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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended February 28, 2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1933

For the transition period from                  to                 

Commission File Number: 000-49908

CYTODYN INC.

(Exact name of registrant as specified in its charter)

Delaware

83-1887078

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer or

Identification No.)

 

 

1111 Main Street, Suite 660

Vancouver, Washington

98660

(Address of principal executive offices)

(Zip Code)

(360980-8524

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Title of Each Class 

    

Trading
Symbol(s)

    

Name of Each Exchange
on Which Registered

None.

None.

None.

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

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

Large Accelerated Filer

Accelerated Filer

 

 

 

 

Non-accelerated Filer

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

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

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

On March 31, 2021, there were 612,875,224 shares outstanding of the registrant’s $0.001 par value common stock.

Table of Contents

TABLE OF CONTENTS

PAGE

PART I

3

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

3

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

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

49

ITEM 4. CONTROLS AND PROCEDURES

50

PART II

51

ITEM 1. LEGAL PROCEEDINGS

51

ITEM 1A. RISK FACTORS

51

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

53

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

53

ITEM 4. MINE SAFETY DISCLOSURES

54

ITEM 5. OTHER INFORMATION

54

ITEM 6. EXHIBITS

55

2

Table of Contents

PART I. Financial Information

Item 1. Consolidated Financial Statements

CytoDyn Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share data)

    

February 28, 2021

    

May 31, 2020

(unaudited)

(audited)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash

$

14,291

$

14,282

Restricted cash

 

 

10

Inventories

 

93,537

 

19,147

Prepaid expenses

 

1,208

 

498

Prepaid service fees

 

1,819

 

2,890

Total current assets

 

110,855

 

36,827

Operating leases right-of-use asset

 

760

 

176

Property and equipment, net

 

124

 

55

Intangibles, net

 

1,915

 

13,456

Total assets

$

113,654

$

50,514

Liabilities and Stockholders’ (Deficit) Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

72,509

$

29,479

Accrued liabilities and compensation

 

13,575

 

6,879

Accrued interest on convertible notes

 

2,391

 

292

Accrued dividends on convertible preferred stock

 

2,227

 

981

Operating leases payable

 

183

 

115

Convertible notes payable, net

 

37,976

 

6,745

Warrant exercise proceeds held in trust

 

 

10

Total current liabilities

 

128,861

 

44,501

Long-term liabilities:

 

  

 

  

Convertible notes payable, net

 

 

8,431

Operating leases liability

 

588

 

63

Total long-term liabilities

 

588

 

8,494

Total liabilities

 

129,449

 

52,995

Commitments and Contingencies (Note 10)

 

  

 

  

Stockholders’ (Deficit) Equity

 

  

 

  

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

 

  

 

  

Series D convertible preferred stock, $0.001 par value; 12 authorized; 9 issued and outstanding at February 28, 2021 and May 31, 2020, respectively

 

 

Series C convertible preferred stock, $0.001 par value; 8 authorized; 8 issued and outstanding at February 28, 2021 and May 31, 2020, respectively

 

 

Series B convertible preferred stock, $0.001 par value; 400 shares authorized, 79 and 92 shares issued and outstanding at February 28, 2021 and May 31, 2020, respectively

 

 

Common stock, $0.001 par value; 800,000 shares authorized, 609,420 and 519,261 issued and 608,978 and 518,975 outstanding at February 28, 2021 and May 31, 2020, respectively

 

609

 

519

Additional paid-in capital

 

449,579

 

351,711

Accumulated (deficit)

 

(465,983)

 

(354,711)

Less: Treasury stock, $0.001 par value (442 and 286 shares at February 28, 2021 and May 31, 2020, respectively)

 

 

Total stockholders’ (deficit) equity

 

(15,795)

 

(2,481)

Total liabilities and stockholders' (deficit) equity

$

113,654

$

50,514

See accompanying notes to consolidated financial statements.

3

Table of Contents

CytoDyn Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

    

Three Months Ended

Nine Months Ended

February 28,

February 29,

February 28,

February 29,

    

2021

    

2020

    

2021

    

2020

    

Operating expenses:

 

  

 

  

 

  

 

  

 

General and administrative

$

7,902

$

6,465

$

25,328

$

12,605

Research and development

 

12,323

 

15,109

 

44,061

 

32,691

Amortization and depreciation

 

511

 

501

 

1,522

 

1,532

Intangible asset impairment charge

10,049

 

 

10,049

 

Total operating expenses

 

30,785

 

22,075

 

80,960

 

46,828

Operating loss

 

(30,785)

 

(22,075)

 

(80,960)

 

(46,828)

Other income

 

500

500

Interest income

 

1

3

2

5

Change in fair value of derivative liabilities

 

 

(2,934)

 

 

(2,105)

Loss on extinguishment of convertible notes

 

(7,625)

(11,794)

Interest expense:

 

  

 

  

 

  

 

  

Finance charges

 

(2)

 

(61)

 

(140)

 

(1,619)

Amortization of discount on convertible notes

 

(157)

 

 

(2,739)

 

(1,470)

Amortization of debt issuance costs

 

(21)

 

 

(40)

 

(404)

Inducement interest expense

 

(4,139)

 

(5,163)

 

(11,242)

 

(7,876)

Interest on convertible notes payable

 

(1,257)

 

(6,038)

 

(2,870)

 

(6,995)

Total interest expense

 

(5,576)

 

(11,262)

 

(17,031)

 

(18,364)

Loss before income taxes

 

(43,985)

 

(35,768)

 

(109,783)

 

(66,792)

Income tax benefit

 

 

 

 

Net loss

$

(43,985)

$

(35,768)

$

(109,783)

$

(66,792)

Basic and diluted loss per share

$

(0.08)

$

(0.08)

$

(0.18)

$

(0.17)

Basic and diluted weighted average common shares outstanding

 

577,854

 

432,112

 

595,226

 

396,641

See accompanying notes to consolidated financial statements.

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CytoDyn Inc.

Consolidated Statement of Changes in Stockholders’ (Deficit) Equity

(Unaudited)

(In thousands, expect per share data)

Preferred Stock

Common Stock

Treasury Stock

    

Additional

    

Accumulated

    

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

Paid-In Capital 

Deficit

Total

Balance May 31, 2019

95

$

329,554

$

330

159

$

$

220,120

$

(229,364)

$

(8,914)

First Quarter Fiscal Year Ended May 31, 2020

Issuance of stock for convertible note repayment

 

3,014

 

3

 

 

1,002

 

 

1,005

Proceeds from registered direct offering ($0.50 per share)

 

5,640

 

6

 

 

2,250

 

 

2,256

Offering costs related to registered direct offering

 

 

 

 

(260)

 

 

(260)

Proceeds from public warrant tender offers

 

45,376

 

45

 

 

11,855

 

 

11,900

Offering costs related to public warrant tender offers

 

 

 

 

(1,058)

 

 

(1,058)

Inducement interest expense - tender offers and debt conversions

 

 

 

 

2,430

 

 

2,430

Proceeds from Series C preferred stock offering

2

 

 

 

 

1,754

 

 

1,754

Offering costs related to Series C preferred stock offering

 

 

 

 

(198)

 

 

(198)

Dividends on Series C preferred stock

 

 

 

 

 

(110)

 

(110)

Legal fees in connection with equity offerings

 

 

 

 

(16)

 

 

(16)

Stock-based compensation

 

 

 

 

581

 

 

581

Net Loss August 31, 2019

 

 

 

 

 

(16,164)

 

(16,164)

Balance August 31, 2019

97

$

383,584

$

384

159

$

$

238,460

$

(245,638)

$

(6,794)

Second Quarter Fiscal Year Ended May 31, 2020

Issuance of stock for convertible note repayment

 

2,270

 

2

 

 

738

 

 

740

Note conversion and extension fees

 

 

 

 

(217)

 

 

(217)

Proceeds from registered direct offering ($0.50 per share)

 

13,461

 

13

 

 

4,396

 

 

4,409

Offering costs related to registered direct offering

 

 

 

 

(74)

 

 

(74)

Inducement interest expense - debt conversion

 

 

 

 

283

 

 

283

Proceeds from Series C preferred stock offering

3

 

 

 

 

2,788

 

 

2,788

Offering costs related to Series C preferred stock offering

 

 

 

 

(182)

 

 

(182)

Exercise of option to repurchase common stock

 

 

 

 

(8)

 

 

(8)

Dividends on Series C preferred stock

 

 

 

 

 

(151)

 

(151)

Stock-based compensation

 

 

 

 

434

 

 

434

Net Loss November 30, 2019

 

 

 

 

 

(14,860)

 

(14,860)

Balance November 30, 2019

100

$

399,315

$

399

159

$

$

246,618

$

(260,649)

$

(13,632)

Third Quarter Fiscal Year Ended May 31, 2020

Issuance of stock for convertible note repayment

 

17,683

 

18

 

 

9,059

 

 

9,077

Proceeds from registered direct offering ($0.50 per share)

 

19,756

 

20

 

 

5,981

 

 

6,001

Offering costs related to registered direct offering

 

 

 

 

(44)

 

 

(44)

Proceeds from warrant exercises

10,716

11

5,417

5,428

Relative fair market value associated with warrants exercised

2,404

2,404

Proceeds from private warrant exchange

20,441

20

5,965

5,985

Offering costs related to private warrant exchange

(197)

(197)

Inducement interest expense - private warrant exchange

5,163

5,163

Proceeds from Series C preferred stock offering

 

 

 

 

415

 

 

415

Offering costs related to Series C preferred stock offering

 

 

 

 

(53)

 

 

(53)

Dividends on Series C preferred stock

 

 

 

 

 

(204)

 

(204)

Proceeds from Series D Preferred offering

8

 

7,570

 

 

7,570

Offering costs related to Series D Preferred offering

(5)

(5)

Dividends on Series D Preferred shares

(62)

(62)

Stock issued for services

2,620

3

(3)

Stock issued for bonuses and tendered for income tax

380

127

154

154

Exercise of stock options

181

54

54

Stock-based compensation

 

 

 

3,331

3,331

Net Loss February 29, 2020

 

 

 

 

 

(35,768)

 

(35,768)

Balance February 29, 2020

108

$

471,092

$

471

286

$

$

291,829

$

(296,683)

$

(4,383)

See accompanying notes to consolidated financial statements.

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CytoDyn Inc.

Consolidated Statement of Changes in Stockholders’ (Deficit) Equity

(Unaudited)

(In thousands, except per share data)

Preferred Stock

Common Stock

Treasury Stock

    

Additional

    

Accumulated

    

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

Paid-In Capital 

Deficit

Total

Balance May 31, 2020

109

$

519,261

$

519

286

$

$

351,711

$

(354,711)

$

(2,481)

First Quarter Fiscal Year Ended May 31, 2021

Issuance of stock for convertible note repayment

2,119

2

 

9,535

 

 

9,537

Issuance of legal settlement shares

4,000

4

 

(4)

 

 

Exercise of stock options

100

 

39

 

 

39

Stock issued for incentive compensation and tendered for income tax

323

156

 

828

 

 

828

Conversion of Series B preferred stock to common stock

(5)

50

 

 

 

Private warrant exchange

16,544

17

 

7,787

 

 

7,804

Exercise of warrants

27,928

28

 

13,441

 

 

13,469

Inducement interest expense related to private warrant exchange

 

3,345

 

 

3,345

Offering costs related to private warrant exchange

 

(364)

 

 

(364)

Dividend declared and paid on Series B preferred stock ($0.25 per share)

 

 

(243)

 

(243)

Dividends accrued on preferred stock

 

 

(420)

 

(420)

Stock-based compensation

 

2,086

 

 

2,086

Net Loss August 31, 2020

 

 

(30,832)

 

(30,832)

Balance August 31, 2020

104

$

570,325

$

570

442

$

$

388,404

$

(386,206)

$

2,768

Second Quarter Fiscal Year Ended May 31, 2021

Issuance of stock for convertible note repayment

4,293

4

 

11,549

 

 

11,553

Exercise of stock options

10

 

10

 

 

10

Stock issued for private offering ($1.50 per share)

667

1

 

999

 

 

1,000

Private warrant exchange

12,480

13

 

4,583

 

 

4,596

Exercise of warrants

2,504

2

 

1,737

 

 

1,739

Inducement interest expense related to private warrant exchange

 

3,758

 

 

3,758

Dividends accrued on preferred stock

 

 

(415)

 

(415)

Stock-based compensation

 

3,423

 

 

3,423

Net Loss November 30, 2020

 

 

(34,966)

 

(34,966)

Balance November 30, 2020

104

$

590,279

$

590

442

$

$

414,463

$

(421,587)

$

(6,534)

Third Quarter Fiscal Year Ended May 31, 2021

Issuance of stock for convertible note repayment

4,013

4

 

20,500

 

 

20,504

Exercise of stock options

2,471

2

 

1,778

 

 

1,780

Conversion of Series B convertible preferred stock to common stock

(8)

80

 

 

 

Private warrant exchange

5,939

6

 

3,461

 

 

3,467

Exercise of warrants

6,638

7

 

3,432

 

 

3,439

Inducement interest expense related to private warrant exchange

 

4,139

 

 

4,139

Offering costs related to private warrant exchange

 

(131)

 

 

(131)

Dividends accrued on preferred stock

 

 

(411)

 

(411)

Stock-based compensation

 

1,937

 

 

1,937

Net Loss February 28, 2021

 

 

(43,985)

 

(43,985)

Balance February 28, 2021

96

$

609,420

$

609

442

$

$

449,579

$

(465,983)

$

(15,795)

See accompanying notes to consolidated financial statements.

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CytoDyn Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Nine Months Ended

February 28,

February 29,

    

2021

    

2020

    

Cash flows from operating activities:

 

  

 

  

 

Net loss

$

(109,783)

$

(66,792)

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

 

  

 

  

Amortization and depreciation

 

1,522

 

1,532

Amortization of debt issuance costs

 

40

 

404

Amortization of discount on convertible notes

 

2,739

 

1,470

Inducement interest expense

 

11,242

 

7,876

Interest expense associated with accretion of convertible notes payable

 

 

6,615

Change in fair value of derivative liabilities

 

 

2,105

Stock-based compensation

 

9,053

 

4,346

Loss on extinguishment of convertible notes

 

11,794

 

Intangible asset impairment charge

 

10,049

 

Changes in operating assets and liabilities:

 

 

  

(Increase) in inventories

 

(74,391)

 

(15,896)

Decrease (increase) in prepaid expenses

362

165

Increase in accounts payable and accrued expenses

 

52,606

 

18,683

Net cash used in operating activities

 

(84,767)

 

(39,492)

Cash flows from investing activities:

 

  

 

  

Furniture and equipment purchases

 

(100)

 

(38)

Net cash used in investing activities

 

(100)

 

(38)

Cash flows from financing activities:

 

  

 

  

Proceeds from warrant transactions, net of offering costs

15,371

Proceeds from sale of common stock and warrants

 

1,000

 

12,666

Proceeds from exercise of warrants

 

18,647

 

23,313

Proceeds from sale of preferred stock, net of offering costs

 

 

12,527

Principal paid on maturity of short-term convertible notes

 

 

(460)

Payment on convertible notes

 

(950)

 

(1,725)

Exercise of option to repurchase shares held in escrow

 

 

(8)

Release of funds held in trust for warrant tender offer

 

(10)

 

(854)

Proceeds from exercise of stock options

1,829

54

Payment of payroll withholdings related to tender of common stock for income tax withholding

(778)

(89)

Proceeds from convertible notes payable, net

 

50,000

 

Payment of conversion offering costs

 

 

(2,303)

Dividend declared and paid on Series B preferred stock

(243)

Net cash provided by financing activities

 

84,866

 

43,121

Net change in cash

 

(1)

 

3,591

Cash, beginning of period

 

14,292

 

3,466

Cash, end of period

$

14,291

$

7,057

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for interest

$

140

$

9

Non-cash investing and financing transactions:

 

  

 

  

Conversion of principal and interest of convertible notes to common stock

$

29,800

$

10,976

Accrued dividends on convertible preferred stock

$

1,246

$

527

Derivative liability associated with warrants

$

$

2,404

Common stock issued for accrued bonus compensation

$

$

155

Common stock issued for services

$

$

3

See accompanying notes to consolidated financial statements.

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CYTODYN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 28, 2021

(UNAUDITED)

Note 1. Organization

CytoDyn Inc. (the “Company”) was originally incorporated under the laws of Colorado on May 2, 2002 under the name RexRay Corporation and, effective August 27, 2015, reincorporated under the laws of Delaware. The Company is a late-stage biotechnology company 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, immunology, and novel coronavirus disease (“COVID-19”).

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 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 expanded its clinical focus to include evaluating leronlimab’s effectiveness in multiple other autoimmune indications where CCR5 antagonism has shown initial promise, as well as COVID-19. The Company targets leronlimab treatment as a therapy for patients who experience respiratory complications from 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

Basis of Presentation

The accompanying consolidated interim financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments, which consist solely of typical recurring adjustments, needed to fairly present the financial results of the periods presented. The consolidated financial statements and notes thereto are presented as prescribed by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended May 31, 2020 and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020, filed with the Securities and Exchange Commission on August 14, 2020. Operating results for the three and nine months ended February 28, 2021 are not necessarily indicative of the results that may be expected for the entire year. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine months ended February 28, 2021 and February 29, 2020, (b) the financial position at February 28, 2021 and May 31, 2020 and (c) cash flows for the nine month periods ended February 28, 2021 and February 29, 2020.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, CytoDyn Operations Inc. and Advanced Genetic Technologies, Inc. (“AGTI”), of which AGTI is a dormant entity. All intercompany transactions and balances are eliminated in consolidation.

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Reclassifications

Certain prior year and prior quarter amounts shown in the accompanying consolidated financial statements have been reclassified to conform to the current period presentation. 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 loss per share.

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 approximately $44.0 million and $109.8 million for the three and nine months ended February 28, 2021, respectively, and has an accumulated deficit of approximately $466.0 million as of February 28, 2021. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to obtain additional operating capital, complete development of its product candidate, leronlimab, obtain approval to commercialize leronlimab from regulatory agencies, continue to outsource manufacturing of leronlimab, and ultimately achieve initial revenues and attain profitability. The Company continues to engage in significant research and development activities related to leronlimab for multiple indications and expects to incur significant research and development expenses in the future primarily related to its clinical trials. These research and development activities are subject to significant risks and uncertainties. The Company intends to finance its future development activities and its working capital needs 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 judgments that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of expenses during the reporting period. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the recent coronavirus disease could have on our significant accounting estimates and assumptions. The Company’s estimates are based on historical experience and on various market and other relevant, appropriate assumptions. Actual results could differ from these estimates.

Cash

Cash is maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. Balances in excess of federally insured limits at February 28, 2021 and May 31, 2020 approximated $14.0 million and $14.0 million, respectively.

Identified Intangible Assets

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 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. The Company recognized an impairment charge of approximately $10.0 million for the three and nine months ended February 28, 2021 and none for the three and nine months ended February 29, 2020. The value of the Company’s patents would be

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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. Contingent milestone payments that are due to third parties under research and development collaboration arrangements or other contractual agreements are expensed when the milestone conditions are probable and the amount of payment is reasonably estimable, see further discussion in Note 9 and 10.

Inventory

The Company values inventory at the lower of cost or net realizable value using the average cost method. Inventories consist of raw materials, bulk drug substance, and drug product in unlabeled vials to be used for commercialization of the Company’s biologic, leronlimab, which is in the regulatory approval process. The consumption of raw materials during production is classified as work-in-progress until saleable. Once it is determined to be in saleable condition following regulatory approval, inventory is classified as finished goods. Inventory is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory, 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 for pre-launch inventory, the Company relies on independent analyses provided by third parties knowledgeable of the range of likely commercial prices comparable to 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 future economic benefit in excess of capitalized costs. The material factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive Phase 3 clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and status of the Company’s regulatory 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.

Anticipated future sales, shelf lives, and expected approval date are considered when evaluating realizability of capitalized inventory. The shelf life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory, the Company considers the product stability data of all of the pre-approval inventory procured or produced to date to determine whether there is adequate shelf life.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued liabilities, and short-term and long-term debt. As of February 28, 2021, 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. Short-term and long-term debt are reported at amortized cost in the Consolidated Balance Sheets. The remaining financial instruments are reported in the Consolidated Balance Sheets at amounts that approximate current fair values.

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During the fiscal year ending May 31, 2020, the Company carried 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 the Consolidated Statement of Operations.

The fair value hierarchy specifies three levels of inputs that may be used to measure fair value 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 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 which 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 cannot be corroborated with observable market data.

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 February 28, 2021 and May 31, 2020. As of February 28, 2021, there were no assets or liabilities measured at fair value using Level 3 inputs; previous outstanding derivative warrants and related convertible debt had been converted prior to May 31, 2020 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. During the 2020 fiscal year, the Company used 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 were classified within Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation models.

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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 the year ended May 31, 2020 (in thousands):

Investor warrants issued with registered direct equity offering

    

$

4,360

Placement agent warrants issued with registered direct equity offering

 

819

Fair value adjustments

 

(3,855)

Balance at May 31, 2018

 

1,324

Inception date value of redemption provisions

 

2,750

Fair value adjustments—convertible notes

 

(745)

Fair value adjustments—warrants

 

(922)

Balance at May 31, 2019

2,407

Fair value adjustments—convertible notes

 

(2,005)

Fair value adjustments—warrants

 

11,547

Exercise of derivative warrants

 

(11,949)

Balance at May 31, 2020

$

Operating Leases

Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of operating leases payable and operating leases liabilities in the 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), when designated milestones have been achieved or when pre-defined performance conditions are met.

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, when designated milestones have been achieved or when pre-defined performance conditions are met. 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. Periodically, the Company will issue restricted common stock to executives or third parties as compensation for services rendered. Such stock awards are valued at fair market value on the effective date of the Company’s obligation.

The Company periodically issues stock options or 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

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of issuance. The Company recognizes the compensation expense associated with the equity instruments over the requisite service or vesting period.

Debt

The Company has historically issued promissory notes at a discount and has incurred direct debt issuance costs. Debt discount and issuance costs are capitalized and amortized over the life of the convertible promissory note in accordance with ASC 470-35, <