTI and CVM are dormant entities. All intercompany transactions and balances are eliminated in consolidation.

Reclassifications

Certain prior year amounts shown in the accompanying consolidated financial statements have been reclassified to conform to the 2020 presentation. These reclassifications did not have any effect on total current assets, total assets, total current liabilities, total liabilities, total stockholders’ (deficit) equity, net loss or earnings per shares.

Going Concern

The consolidated accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of $124,403,402, $56,186,660 and $50,149,681 for the years ended May 31, 2020, May 31, 2019, and May 31, 2018, respectively, and has an accumulated deficit of $354,710,895 as of May 31, 2020. These factors, among several others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

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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, obtain U.S. Food and Drug Administration (the “FDA”) approval, outsource manufacturing of the product candidate, and ultimately achieve initial revenues and attain profitability. The Company is currently engaging in significant research and development activities related to its product candidate, and expects to incur significant research and development expenses in the future primarily related to its clinical trials. These research and development activities are subject to significant risks and uncertainties. The Company intends to finance its future development activities and its working capital needs largely from the sale of equity and debt securities, combined with additional funding from other traditional sources. There can be no assurance, however, that the Company will be successful in these endeavors.

Use of Estimates

The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash

Cash is maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced, nor does it expect to experience any losses related to these balances. Balances in excess of federally insured limits at May 31, 2020 and May 31, 2019 approximated $14.0 million and $3.3 million, respectively, which included restricted cash of approximately $0.0 million and $0.9 million, respectively.

Identified Intangible Assets

The Company follows the provisions of FASB ASC Topic 350 Intangibles-Goodwill and Other, which establishes accounting standards for the impairment of long-lived assets such as intangible assets subject to amortization. The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying value, the asset is considered impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. There were no impairment charges for the years ended May 31, 2020, May 31, 2019, and May 31, 2018. The value of the Company’s patents would be significantly impaired by any adverse developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Note 8.

Research and Development

Research and development costs are expensed as incurred. Clinical trial costs incurred through third-parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third-parties under research and development collaboration arrangements or other contractual agreements, the milestone payment obligations are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable.

Inventories

The Company values inventory at the lower of cost or net realizable value using the average cost method. Inventories currently consist solely of specialized raw materials to be used for commercial production of the

 

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Company’s biologic, leronlimab, which is awaiting regulatory approval. Inventory purchased in preparation for product launches is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory, in light of the status of the product within the regulatory approval process. The Company evaluates its inventory levels on a quarterly basis and writes down inventory that has become obsolete, or has a cost in excess of its expected net realizable value, and inventory quantities in excess of expected requirements. In assessing the lower of cost or net realizable value to pre-launch inventory, the Company relies on independent analysis provided by a third-party knowledgeable of the range of likely commercial prices of current comparable commercial product.

Inventories Procured or Produced in Preparation for Product Launches

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 some 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 the compilation of the regulatory application. The Company closely monitors the status of the product within the regulatory review and approval process, including all relevant communication 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.

For inventories capitalized in preparation for product launch, anticipated future sales, shelf lives, and expected approval date are taken into account when evaluating realizability. The shelf-life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory, the Company considers the product stability data of all of the pre-approval inventory procured or produced to date to determine whether it has an adequate shelf life.

Fair Value of Financial Instruments

At May 31, 2020 and May 31, 2019, the carrying value of the Company’s cash, accounts payable and accrued liabilities approximate their fair value due to the short-term maturity of the instruments. The Company carries derivative financial instruments at fair value as required by U.S. GAAP.

Derivative financial instruments consist of financial instruments that contain a notional amount and one or more underlying variables (e.g., interest rate, security price, variable conversion rate or other variables), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. The Company follows the provisions of ASC 815, Derivatives and Hedging as their instruments are recorded as a derivative liability, at fair value, and ASC 480, Distinguishing Liabilities from Equity as it relates to warrant liability, with changes in fair value reflected in income.

Fair Value Hierarchy

The three levels of inputs that may be used to measure fair value are as follows:

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

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived

 

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valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

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

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of May 31, 2020 and May 31, 2019 is as follows:

 

     Fair Value Measurement at
May 31, 2020 (1)
     Fair Value Measurement at
May 31, 2019 (1)
 
     Using
Level 3
     Total      Using
Level 3
     Total  

Liabilities:

           

Derivative liability - convertible note redemption provision

   $ —        $ —        $ 2,005,137      $ 2,005,137  

Derivative liability - warrants

     —          —          402,132        402,132  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability

   $ —        $ —        $ 2,407,269      $ 2,407,269  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair value hierarchy as of May 31, 2020 and May 31, 2019. As of May 31, 2020, there were no longer any assets or liabilities measured at fair value using Level 3 inputs because all derivative warrants and convertible debt had been converted according to the terms of the agreements.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurements. These instruments are not quoted on an active market. The Company uses a Binomial Lattice Model to estimate the value of the warrant derivative liability and a Monte Carlo Simulation to value the derivative liability of the redemption provision within a convertible promissory note. These valuation models were used because management believes they reflect all the assumptions that market participants would likely consider in negotiating the transfer of the instruments. The Company’s derivative liabilities are classified within Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation models.

The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from inception to May 31, 2020:

 

Investor warrants issued with registered direct equity offering

   $ 4,360,000  

Placement agent warrants issued with registered direct equity offering

     819,200  

Fair value adjustments

     (3,855,468
  

 

 

 

Balance at May 31, 2018

     1,323,732  

Inception date value of redemption provisions

     2,750,006  

Fair value adjustments - convertible notes

     (744,869

Fair value adjustments - warrants

     (921,600
  

 

 

 

Balance at May 31, 2019

   $ 2,407,269  

Fair value adjustments - convertible notes

     (2,005,137

Fair value adjustments - warrants

     11,546,840  

Exercise of derivative warrants

     (11,948,972
  

 

 

 

Balance at May 31, 2020

   $ —    
  

 

 

 

 

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Operating Leases

Effective June 1, 2019, the Company now determines whether an arrangement is considered a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on its consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms do not include options to extend or terminate the lease as it is not reasonably certain that it will exercise these options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

Stock-Based Compensation

U.S. GAAP requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award (requisite service period) or when designated milestones have been achieved.

The Company accounts for stock-based awards established by the fair market value of the instrument using the Black-Scholes option pricing model utilizing certain weighted average assumptions including stock price volatility, expected term and risk-free interest rates, as of the grant date. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the stock-based award. The expected volatility is based on the historical volatility of the Company’s common stock on monthly intervals. The computation of the expected option term is based on the “simplified method,” as the Company issuances are considered “plain vanilla” options. For stock-based awards with defined vesting, the Company recognizes compensation expense over the requisite service period or when designated milestones have been achieved. The Company estimates forfeitures at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Based on limited historical experience of forfeitures, the Company estimated future unvested forfeitures at 0% for all periods presented.

Common Stock

Under the Company’s Certificate of Incorporation, as amended, the Company is authorized to issue up to 800,000,000 shares of common stock. As of May 31, 2020, the Company had 518,975,572 shares of common stock outstanding.

Preferred Stock

The Company’s Board is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of May 31, 2020, the Company had 400,000 shares authorized and 92,100 shares outstanding of Series B convertible preferred stock, 8,203 shares authorized and outstanding of Series C convertible preferred stock, and 11,737 shares authorized and 8,452 shares outstanding of Series D convertible preferred stock. The remaining authorized preferred shares have no specified rights.

Treasury Stock

As of the year ended May 31, 2020, the Company holds 286,008 shares of $0.001 par value common stock as treasury stock.

 

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Debt Discount

During the years ended May 31, 2020, May 31, 2019 and May 31, 2018, the Company incurred approximately $2.1 million, $4.2 million, and $1.5 million, respectively, of debt discount related to the issuance of convertible promissory notes, as described in Note 5. The discount was amortized over the life of the convertible promissory notes and the Company recognized approximately $1.6 million, $1.7 million, and $1.6 million, of related amortization expense for the years ended May 31, 2020, May 31, 2019 and May 31, 2018, respectively.

Debt Issuance Costs

During the years ended May 31, 2020 and May 31, 2019, the Company incurred direct costs associated with the issuance of convertible promissory notes, as described in Note 5, and recorded approximately $0.0 million and $1.0 million, respectively, of debt issuance costs. The Company recognized approximately $0.4 million, $0.5 million, and $0.4 million of related amortization expense for the years ended May 31, 2020, May 31, 2019 and May 31, 2018, respectively.

Offering Costs

During the years ended May 31, 2020, May 31, 2019 and May 31, 2018, the Company incurred approximately $2.3 million, $4.3 million, and $3.5 million respectively, in direct incremental costs associated with the sale of equity securities. The offering costs were recorded as a component of equity upon receipt of the proceeds, as fully described in Notes 11, 12, and 13.

Stock Based Compensation for Services

The Company periodically issues warrants to consultants for various services. The Black-Scholes option pricing model, as described more fully above, is utilized to measure the fair value of the equity instruments on the date of issuance. The Company recognizes the compensation expense associated with the equity instruments over the requisite service or vesting period.

Loss per Common Share

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share would include the weighted average common shares outstanding and potentially dilutive common share 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. For this reason, common stock options and warrants to purchase 131,360,528, 178,591,849; and 132,385,269 shares of common stock were not included in the computation of basic and diluted weighted average common shares outstanding for the years ended May 31, 2020, May 31, 2019 and May 31, 2018, respectively. As of May 31, 2020 and May 31, 2019 the Company had convertible notes outstanding, including accrued interest, that could convert into 3,864,298 and 11,345,852 common shares, respectively; and shares of Series D, Series C and Series B convertible preferred stock, including undeclared dividends, that could potentially convert in the aggregate into 30,129,860, and 7,973,911 common shares, respectively.

Income Taxes

Deferred taxes are provided on the asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating loss carry forwards are recognized to the extent that realization of these benefits is considered more likely than not. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

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The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (“ASC 740-10”). A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there are no unrecognized benefits for all periods presented. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefit in interest expense and penalties in operating expenses.

In accordance with Section 15 of the Internal Revenue Code, we utilized a federal statutory rate of 21% for our fiscal 2020 and 2019 tax years. The Company had no net tax expense for the year ended May 31, 2020 and a tax benefit of $2.8 million for the year ended May 31, 2019. The Company has a full valuation allowance as of May 31, 2020 and May 31, 2019, as management does not consider it more than likely than not that the benefits from the deferred taxes will be realized.

Note 3 – Recent Accounting Pronouncements

Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards Board (“FASB”) (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s present or future financial statements.

In December 2019, the FASB issued “ASU 2019-12, Simplifying the Accounting for Income Taxes.” The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC 740 and clarifying existing guidance to facilitate consistent application. The standard will become effective for us beginning on January 1, 2021. The Company is currently evaluating the new standard to determine the potential impact on its financial condition, results of operations, cash flows, and financial statement disclosures.

In July 2017, the FASB issued “ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company adopted ASU 2017-11 for the year ended May 31, 2020, and applied ASU 2017-11 on a full retrospective basis. Prior to fiscal year 2020 the company did not evaluate the impact of ASU 2017-11. The effect of the restrospective and current period adoption is immaterial to the Company’s financial statements.

In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential on its financial statements.

 

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Note 4 – Inventories

The Company’s inventory as of May 31, 2020 and May 31, 2019 was $19,146,678 and $0, respectively. Inventory as of May 31, 2020 consisted of raw materials purchased for use in the commercial manufacturing 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. 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 Phase 3 clinical trial results, and information gathered from pre-filing meetings with the FDA for the BLA. The BLA was initially submitted with the FDA in April 2020 and the BLA submission was completed on May 11, 2020. In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA filing requesting additional information, and the Company has requested a Type A meeting to discuss the FDA’s request for additional information, which the Company expects will be resolved on a timely basis during calendar year 2020.

Note 5 – Convertible Instruments

Series D Convertible Preferred Stock

On January 28, 2020, the Company filed a certificate of designation (the “Series D Certificate of Designation”) to authorize 11,737 shares of Series D Convertible Preferred Stock, $0.001 par value per share (“Series D Preferred Stock”), and on January 31, 2020 issued 7,570 shares of Series D Convertible Preferred Stock, at $1,000.00 per share for cash proceeds totaling approximately $7,565,000, net of offering costs of $5,000. On March 13, 2020, the Company issued an additional 882 shares of Series D Preferred Stock at $1,000.00 per share resulting in net proceeds of $882,000. As of May 31, 2020, 8,452 shares remain outstanding. The Series D Certificate of Designation provides, among other things, that holders of Series D Preferred Stock shall be entitled to receive cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series D Preferred Stock, to be paid, at the option of the holder, in cash or in shares of common stock at the rate of $0.50 per share. Any dividends paid by the Company will first be paid to the holders of Series D Preferred Stock prior and in preference to any payment or distribution to holders of common stock. Dividends on the Series D Preferred Stock shall be cumulative and there are no sinking fund provisions applicable to the Series D Preferred Stock. The Series D Dividends are to be paid annually in arrears on the last day of December each year. The Series D Preferred Stock does not have redemption rights. The stated value per share for the Series D Preferred Stock is $1,000.00 (the “Series D Stated Value”). In the event of any liquidation, dissolution or winding up of the Company, the holders of Series D Preferred Stock will be entitled, on a pari passu basis with the holders of the Series C Preferred Stock and in preference to any payment or distribution to any holders of the Series B Preferred Stock or Common Stock, an amount per share equal to the Series D Stated Value plus the amount of any accrued and unpaid dividends.. If, at any time while the Series D Preferred Stock is outstanding, the Company effects any reorganization, merger or sale of the Company or substantially all of its assets (each a “Fundamental Transaction”), a holder of the Series D Preferred Stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series D Preferred Stock immediately prior to the Fundamental Transaction. Each share of Series D Preferred Stock is convertible at any time at the holder’s option into that number of fully paid and nonassessable shares of common stock determined by dividing the Series D Stated Value by the conversion price of $0.80 (subject to adjustment as set forth in the certificate of designation for the Series D Preferred Stock). No fractional shares will be issued upon the conversion of the Series D Preferred Stock. Except as otherwise provided in the Series D Certificate of Designation or as otherwise required by law, the Series D Preferred Stock has no voting rights. As of May 31, 2020, the accrued dividends were approximately $272,000, or 544,000 shares of common stock. There were no accrued dividends as of May 31, 2019.

Series C Convertible Preferred Stock

On March 20, 2019, the Company filed a certificate of designation (the “Series C Certificate of Designation”) to authorize 5,000 shares and issued 3,246 shares of Series C Convertible Preferred Stock, $0.001 par value per

 

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share (“Series C Preferred Stock”), at $1,000.00 per share for cash proceeds totaling $3,083,700, net of placement agent fees of $162,300. On August 29, 2019, the Company issued the remaining 1,754 shares of Series C Preferred Stock at $1,000.00 per share for cash proceeds totaling $1,542,545, net of placement agent fees and legal fees totaling $211,455. On October 11, 2019, the Company amended its certificate of designation to authorized an increase in authorized Series C Preferred Stock from 5,000 shares to 20,000 shares. Between October 21, 2019 and November 8, 2019, the Company issued an additional 2,788 shares of Series C Convertible Preferred Stock, and on December 6, 2020 the Company issued 415 shares of Series C Convertible Preferred Stock. On January 28, 2020, the Company further amended its Series C Certificate of Designation to reduce the number of authorized shares of Series C Preferred Stock from 20,000 shares to 8,203 shares, all of which remain outstanding as of May 31, 2020. The Series C Certificate of Designation provides, among other things, that holders of Series C Preferred Stock shall be entitled to receive, out of any assets at the time legally available therefor, cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series C Preferred Stock, to be paid per share of Series C Preferred Stock, which dividends shall accrue whether or not declared. Any dividends paid by the Company will first be paid to the holders of Series C Preferred Stock prior and in preference to any payment or distribution to holders of common stock. Dividends on the Series C Preferred Stock are mandatory and cumulative and there are no sinking fund provisions applicable to the Series C Preferred Stock. The Series C Dividends are to be paid annually in arrears on the last day of December each year. The Series C Preferred Stock does not have redemption rights. The stated value per share for the Series C Preferred Stock is $1,000.00 (the “Series C Stated Value”). In the event of any liquidation, dissolution or winding up of the Company, the Series C Preferred Stock will be paid, on a pari passu basis with the holders of the Series D Preferred Stock and prior and in preference to any payment or distribution on any shares of common stock, currently outstanding series of preferred stock, or subsequent series of preferred stock, an amount per share equal to the Series C Stated Value and the amount of any accrued and unpaid dividends. If, at any time while the Series C Preferred Stock is outstanding, the Company effects any Fundamental Transaction, a holder of the Series C Preferred Stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series C Preferred Stock immediately prior to the Fundamental Transaction. Each share of Series C Preferred Stock is convertible at any time at the holder’s option into that number of fully paid and nonassessable shares of the Company’s common stock determined by dividing the Series C Stated Value by the conversion price of $0.50 per share (subject to adjustment as set forth in the Certificate of Designation). No fractional shares will be issued upon the conversion of the Series C Preferred Stock. Except as otherwise provided in the Series C Certificate of Designation or as otherwise required by law, the Series C Preferred Stock has no voting rights. As of May 31, 2020, the accrued dividends were approximately $709,000 or 1,419,000 shares of common stock. There were no accrued dividends as of May 31, 2019.

Series B Convertible Preferred Stock

During fiscal 2010, the Company issued 400,000 shares of Series B Convertible Preferred Stock, $0.001 par value per share (“Series B Preferred Stock”) at $5.00 per share for cash proceeds totaling $2,009,000, of which 92,100 shares remained outstanding at May 31, 2020. Each share of the Series B Preferred Stock is convertible into ten shares of the Company’s common stock. At the option of the Company, dividends on the Series B Preferred Stock may be paid in cash or shares of the Company’s common stock, valued at $0.50 per share. The holders of the Series B Preferred Stock can only convert their shares to shares of common stock provided the Company has sufficient authorized shares of common stock at the time of conversion. Accordingly, the conversion option was contingent upon the Company increasing its authorized common shares, which occurred in April 2010, when the Company’s stockholders approved an increase in the authorized shares of common stock to 100,000,000. At the commitment date, which occurred upon such stockholder approval, the conversion option related to the Series B Preferred Stock was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive dividend to the Series B Preferred Stock holders of approximately $6,000,000. The constructive dividend increased and decreased additional paid-in capital by identical amounts. The Series B Preferred Stock has liquidation preferences over the common shares at $5.00 per share, plus any accrued and unpaid dividends. Dividends are payable to the Series B Preferred Stock holders when declared by

 

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the Board of Directors at the rate of $0.25 per share per annum. Such dividends are cumulative and accrue whether or not declared and whether or not there are any profits, surplus or other funds or assets of the Company legally available. Except as provided by law, the Series B holders have no voting rights. As of May 31, 2020, and May 31, 2019, the undeclared dividends were approximately $245,000 or 490,000, shares of common stock, and approximately $222,000, or 444,000 shares of common stock, respectively. On July 30, 2020, in connection with the conversion of 5,000 shares of Series B Preferred Stock to common stock, the Company paid to the holders of the Series B Preferred Stock a dividend of $243,285. As of July 30, 2020, there are 87,100 shares of Series B Preferred Stock outstanding.

2018 Short-term Convertible Notes

During the fiscal year ended May 31, 2018, the Company issued approximately $4.89 million in aggregate principal of short-term Convertible Notes, (the “2018 Short-term Convertible Notes”) with a maturity date of January 31, 2018, and related warrants to investors for cash. The principal amount of the 2018 Short-term Convertible Notes, including any accrued but unpaid interest thereon, was convertible at the election of the holder at any time into shares of common shares at any time prior to maturity at a conversion price of $0.75 per share. The 2018 Short-term Convertible Notes bore simple interest at the annual rate of 7%. Principal and accrued interest, to the extent not previously paid or converted, is due and payable on the maturity date. At the commitment date, the Company determined that the conversion feature related to these 2018 Short-term Convertible Notes to be beneficial to the investors. As a result, the Company determined the intrinsic value of the beneficial conversion feature utilizing the fair value of the underlying common stock on the commitment dates and the effective conversion price after discounting the 2018 Short-term Convertible Notes for the fair value of the related warrants. In connection with the sale of the 2018 Short-term Convertible Notes, detachable common stock warrants to purchase a total of 4,025,656 common shares, with an exercise price of $1.00 per share and a five-year term were issued to the investors. The Company determined the fair value of the warrants at issuance using the Black-Scholes option pricing model utilizing certain weighted average assumptions, such as expected stock price volatility, expected term of the warrants, risk-free interest rates and expected dividend yield at the grant date.

 

     2018

Expected dividend yield

   0%

Stock price volatility

   69.80%

Expected term

   5 year

Risk-free interest rate

   1.77 - 1.93%

Grant-date fair value

   $0.30 - $0.39

The fair value of the warrants, coupled with the beneficial conversion features, were recorded as a debt discount to the 2018 Short-term Convertible Notes and a corresponding increase to additional paid-in capital was amortized over the term of the 2018 Short-term Convertible Notes. The Company incurred debt discount of approximately $1.6 million related to the beneficial conversion feature and detachable warrants issued with the notes during the year ended May 31, 2018. Accordingly, the Company recognized approximately $-0- and $1.6 million of non-cash debt discount during the year ended May 31, 2019 and May 31, 2018, respectively. In connection with the 2018 Short-term Convertible Notes, the Company incurred direct issuance costs of approximately $0.4 million during the year ended May 31, 2018. The issuance costs were amortized over the term of the 2018 Short-term Convertible Notes and accordingly the Company recognized approximately $-0- and $0.4 million of debt issuance costs during the years ended May 31, 2019 and May 31, 2018, respectively. On January 31, 2018, in connection with a registered direct equity offering, as fully described in Note 13, the 2018 Short-term Convertible Notes in an aggregate principal amount of $5,788,500, plus accrued unpaid interest of approximately $243,000 were sold for 12,062,728 shares of common stock. The 2018 Short-term Convertible Note investors also received warrants to purchase 7,718,010 shares of common stock. The securities were sold at a combined purchase price of $0.50 per share of common stock and related warrants, for aggregate gross proceeds to the Company of approximately $6.0 million. In 2018, the Company repaid one 2018 Short-term

 

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Convertible Note, including accrued interest in the aggregate of approximately $259,000. During the years ended May 31, 2020, May 31, 2019 and May 31, 2018, the Company recognized approximately $-0-, $-0- and $75,000, of interest expense related to the note.

Activity related to the 2018 Short-term Convertible Notes was as follows:

 

     2018  

Face amount of Short-term Convertible Notes

   $ 6,038,500  

Unamortized discount

     —    

Registered direct offering

     (5,788,500

Note repayment

     (250,000
  

 

 

 

Carrying value of Short-term Convertible Notes

   $ —  
  

 

 

 

2019 Short-term Convertible Notes

During the year ended May 31, 2019, the Company issued approximately $5.5 million of nine-month unsecured Convertible Notes (the “2019 Short-term Convertible Notes”) and related warrants to investors for cash. The principal amount of the 2019 Short-term Convertible Notes, including any accrued but unpaid interest thereon, is convertible at the election of the holder at any time into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. The 2019 Short-term Convertible Notes bear simple interest at the annual rate of 10%. Principal and accrued interest, to the extent not previously paid or converted, is due and payable on the maturity date. At the commitment dates, the Company determined that the conversion feature related to these 2019 Short-term Convertible Notes to be beneficial to the investors. As a result, the Company determined the intrinsic value of the beneficial conversion feature utilizing the fair value of the underlying common stock on the commitment dates and the effective conversion price after discounting the 2019 Short-term Convertible Notes for the fair value of the related warrants. In connection with the sale of the 2019 short-term Notes, detachable common stock warrants to purchase a total of 5,460,000 common shares, with an exercise price of $0.30 per share and a five-year term were issued to the investors. The Company determined the fair value of the warrants at issuance using the Black-Scholes option pricing model utilizing certain weighted average assumptions, such as expected stock price volatility, expected term of the warrants, risk-free interest rates and expected dividend yield at the grant date.

 

     2018 - 2019

Expected dividend yield

   0%

Stock price volatility

   55.8 - 55.88%

Expected term

   5 year

Risk-free interest rate

   2.48 - 2.56%

Grant-date fair value

   $0.30 - $0.38

The fair value of the warrants, coupled with the beneficial conversion features, were recorded as a debt discount to the 2019 Short-term Convertible Notes and a corresponding increase to additional paid-in capital and will be amortized over the life of the 2019 Short-term Convertible Notes. In connection with the 2019 Short-term Convertible Notes, the placement agent earned a “tail fee” comprised of warrants covering 972,000 shares of common stock and a cash fee of $583,200. The placement agent warrants are exercisable at a price of $0.50 per share and will expire five years from the date of issuance and include a cashless exercise provision. During the year ended May 31, 2019, and in connection with the 2019 Short-term Convertible Notes, the Company incurred debt discount and issuance costs of approximately $3.0 million, related to the beneficial conversion feature and detachable warrants issued with the 2019 Short-term Convertible Notes and approximately $0.8 in issuance costs. The debt discount and issuance costs will be amortized over the term of the 2019 Short-term Convertible Notes. Accordingly, the Company recognized approximately $1.7 million and $0.5 million of debt discount and issuance costs, respectively, during the year ended May 31, 2019.

 

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Beginning on September 30, 2019 and through November 14, 2019, principal and interest totaling approximately $5.9 million came due. Holders of notes totaling approximately $1.1 million in principal and accrued interest agreed to extend their notes for another three months, and holders of notes totaling approximately $4.1 million in principal and accrued interest agreed to extend their notes for another six months. One note-holder with principal and accrued interest totaling approximately $0.2 million converted to shares of common stock of the Company.

During the quarter ended November 30, 2019, a total of approximately $0.7 million of principal and accrued interest was repaid in cash. In addition, detachable stock warrants to purchase a total of 4,750,000 warrants with a five-year term and an exercise price of $0.30 per share were issued to investors who extended their notes. One investor received 200,000 warrants with a five-year term and an exercise price of $0.45 per share for converting the entire principal and accrued interest on its note. In connection with the note extensions and conversion, the Company recorded a non-cash inducement interest expense of approximately $0.3 million during the quarter ended November 30, 2019. The new principal amount of the 2019 Short-term Convertible Notes, including any accrued but unpaid interest thereon, is convertible at the election of the holder at any time into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. The 2019 Short-term Convertible Notes bear simple interest at the annual rate of 10%. Principal and accrued interest, to the extent not previously paid or converted, is due and payable on the maturity date. At the new commitment dates, the Company determined that there was a decrease in the fair value of the embedded conversion option resulting from the modification, the value of which is not required to be recognized under U.S. GAAP.

On December 31, 2019, the holder of a 2019 Short-term Convertible Note in the aggregate principal amount of $549,912, including accrued but unpaid interest, tendered a notice of conversion at the stated conversion rate of $0.50 per share. The Company issued 1,099,823 shares of common stock in satisfaction of the conversion notice.

On January 31, 2020, the holder of a 2019 Short-term Convertible Note in the aggregate principal amount of $512,063, including accrued but unpaid interest, tendered a notice of conversion at the stated conversion rate of $0.50 per share. The Company issued 1,025,205 shares of common stock in satisfaction of the conversion notice.

During April 2020, the holders of the remaining outstanding 2019 Short-term Convertible Note in the aggregate principal amount of $4,116,005, including accrued but unpaid interest, tendered notices of conversion at the stated conversion rate of $0.50. The Company issued 8,232,006 shares of common stock in satisfaction of the conversion notices.

Activity related to the 2019 Short-term Convertible Notes was as follows:

 

     May 31, 2020      May 31, 2019      May 31, 2018  

Face value of Short-term convertible Notes

   $ 5,460,000      $ 5,460,000      $ —  
  

 

 

       

Unamortized discount

     —          (1,469,625      —    

Unamortized issuance costs

     —          (404,340      —    

Accrued interest converted into principal

     153,876        —          —    

Note repayment

     (460,000      —          —    

Note conversions into common stock

     (5,153,876      —          —    
  

 

 

    

 

 

    

 

 

 

Carrying value of Short-term Convertible Notes

   $ —      $ 3,586,035      $ —  
  

 

 

    

 

 

    

 

 

 

The Company recognized approximately $444,000, $213,000, and $-0- of interest expense for the fiscal years ended May 31, 2020, May 31, 2019, and May 31, 2018, respectively.

Long-term Convertible Notes - June 2018 Note

On June 26, 2018, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory note (the “June 2018 Note”) with a two-year term to an institutional accredited

 

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investor in the initial principal amount of $5.7 million. The investor gave consideration of $5.0 million to the Company. The June 2018 Note bears interest of 10% and is convertible into common stock, at a conversion rate of $0.55 per share. The June 2018 Note provided for conversion in total, or in part, of the outstanding balance, into common stock of the Company at any time after six months from the issue date upon five trading days’ notice, subject to certain adjustments and ownership limitations specified in the June 2018 Note, and allowed for redemption, at any time after six months from the issue date upon five trading days’ notice, subject to a maximum monthly redemption amount of $350,000. The securities purchase agreement required the Company to reserve shares for future conversions or redemptions by dividing the outstanding principal balance plus accrued interest by the conversion price of $0.55 per share times 1.5. As a result of the entry into the January 2019 Note (as defined below), the Company’s obligations under the June 2018 Note were secured by all of the assets of the Company, excluding the Company’s intellectual property.

Effective November 15, 2018, the June 2018 Note was amended to allow the Investor to redeem the monthly redemption amount of $350,000 in cash or stock, at the lesser of (i) $0.55, or (ii) the lowest closing bid price of the Company’s common stock during the 20 days prior to the conversion, multiplied by a conversion factor of 85%. The variable rate redemption provision meets the definition of a derivative instrument and subsequent to the amendment, it no longer meets the criteria to be considered indexed to the Company’s own stock. As of November 15, 2018, the redemption provision requires bifurcation as a derivative liability at fair value under the guidance in ASC Topic No. 815, “Derivatives and Hedging.”

The amendment of the June 2018 Note was also evaluated under ASC Topic 470-50-40, “Debt Modifications and Extinguishments.” Based on the guidance, the instruments were determined to be substantially different, and debt extinguishment accounting was applied. We recorded approximately $1.5 million as an extinguishment loss, which was the difference in the net carrying value of the June 2018 Note prior to the amendment of approximately $5.4 million, and the fair value of the June 2018 Note and embedded derivatives after the amendment of approximately $6.9 million. The extinguishment loss includes a write-off of unamortized debt issuance costs and the debt discount associated with the original the June 2018 Note.

During the twelve months ended May 31, 2020 and May 31, 2019, the Company recognized approximately $383,000 and $386,000, of interest expense related to the June 2018 Note. During the twelve months ended May 31, 2019, the Company received redemption notices from the holder of the Company’s June 2018 Note, requesting an aggregate redemption of $1,455,000 of the outstanding balance thereof. In satisfaction of the redemption notices, the Company issued shares of common stock totaling 3,756,406 to the June 2018 Note holder in accordance with the terms of the June 2018 Note. During the year ended May 31, 2020, the Company received a redemption notice requesting an aggregate redemption of $4,476,000 settling the remaining outstanding balance in full, including accrued but unpaid interest. In satisfaction of the redemption notice, the Company issued shares of common stock totaling 8,512,622 and paid cash totaling $525,000 to the June 2018 Note holder in accordance with the terms of the June 2018 Note. Following the redemptions, the June 2018 Note has been fully satisfied and there is no outstanding balance.

Long-term Convertible Notes - January 2019 Note

On January 30, 2019, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory note (the “January 2019 Note”) with a two-year term to the holder of the June 2018 Note in the initial principal amount of $5.7 million. In connection with the issuance of the January 2019 Note, the Company granted a lien against all of the assets of the Company, excluding the Company’s intellectual property, to secure all obligations owed to the investor by the Company (including those under both the January 2019 Note and the June 2018 Note). The investor gave consideration of $5.0 million to the Company, reflecting original issue discount of $0.6 million and issuance costs of $0.1 million. The January 2019 Note bears interest of 10% and is convertible into common stock, at $0.50 per share. The January 2019 Note provided for conversion in total, or in part, of the outstanding balance, into common stock of the Company at any time upon five trading days’ notice, subject to certain adjustments and ownership limitations specified in the Note. The Company

 

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analyzed the conversion option for derivative accounting treatment under ASC 815 and determined that the embedded conversion option did not qualify for derivative accounting.

The January 2019 Note provided the investor may redeem any portion of the January 2019 Note upon five trading days’ notice, subject to a maximum monthly redemption amount of $350,000. The monthly redemption amount may be paid in cash or stock, at the Company’s election, at the lesser of (i) $0.50, or (ii) the lowest closing bid price of the Company’s common stock during the 20 days prior to the conversion, multiplied by a conversion factor of 85%. The redemption provision meets the definition of a derivative instrument and does not meet the criteria to be considered indexed to the Company’s own stock. Therefore, the redemption provision requires bifurcation as a derivative liability at fair value under the guidance in ASC Topic No. 815 (“ASC 815”). The securities purchase agreement requires the Company to reserve 20,000,000 shares for future conversions or redemptions.

In conjunction with the January 2019 Note, the investor received a warrant to purchase 5,000,000 shares of common stock with an exercise price of $0.30 which is exercisable until the 5-year anniversary of the date of issuance. The warrant achieved equity classification at inception. The net proceeds of $5.0 million were allocated first to the redemption provision at its fair value, then to the warrants at their relative fair value and the beneficial conversion feature at its intrinsic value as follows:

 

     January 30, 2019  

Fair value of redemption provision

   $ 1,465,008  

Relative fair value of equity classified warrants

     858,353  

Beneficial conversion feature

     2,676,639  
  

 

 

 

Net proceeds of January 2019 Note

   $ 5,000,000  
  

 

 

 

Under the guidance of ASC 815, after allocation of proceeds to the redemption provision, relative fair value of equity classified warrants and the beneficial conversion feature, there were no proceeds remaining to allocate to convertible note payable. Therefore, principal, accrued interest, debt discount and offering costs will be recognized as interest expense, which represents the accretion of the convertible note payable and related debt discount and issuance costs. During the years ended May 31, 2020 and May 31, 2019, the Company recognized approximately $6,145,000 and $126,000, respectively, of interest expense related to the January 2019 Note. Interest expense recorded during the year ended May 31, 2020 included approximately $5,760,000 representing accretion of the remaining unamortized discount on the Note which was recognized immediately upon conversion of the debt in accordance with ASC 470-20-40-1. During the year ended May 31, 2020, the Company received a redemption notice from the holder of the Company’s January 2019 Note, requesting an aggregate redemption of approximately $6,271,000 settling the remaining outstanding balance in full, including accrued interest. In satisfaction of the redemption notice, the Company issued shares of common stock totaling 10,842,255 and paid cash totaling $850,000 to the January 2019 Note holder in accordance with the terms of the January 2019 Note. Following the redemption, the January 2019 Note has been fully satisfied and there is no outstanding balance.

 

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Activity related to the June 2018 Note and the January 2019 Note is as follows:

 

     Short Term      Long Term      Total  

June 2018 Note

   $ 2,100,000      $ 3,600,000      $ 5,700,000  

Monthly redemption provision

     2,100,000        (2,100,000      —    

Note amendment, net

     —          111,410        111,410  

Redemptions

     —          (1,455,00      (1,455,00

Interest accretion - June 2018 and January 2019 Notes

     —          298,158        298,158  
  

 

 

    

 

 

    

 

 

 

Carrying value of Notes at May 31,

     4,200,00        454,568        4,654,568  

Redemptions

     (10,688,640      (56,597      (10,745,237

Interest accretion - June 2018

     6,488,640        38,838        6,527,478  

Extinguishment of note

     —          (436,809      (436,809
  

 

 

    

 

 

    

 

 

 

Carrying value of Notes at May 31, 2020

   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

 

March 31, 2020 Convertible Promissory Note

On March 31, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a secured convertible promissory note with a two-year maturity to an institutional accredited investor in the initial principal amount of $17.1 million. The Company received consideration of $15.0 million, reflecting an original issue discount of $2.1 million. The Note is secured by all of the assets of the Company, excluding the Company’s intellectual property.

Interest accrues on the outstanding balance of the Note at 10% per annum. Upon the occurrence of an Event of Default, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. In addition, upon any Event of Default, the Investor may accelerate the outstanding balance payable under the Note, which will increase automatically upon such acceleration by 15%, 10% or 5%, depending on the nature of the Event of Default.

The Investor may convert all or any part the outstanding balance of the Note into shares of Common Stock at an initial conversion price of $4.50 per share upon five trading days’ notice, subject to certain adjustments and volume and ownership limitations specified in the Note. On April 3, 2020, the Company amended the Note limiting monthly issuances of Common Stock resulting from conversions to 1,000,000 shares in any calendar month during the first six months (“April 3, 2020 Conversion Limitation Amendment”), and further amended the Note to remove this conversion limitation in July 2020. In addition to standard anti-dilution adjustments, the conversion price of the Note is subject to full-ratchet anti-dilution protection, pursuant to which the conversion price will be automatically reduced to equal the effective price per share in any new offering by the Company of equity securities that have registration rights, are registered or become registered under the Securities Act of 1933, as amended. The Note provides for liquidated damages upon failure to deliver Common Stock within specified timeframes.

The Investor may redeem any portion of the Note, at any time after six months from the issue date, upon three trading days’ notice, subject to a Maximum Monthly Redemption Amount of $950,000. The Note requires the Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the Note, in part or in full, at a 15% premium to par value, at any time upon fifteen trading days’ notice.

Investor may sell Conversion Shares pursuant to a registration statement prior to the date that is six (6) months from the issue date and will be limited to 1,000,000 shares per calendar month (the “Volume Limitation”);

 

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provided, however, in the event any intra-day trading price of the Common Stock during the applicable time period meets or exceeds $4.50 per share then the Volume Limitation shall not apply for the remainder of the calendar month or the five trading days thereafter, whichever is longer.

Pursuant to the terms of the Agreement and the Note, the Company must obtain the Investor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $15 million. Upon any such approval, the outstanding principal balance of the Notes shall increase automatically by 5% upon the issuance of such additional debt.

The Company agreed to use commercially reasonable efforts to file a Registration Statement on Form S-3 with the SEC by April 30, 2020 registering a number of shares of Common Stock sufficient to convert the entire Outstanding Balance of the Note plus, if legally permissible, 1,666,668 shares of Common Stock from Investor’s February 12, 2020 warrant exercise plus 833,332 shares of Common Stock from Investor’s February 4, 2020 warrant exercise, which S-3 was declared effective on May 11, 2020.

The embedded conversion feature in the secured convertible promissory Note was analyzed under ASC 815 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 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. We reconsider the value of the default put provisions each reporting period to determine if the value becomes material to the financial statements.

The original issue discount of $2.1 million related to these convertible notes has been recorded as a discount on the convertible notes and the discount is being amortized over the term of the convertible note. Amortization of debt discounts during the year ended May 31, 2020 amounted to $175,000 and are recorded as interest expense in the accompanying consolidated statements of operations. The unamortized discount balance for the Note of $1,925,000 as of May 31, 2020, is being amortized over the term of the Note.

Note 6 – Derivative Liabilities

The investor and placement agent warrants issued in connection with a registered direct offering in September 2016 contained a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer or share exchange, whereby such other Person or group acquires more than 50% of the