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, 2019
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
CYTODYN INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1111 Main Street, Suite 660
Vancouver, Washington
(Address of principal executive offices)
83-1887078
(I.R.S. Employer
Identification No.)
98660
(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
None.
Trading
Symbol(s)
None.
Name of each exchange
on which registered
None.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, par value $0.001 per share
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
Non-accelerated filer
☐
☐
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 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 asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter: $144,497,302 as of November 30, 2018.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of June 30, 2019,
the registrant had 364,748,563 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders
Parts Into Which
Incorporated
Part III
CYTODYN INC.
FORM 10-K FOR THE YEAR ENDED MAY 31, 2019
Table of Contents
PART I
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
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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 focus 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. 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 our cash position and our ongoing ability to raise additional
capital to fund our operations, (ii) our ability to complete the filing of a Biologics License Application (“BLA”) with the U.S. Food and Drug
Administration (“FDA”) for leronlimab (PRO 140), as a combination therapy for the Human Immunodeficiency Virus (“HIV”), (iii) our ability to meet our
debt obligations, if any, (iv) our ability to identify patients to enroll in our clinical trials in a timely fashion, (v) our ability to achieve approval of a
marketable product, (vi) design, implementation and conduct of clinical trials, (vii) the results of our clinical trials, including the possibility of unfavorable
clinical trial results for any clinical indication, (viii) the market for, and marketability of, any product that is approved, (ix) our ability to enter into
partnership or licensing arrangements with third parties, (x) the existence or development of vaccines, drugs, or other treatments for infection with HIV that
are viewed by medical professionals or patients as superior to our products, (xi) regulatory initiatives, compliance with governmental regulations and the
regulatory approval process, (xii) general economic and business conditions, (xiii) changes in foreign, political, and social conditions, (xiv) the specific
risk factors discussed under the heading “Risk Factors” below, and (xv) various other matters, many of which are beyond our 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 which may
cause actual results to differ from those expressed or implied by these forward-looking statements.
Item 1.
Business.
Overview/Corporate History
PART I
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 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.
Our current business strategy is to prioritize the completion our BLA filing for leronlimab as a combination therapy for highly treatment experienced
HIV patients, to advance our Phase 1b/2 clinical trial metastatic breast cancer, 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 concurrently to
explore other cancer and immunologic indications for leronlimab.
2
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.
Due to its selectivity and target-specific mechanism of action, leronlimab appears to allow chemokine binding (CCL3, CCL4) at therapeutic doses
and appears not to be an agonist of the CCR5 receptor (i.e., it does not appear to activate the immune function of the receptor). This apparent target
specificity differentiates leronlimab from other CCR5 antagonists. 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. As we progress in evaluating leronlimab via a pathways approach, we see an
opportunity to build a broad pipeline of indications through label expansion following initial approval for multi-drug resistant HIV.
The preclinical and clinical development of PRO 140 was led by Progenics Pharmaceuticals, Inc. (“Progenics”) through 2011. We acquired the asset
from Progenics in October 2012, as described in “PRO 140 Acquisition and Licensing Arrangements” below, and filed the non-clinical portion of our BLA
on March 18, 2019. The non-clinical portion constitutes the first of three sections of the BLA, and we are progressing forward with the preparation and
submission of the clinical and Chemistry, Manufacturing, and Controls (“CMC”) portions.
Leronlimab and Human Immunodeficiency Virus (“HIV”)
We believe the leronlimab antibody shows promise as a powerful anti-viral 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 no 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.
3
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;
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 four and a half 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. Subsequently, we entered into an exclusive
worldwide licensing agreement with IncellDX to sell non-commercial grade quantities of PA-14 or PRO 140 for use in the development and
commercialization of immunoassays for quantitative measurement of CCR5 levels on human cells.
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 since announced that we will begin multiple pre-clinical
studies on melanoma cancer, pancreatic, breast, prostate, colon, lung, liver, and stomach cancer. Pending the results of such studies, we could eventually
advance multiple Phase 2 clinical trials with leronlimab in the cancer arena. 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.
4
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 already 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.
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 important asset in 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.
5
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.
Current Clinical Trials
We will require a significant amount of additional capital to complete the preparation and submission of the remaining two sections of our BLA
filing and to complete our clinical trial programs for leronlimab. 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 2b Extension Study for HIV, as Monotherapy. Currently, there are four patients in this ongoing extension study and each has surpassed four
and one-half 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 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 recently 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.
Phase 1b/2 Trial for Triple-Negative Breast Cancer. We recently received clearance from the FDA for our IND submission to initiate a Phase 1b/2
clinical trial for metastatic triple-negative breast cancer patients. In May 2019, the FDA granted leronlimab Fast Track designation for use in combination
with carboplatin. We have identified five clinical trial sites and expect to dose the first patients during the third quarter of calendar 2019. 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. Up
to 48 patients are expected to be enrolled in this study. First patient dosing is expected in the third quarter of calendar 2019.
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”)
6
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.
Other Product Candidates
Except as otherwise disclosed above, until certain clinical trials for leronlimab have advanced further and the remaining two section of our BLA
filing are submitted, we do not plan to devote material resources towards the development, research, testing, approval or commercialization of other
product candidates.
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 an independent party as a contract manufacturer for PRO 140. Therefore, if this arrangement continues, an annual license fee of £300,000
(approximately US$365,000 given current exchange rate) would continue to apply, as well as a royalty, up to 2% of the net selling price upon
commercialization of PRO 140, excluding value added taxes and similar amounts.
Patents, Proprietary Technology and Data Exclusivity
Protection of our 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 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 that, absent patent term extension, patent
protection relating to the PRO 140 antibody itself will start to expire in 2023, certain methods of using PRO 140 for treatment of HIV-1 will start to expire
in 2026, certain formulations comprising 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.
7
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 generally 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 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 PRO 140 will be approved by FDA. Further, no other
applications referencing 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
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 28, 2019, is set forth below.
PRO 140 product candidate(2)
Prostate cancer diagnostics
Methods involving treatment of cancer metastasis and anti-CCR5 agents
Mouse model
Expiration
Dates(1)
Number of Patent
Applications
Number of Patents
U.S.
8
International
35
2018-2032
1
3
2032-2033
U.S.
12
2
3
1
International
26
12
1
(1)
(2)
Patent term extensions and pending patent applications may extend periods of patent protection.
PRO 140 patents and applications relate to HIV-1, GvHD, immunomodulation and cancer 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 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.
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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 (PRO 140) 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 (PRO 140) 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 (PRO 140). 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 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.
9
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 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 our Phase 1b/2 clinical trial metastatic breast cancer, continue
our 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.
10
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 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.
11
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.
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.
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 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 a suitable
CMO 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.
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.
12
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 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.
We have not submitted to the FDA for either 510(k) or a PMA or commenced clinical trials. Even if we conduct successful preclinical and clinical
studies and submit a 510(k) or PMA, the FDA may not permit commercialization of PCa Test for the desired indications, on a timely basis, or at all. Our
inability to achieve regulatory approval for PCa Test in the U.S. for the desired indication could materially adversely affect our ability to grow 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;
13
•
•
•
•
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.
Research and Development Costs
Our research and development expenses totaled approximately $42.5 million, $38.2 million and $20.2 million for the fiscal years ended May 31,
2019, May 31, 2018 and May 31, 2017, respectively. We expect our research and development expenses to continue to increase in future periods as the
activity within our clinical trials expands and our biologics manufacturing processes and related regulatory compliance activities increase.
Employees and Consultants
We currently have 10 full-time employees, as well as several independent consultants assisting us with our 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 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 and the filing of a BLA is underway. During the fiscal years
ended May 31, 2019 and 2018, we incurred net losses of approximately $56.2 million and $50.1 million, respectively, and at May 31, 2019, we had an
accumulated deficit of approximately $229.4 million and a stockholders’ deficit of $8.9 million. We expect to incur losses for the foreseeable future as we
continue development of, and seek regulatory approvals for, our drug candidate and commercialize any approved product usages. If our current drug
candidate fails to gain regulatory approval, or if it or other candidates we own 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.
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. 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 services of any member of our senior management team or the inability to hire and retain experienced management personnel
could harm our operating results.
In July 2019, Dr. Richard G. Pestell was terminated as our Chief Medical Officer. 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.
We expect to rely on third party manufacturers and will be dependent on their quality and effectiveness.
Our primary product candidate 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 and we cannot 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 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 that 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 that
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 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 four employees dedicated to 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
will be 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 filing for our leronlimab drug candidate or other products or commercialize any products that
are approved, which would have a material and adverse effect on our business, financial condition and stock price.
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 will need substantial additional funding to complete 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.
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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 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:
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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. 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:
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the costs of our ongoing clinical trial programs and pre-clinical studies, including our Phase1b/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:
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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;
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the time and costs involved to complete the remaining two sections of our BLA submission;
the time and costs involved in obtaining regulatory approvals;
whether our outstanding convertible notes are converted into equity or we receive additional cash upon the exercise of our outstanding
common stock warrants;
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 fail to raise additional funds on a timely basis we will need to scale back our business plans, which would adversely affect our business,
financial condition, and stock price, and 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 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.
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, if clinical trials for other indications are pursued at all.
The commencement and completion of clinical trials could be delayed or prevented by many factors, including, but not limited to:
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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 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 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
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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.
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 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.
Clinical trials may fail to demonstrate the desired safety and efficacy of our product candidate, 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. 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.
Our product candidate 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.
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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 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:
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severity of the disease under investigation;
design of the trial protocol;
size of the patient population;
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.
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 our product candidate 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 potential product liability claims. While leronlimab was 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:
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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 our product candidate and
could have a material adverse effect on our business and financial results.
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 that 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 that 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.
Although 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 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 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 PRO 140.
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 that 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.
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 our drug candidates, before an NDA or BLA can be filed with the FDA
for marketing approval of any of our drug candidates.
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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 our 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 any of our drug candidates 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. We have never submitted an NDA or BLA to the FDA or any
comparable applications to other regulatory authorities. If our development efforts for our drug candidates, including regulatory approval, are not
successful for our planned indications, or if adequate demand for our drug candidates is not generated, our business will be harmed.
Receipt of necessary regulatory approval is subject to a number of risks, including the following:
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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;
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 any of our drug candidates 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 that 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 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.
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Even if we obtain marketing approval for leronlimab, we must successfully commercialize it.
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.
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:
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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 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 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
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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. 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.
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 it.
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.
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:
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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
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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 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:
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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; 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.
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.
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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:
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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;
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.
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:
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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; 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 research and development programs that have substantially greater financial resources than we do. Our
competitors also have significantly greater experience in:
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developing drug and other product candidates;
undertaking preclinical testing and clinical trials;
building relationships with key customers and opinion-leading physicians;
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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 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 of the code with civil penalties. While we intend to ensure that 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 that 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-
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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.
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:
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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, 2019, our disclosure controls and procedures and
internal control over financial reporting were effective. Prior to the
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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.
Our board of directors may not be comprised of a majority of independent directors in the future. In the absence of a majority of independent
directors, our executive officers could establish policies and enter into transactions without independent review and approval thereof. If we are unable to
attract and retain qualified, independent directors, the management of the business could be compromised.
We currently do not have a majority of independent directors serving on our Board of Directors, which may afford less protection to our stockholders
than if our Board of Directors had a majority of independent directors, and our audit committee currently does not have a “financial expert” as
defined by applicable SEC requirements. If we are unable to attract and retain qualified, independent directors, the oversight of our business could be
compromised.
As of the date of this annual report, a majority of our directors did not satisfy the standards for independence as specified by the SEC and the listing
standards of The Nasdaq Stock Market (the “NASDAQ Rules”) pursuant to which we evaluate director independence. If our Board of Directors is not
made up of a majority of independent directors, there may be a lower level of oversight on executive management, and our Board of Directors 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 our Board of Directors may afford less protection to our stockholders than if our Board
of Directors were composed of a majority of independent directors.
A lack of independent directors may also make it difficult to create board committees meeting the requirements of our board committee charters and
the NASDAQ Rules pursuant to which we evaluate director independence. Historically, we have strived to have an audit committee comprised of at least
three independent directors and other board committees comprised solely of independent directors. Currently, our audit committee has only one member,
who is independent under the NASDAQ Rules and applicable SEC requirements, and our other board committees include certain non-independent
directors. Due to the lack of independent directors, it may be difficult to establish effective operating board committees comprised of independent
members to oversee committee functions. This structure gives our executive officers additional control over certain corporate governance issues, including
compensation matters and audit issues for internal control and reporting purposes, with more limited oversight of our executive officers’ decisions and
activities.
In addition, as previously reported in our Form 8-K filed August 14, 2019, the chairman of our audit committee resigned from the Board of
Directors effective August 12, 2019. As a result, as of the date of this annual report, our audit committee no longer had a “financial expert” as defined by
applicable SEC requirements. We are currently attempting to identify additional qualified individuals who are independent, and who have sufficient
experience in finance and accounting to satisfy the definition of an audit committee “financial expert.” Until we have done so, we may be unable to
establish or maintain effective internal control over financial reporting, oversee the relationship with our independent auditing firm, adequately assess the
impact on our financial reporting of any newly issued accounting rules or standards, adequately assess our processes relating to our risk and control
environment and evaluate our internal and independent audit processes. As a result, we may discover material weaknesses in our internal control over
financial reporting and/or disclosure controls and procedures, which we may not successfully remediate on a timely basis or at all. Any failure to remediate
any future material weaknesses, or to implement required new or improved controls, could cause us to fail to meet our reporting obligations or result in
material misstatements in our financial statements.
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. Thus, 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.
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 filed, respectively, as Exhibits 2.1, 10.13 and 10.19 to this
Form 10-K.
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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 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 that our actions 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:
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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.
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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.
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 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.
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 prevent such breaches or failures, our operations could be disrupted, or we may suffer financial damage or loss because of lost or
misappropriated information.
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 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.
30
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 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 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.
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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 test using our technologies are:
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•
•
•
•
•
•
not experimental or investigational;
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 that 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 that our prospective diagnostic test represents promising commercial opportunities, our tests may never gain significant
acceptance in the marketplace and therefore may never generate substantial 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;
33
•
•
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.
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, 2019. 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 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.
Since our inception, we have been insolvent and have required debt and equity financing to maintain operations.
Since our inception, we have not achieved cashflows from revenues sufficient to cover basic 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. For the foreseeable future, we will continue to rely upon debt and equity financing to maintain our operations and those of our
subsidiaries.
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, or the Tax Act, which significantly reforms the Internal Revenue Code
of 1986, as amended. The Tax Act, 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. We continue to
examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall
impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. The impact of this tax reform on holders of our
common stock is also uncertain and could be adverse. This periodic report does not discuss any such tax legislation or the manner in which it might affect
us or our stockholders in the future. We urge our stockholders to consult with their legal and tax advisors with respect to such legislation.
34
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 May 31, 2019, we have 14,501,872 shares subject to outstanding options under our stock
option plans, 10,374,144 shares reserved for future issuance under our equity compensation plan and 164,089,977 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.
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, 2017
through May 31, 2019, the market price of our common stock has fluctuated from a high of $0.79 per share in the quarter ended February 28, 2018, to a
low of $0.37 per share in quarter ending May 31, 2019. 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 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
35
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 outstanding options and warrants and under our equity incentive plan or other
compensation plans.
Our certificate of incorporation allows for our Board of Directors 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 of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Currently, our Board of Directors
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 of Directors 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.
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 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 of Directors 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
of Directors. 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:
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•
•
•
•
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 of
Directors 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 1,812 square feet in a commercial office
building pursuant to a lease that expires on April 30, 2021 at a current cost of $3,506 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.
None.
From time to time, we are involved in claims and suits that arise in the ordinary course of our business. 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.
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.
37
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:
Fiscal Year Ended May 31, 2019:
First quarter ended August 31, 2018
Second quarter ended November 30, 2018
Third quarter ended February 28, 2019
Fourth quarter ended May 31, 2019
Fiscal Year Ended May 31, 2018:
First quarter ended August 31, 2017
Second quarter ended November 30, 2017
Third quarter ended February 28, 2018
Fourth quarter ended May 31, 2018
High
Low
$0.71
$0.70
$0.62
$0.55
$0.79
$0.70
$0.84
$0.79
$0.40
$0.50
$0.46
$0.37
$0.56
$0.56
$0.52
$0.45
Holders
The number of record holders of our common stock on June 30, 2019 was approximately 860.
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, 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 3,246 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 2019 dividend in the form of common stock, approximately 510,469 shares of common stock would be
issued in the form of dividend. If such 2019 dividends were to be paid in the form of cash, such cash dividends would total approximately $255,000 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 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. As of June 30, 2019, if we declared a dividend and elected pay such
dividend in the form of common stock, approximately 391,000 shares of common stock would be issued in the form of dividend.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the year ended May 31, 2018 we purchased 159,011 shares of $0.001 par value treasury stock.
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.
Item 6. Selected Financial Data
Not applicable.
38
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, 2019, we commenced several initiatives to advance our lead product candidate, leronlimab (PRO 140).
The following is a brief summary of key accomplishments during the most recent fiscal year:
•
•
•
•
•
•
•
•
•
•
•
•
Raised approximately $57 million in capital through equity, convertible debt offerings and a warrant exchange offer;
Filed with the FDA the first of three sections of our first BLA, with the remaining two sections anticipated for completion;
Entered into a long-term commercial manufacturing agreement with Samsung BioLogics Co., Ltd. to ensure sufficient availability of cost
efficient inventory of leronlimab to meet expected demand post approval;
Filed a pivotal trial protocol with the FDA for leronlimab as a monotherapy for HIV patients;
Defined and initiated our new strategic focus by rapidly and concurrently exploring opportunities for several cancer and immunologic
indications for leronlimab;
Completed the asset acquisition of ProstaGene LLC via an all-stock transaction;
Initiated our first clinical trial in cancer for leronlimab, a Phase 1b/2 clinical trial for triple-negative breast cancer, which received Fast Track
designation from the FDA in May 2019;
Initiated pre-clinical studies with leronlimab for colon cancer and breast cancer, both of which have reported promising results;
Initiated a pre-clinical study with leronlimab to assess its ability to prevent the progression of Non-Alcoholic Fatty Liver Disease (NAFLD)
into NASH;
Continued exploratory discussions with third parties regarding licensing opportunities;
Presented results of our clinical trials and pre-clinical studies at numerous medical and scientific conferences; and
Collaborated with a scientific laboratory to develop a CCR5 receptor occupancy test for leronlimab, a CCR5 antagonist, which is anticipated
to provide improved patient screening for two indications: (i) patient candidates for leronlimab as a HIV monotherapy in order to achieve
optimal dosing and (ii) cancer patients, due to the over expression of CCR5 in certain forms of cancer.
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 four and one-half 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.
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 first of three sections was submitted to the FDA in March
2019. 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.
39
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 recently 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.
Cancer and Immunological Applications for Leronlimab
We are continuing to advance our exploration of opportunities for clinical applications for leronlimab involving the CCR5 receptor, other than
HIV-related treatments, such as cancer, inflammatory conditions and autoimmune diseases.
The target of leronlimab is the important G protein coupled receptor CCR5. CCR5 is more than the pathway to HIV replication; it is also a crucial
component of inflammatory responses and is a key mediator in many cancer metastasis. We believe this opens the potential for multiple pipeline
opportunities for leronlimab. CCR5 is a protein located on the surface of white blood cells and cancer epithelial cells that serves as a receptor for
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. We believe the mechanism of action of leronlimab has the potential to block the movement of T-cells to
inflammatory sites, which could be instrumental in diminishing or eliminating inflammatory responses. CCR5 is also expressed on the surface of epithelial
cells in certain cancers. Some disease processes that we believe could benefit from CCR5 blockade include many types of common cancers, GvHD (a
reaction occurring in some patients after bone marrow transplantation), autoimmunity and chronic inflammation, such as rheumatoid arthritis and
psoriasis. Recent published data has shown that the cancer cells within the tumor consist of two types of cells-one with CCR5 and others without them.
The published data clearly indicated that cancer cells that can metastasize express CCR5. Metastases are the cause of death in the vast majority of cancer
patients. A prior publication indicates that CCR5 antagonists can turn off certain calcium signaling and reduce the migration of CCR5 positive cancer
cells. Inhibition of CCR5 signaling blocks the guided migration and reduces the metastasis. Leronlimab has demonstrated (in an in-vitro study) that it also
turns off calcium signaling and blocks breast cancer cellular invasion. Furthermore, published studies showed current chemotherapy induces CCR5, and
CCR5 antagonists enhance the effectiveness of current chemotherapies, potentially allowing a reduction in chemotherapy, which may provide an improved
quality of life for patients.
Research has demonstrated three key properties of the CCR5’s MOA in cancer. The first is that the CCR5 receptor on cancer cells was responsible
for the migration and invasion of cells into the blood stream, which leads to metastasis of breast, prostate, and colon cancer. The second is that blocking
the CCR5 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 of metastasis.
Due to its MOA, we believe leronlimab may have significant advantages over other CCR5 antagonists. Prior studies have demonstrated that
leronlimab does not cause direct activation of T-cells. We have already reported encouraging human safety data for our clinical trials with leronlimab in
HIV-infected patients.
We also previously initiated our first clinical trial with leronlimab in an immunological indication – a Phase 2 clinical trial with leronlimab for
GvHD in patients with AML or MDS who are undergoing bone marrow stem cell transplantation. As noted below, enrollment under the amended protocol
for the GvHD trial has been delayed subject to increased capital resources. In addition, we also intend to explore potential strategic partnerships with
certain pharmaceutical companies, including for the development of follow-on technologies involving the use of leronlimab alongside their existing
products.
We will require a significant amount of additional capital to complete the foregoing clinical trials for HIV and complete our BLA submission, as
well as to advance our trials for triple-negative breast cancer, certain cancer indications and GvHD. See “Liquidity and Capital Resources” below.
40
Phase 1b/2 Trial for Triple-Negative Breast Cancer
We recently received clearance from the FDA for our IND submission to initiate a Phase 1b/2 clinical trial for metastatic triple-negative breast
cancer patients. In May 2019, the FDA granted leronlimab Fast Track designation for use in combination with carboplatin. We have identified five clinical
trial sites and expect to dose the first patients during the third quarter of calendar 2019. 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. Up to 48 patients are expected to be enrolled in this
study.
Pre-clinical Studies for Multiple Cancer Indications
We are initiating multiple pre-clinical studies with leronlimab for melanoma, pancreatic, breast, prostate colon, lung, liver and stomach cancers. An
ongoing pre-clinical study conducted by us recently reported that leronlimab reduces by more than 98% human breast cancer metastasis in a murine
xenograft model. Based upon these strong results, we filed for Orphan Drug Designation for its Phase 1b/2 triple negative breast cancer trial. In addition,
pre-clinical results in a colorectal cancer study are likewise encouraging.
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 acute myeloid leukemia (“AML”) or myelodysplastic
syndrome (“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.
Licensing Opportunities
We are currently evaluating strategic opportunities with respect to the assets acquired in our November 2018 acquisition of ProstaGene, including
potential licensing or other opportunities to monetize intellectual property assets relating to prostate cancer diagnostics. As an integral part of the
acquisition of ProstaGene, we acquired the PCa Test, which provides substantial additive discriminative value for predicting outcomes of patients
diagnosed with prostate cancer compared to the intermediate Gleason score, the current standard for prostate cancer diagnosis. The clinical objective is to
more precisely guide therapeutic options for men, thereby avoiding unnecessary surgery (prostatectomy) and radiation and/or chemotherapy with its
attendant side effects.
In addition, we continue to conduct exploratory discussions with third parties who have expressed an interest in a licensing arrangement for
leronlimab for HIV indications; such proposed arrangements are country or region specific.
41
Results of operations for the year ended May 31, 2019, 2018 and 2017, are as follows:
For the years ended May 31, 2019, May 31, 2018 and 2017, 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, 2019, 2018 and 2017.
2019
Percentage of Total Net Loss
Years Ended May 31,
2018
2017
Operating expenses:
General and administrative
Research and development
Amortization and depreciation
Total operating expenses
Operating loss
Other income (expense):
Interest income
Loss on extinguishment of convertible notes
Change in fair value of derivative liability
Interest expense:
Amortization of discount on convertible notes
Amortization of debt issuance costs
Interest related to derivative liability
Inducement interest related to warrant extension
Inducement interest related to warrant tender offer
Inducement interest related to convertible notes
Interest on convertible notes payable
Total interest expense
Loss before income taxes
Income tax benefit
Net loss
Basic and diluted loss per share
Basic and diluted weighted average common shares outstanding
Results of operations for the years ended May 31, 2019 and 2018
$ 12,116,743 (0.22)% $
42,490,144 (0.76)
1,245,167 (0.02)
55,852,054 (0.99)
(55,852,054) (0.99)
7,340,605 (0.15)% $
6,758,606 (0.26)%
38,222,580 (0.76)
356,128 (0.01)
45,919,313 (0.92)
(45,919,313) (0.92)
20,205,743 (0.78)
366,385 (0.01)
27,330,734 (1.06)
(27,330,734) (1.06)
4,306 0.00
(1,519,603) (0.03)
1,666,469 0.03
3,620 0.00
— —
1,690,935 0.03
15,167 0.00
— —
2,164,533 0.08
(1,707,068) (0.03)
(459,085) (0.01)
— —
— —
(195,927) (0.00)
— —
(950,617) (0.02)
(3,312,697) (0.06)
(59,013,579) (1.05)
2,826,919 0.05
(1,666,017) (0.03)
(435,609) (0.01)
— —
(826,252) (0.02)
(393,685) (0.01)
(2,352,045) (0.05)
(251,315) (0.01)
(5,924,923) (0.12)
(50,149,681) (1.00)
— —
— —
— —
(540,330) (0.02)
(72,437) (0.00)
— —
— —
— —
(612,767) (0.02)
(25,763,801) (1.00)
— —
$ (56,186,660) (1.00)% $ (50,149,681) (1.00)% $ (25,763,801) (1.00)%
$
(0.21)
272,040,933
$
(0.29)
174,885,422
$
(0.19)
138,004,461
For the years ended May 31, 2019 and 2018, we 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 lower 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.
42
Total operating expenses for the years ended May 31, 2019 and 2018 were approximately as follows:
General and administrative:
Salaries and other compensation
Stock-based compensation
Other
Total general and administrative
Research and development
Amortization and depreciation
Total operating expenses
2019
2018
$ 3,781,000 $ 2,454,000
1,291,000
3,596,000
7,341,000
38,223,000
356,000
$55,852,000 $45,920,000
3,388,000
4,948,000
12,117,000
42,490,000
1,245,000
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 research and development (“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
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
Non-Clinical
CMC
Licenses and patent fees
Total research and development
155,000 $
$25,264,000 $22,543,000
887,000
16,353,000 $14,240,000
553,000
$42,490,000 $38,223,000
718,000 $
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. The future trend of R&D
expenses will be dependent on the timing of 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 activities in preparation for approval and commercialization of
leronlimab. Until satisfaction of the generally accepted accounting principles (“GAAP”) standard for capitalization of such costs pursuant to ASC 350, all
CMC manufacturing costs will continue to be expensed as R&D.
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, we 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 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, we determine the fair value of the derivative liabilities and record a corresponding non-cash benefit or
non-cash charge, as a consequence of a decrease or increase, respectively, in the calculated derivative liabilities.
43
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.
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, 2018 and 2017
For the years ended May 31, 2018 and 2017, we had a net loss of approximately $50.1 million and $25.8 million, respectively. The increase in net
loss of approximately $24.3 million for fiscal 2018 over 2017 was primarily attributable to increased R&D expenses of approximately $18.0 million, an
increase in interest expense of approximately $5.3 million and a modest increase in general and administrative expense of approximately $0.6 million,
combined with a reduction in the non-cash benefit in fair value of derivative liability of approximately $0.5 million. The loss per share for the fiscal year
ended May 31, 2018 was $(0.29) compared to $(0.19) for the prior 2017 fiscal year.
The operating expenses for the years ended May 31, 2018 and 2017 and approximated as follows:
General and administrative:
Salaries and other compensation
Stock-based compensation
Other
Total general and administrative
Research and development
Amortization and depreciation
Total operating expenses
2018
2017
$ 2,454,000 $ 2,332,000
1,205,000
3,222,000
6,759,000
20,206,000
366,000
$45,920,000 $27,331,000
1,291,000
3,596,000
7,341,000
38,223,000
356,000
For the fiscal year ended May 31, 2018 and May 31, 2017, operating expenses totaled approximately $45.9 million and $27.3 million, respectively,
consisting primarily of R&D expenses of $38.2 million, general and administrative expenses of approximately $7.3 million and amortization and
depreciation of approximately $0.4 million. The increase in operating expenses over the comparable 2017 period was attributable to an increase in R&D
expenses of approximately $18.0 million owing to higher clinical trial and manufacturing-related expenses and a modest increase in general and
administrative expenses of approximately $0.6 million primarily related to an increase in consulting services and employee-related expenses.
General and administrative expenses, totaled approximately $7.3 million and $6.8 million, respectively, for fiscal 2018 and 2017. 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 $0.6 million, or 8.6%, for the fiscal year ended May 31, 2018 over
the comparable 2017 period was primarily due to increased consulting services and employee-related expenses.
R&D expenses, which totaled approximately $38.2 million for the fiscal year ended May 31, 2018, increased approximately $18.0 million, or 89.2%,
over the same 2017 period. This increase was attributable to higher clinical trial expenses, combined with an expansion of our CMC activities in
connection with the preparation of a BLA. We expect R&D expenses to maintain at this level, as the two ongoing Phase 2b/3 trials with leronlimab for
HIV therapy continue, along with their related rollover studies, combined with the Phase 2 GvHD trial, and the expenses to continue activities related to
manufacturing cGMP leronlimab material for the BLA and for future use.
44
We record research and development expenses where directly identifiable, approximately as follows for the years ended May 31, 2018 and 2017:
Year Ended May 31,
2018
2017
Research and development:
Clinical
Non-Clinical
CMC
Licenses and patent fees
Total research and development
887,000 $
$22,543,000 $ 9,846,000
691,000
$
$14,240,000 $ 8,998,000
$
671,000
$38,223,000 $20,206,000
553,000 $
For the fiscal year ended May 31, 2018, we recognized an unrealized non-cash benefit from the decrease in derivative liability of approximately
$1.7 million, as compared to an approximate non-cash benefit of $2.2 million in the comparable 2017 period. The warrants that contain a contingent cash
settlement provision, which gives rise to a derivative liability, originated in September 2016. For each reporting period, we determine the fair value of the
derivative liability and record a corresponding non-cash benefit or non-cash charge, as a consequence of a decrease or increase, respectively, in the
calculated derivative liability.
Interest expense for the fiscal year ended May 31, 2018 of approximately $5.9 million increased approximately $5.3 million over the 2017 fiscal year
due primarily to an increase in non-cash interest of approximately $3.5 million related to inducement interest on (i) convertible notes; (ii) the expiration
date extension of certain warrants and (iii) the warrant tender offer that was completed in March 2018, coupled with cash interest expense of
approximately $0.3 million on a convertible note and an increase in amortization of debt discount and issuance costs of approximately $2.1 million, offset
by a reduction in interest related to derivative liability of approximately $0.5 million.
The future trends of all expenses will be driven, in large part, by the future outcomes of clinical trials and the correlative effect on research and
development expenses, as well as general and administrative expenses, in addition to the manufacturing of new commercial leronlimab, along with the
increasing activities to prepare and file a BLA. 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.
Fluctuations in Quarterly Operating Results
We have historically experienced significant fluctuations in our quarterly operating results and we expect such fluctuations to continue in the future.
Our 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 a probability estimate of a fundamental transaction and to our stock price, which can vary substantially from
quarter to quarter, thereby creating a non-cash charge or benefit.
Liquidity and Capital Resources
Our cash position of approximately $3.5 million at May 31, 2019 increased approximately $2.2 million as compared to a balance of approximately
$1.2 million at May 31, 2018. The increase was attributable to net cash provided by financing activities of approximately $52.7 million exceeding net cash
used in operating activities of approximately $50.5 million by approximately $2.2 million. Despite our negative working capital position, vendor relations
remain accommodative and we do not currently anticipate delays in our BLA filing schedule due to liquidity constraints.
Cash Flows
Net cash used in operating activities totaled approximately $50.5 million during the fiscal year ended May 31, 2019, which reflects an increase of
approximately $20.6 million of net cash used in operating activities over the approximate $29.9 million in fiscal 2018. The increase in net cash used in
operating activities was due to an increase in net loss of approximately $6 million, and a net change in the components of net working capital of
approximately $13.4 million.
We made nominal investments in equipment and website development costs totaling approximately $45,000 during the fiscal year ended May 31,
2019.
45
Net cash provided by financing activities of approximately $52.7 million for the year ended May 31, 2019 increased approximately $23.3 million
over $29.4 million of net cash provided by financing activities during fiscal year ended May 31, 2018. The increase in net cash provided from financing
activities was primarily attributable to an increase in net proceeds from the sale of common stock and warrants of approximately $13.1 million, coupled
with an increase of approximately $10.6 million in proceeds from convertible notes and net proceeds of approximately $3.1 million from a preferred
convertible stock offering in the 2019 fiscal year.
Capital Requirements
We have not generated revenue to date, and do not expect to generate product revenue until FDA approval of leronlimab. We expect that we 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 pre-clinical and clinical trial programs. The future trends of all expenses will be driven, in large part, by the timing of the
anticipated approval of our BLA, the magnitude of our commercialization readiness, future clinical trial strategy and timing of the commencement of our
future revenue stream. We 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, we 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. In April 2019 we delivered to Samsung a purchase order for $33 million
worth of process validation and technology transfer services related to the manufacture of leronlimab, with payments by us scheduled to be made
throughout calendar 2020. Under the Samsung Agreement, the purchase order is binding and we are obligated to pay the full amount.
Under the terms of the Samsung Agreement, we are obligated to make specified minimum purchases of leronlimab from Samsung pursuant to
forecasted requirements which we will provide to Samsung. The first forecast will be delivered to Samsung by March 31, 2020. Thereafter, we must
provide Samsung with a rolling quarterly forecast setting forth the total quantity of commercial grade leronlimab that we expect to require in the following
years. We estimate that initial ramp-up costs to manufacture commercial grade leronlimab at scale could total approximately $60 million, with
approximately $30 million payable over the course of calendar 2020, and approximately $30 million payable in the first quarter of 2021. Thereafter, we
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 we 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.
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 $8.3 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 that 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.
Contract Research
We have entered into project work orders for each of our clinical trials with our CRO and related laboratory vendors. Under the terms of these
agreements, we have prepaid certain execution fees for direct services costs. In connection with our clinical trials, we have entered into separate project
work orders for each trial with our CRO. In the event that we terminate any trial, we 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 $0.3 million. In the remote circumstance that
we terminate all clinical trials, the collective financial penalties may range from an approximate low of $0.5 million to an approximate high of
$1.2 million.
46
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 (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.
As of the date of this filing, while we have completed and filed the first of three portions of our BLA, it remains uncertain as to when the remaining
two portions will be filed. Further, if the BLA is accepted by the FDA, it is management’s conclusion that the probability of achieving the subsequent
future clinical development and regulatory milestones is not reasonably determinable, thus the future milestone payments payable to Progenics and its
sub-licensors are deemed contingent consideration and, therefore, are not currently accruable.
Going Concern
As reported in the accompanying financial statements, during the year ended May 31, 2019, May 31, 2018 and May 31, 2017, we incurred net losses
of approximately $56.2, $50.1 million and $25.8 million respectively. We have no activities that produced revenue in the periods presented and have
sustained operating losses since inception.
We currently require and will continue to require a significant amount of additional capital to fund operations, pay our accounts payables, and our
ability to continue as a going concern is dependent upon our ability to raise such additional capital, commercialize our product and achieve profitability. If
we are not able to raise such additional capital on a timely basis or on favorable terms, we may need to scale back our operations or slow down or cease
completion of the remaining two sections of our BLA filing, including related CMC activities, which could materially delay the filing of the last two
sections of the BLA submission. Our failure to raise additional capital could also affect our relationships with key vendors, disrupting our ability to timely
execute our business plan. In extreme cases, we could be forced to file for bankruptcy protection, discontinue our operations or liquidate our assets.
Since inception, we have financed our activities principally from the sale of public and private equity securities and proceeds from convertible notes
payable and related party notes payable. We intend to finance our future operating activities and our working capital needs largely from the sale of equity
and debt securities, combined with additional funding from other traditional financing sources. As of the date of this filing, we have approximately
104 million shares of common stock authorized and available for issuance under our certificate of incorporation, as amended, and approximately
$156 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 (assuming the full exercise of outstanding warrants, at the currently applicable exercise prices, that were previously issued in
registered transactions thereunder).
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 we raise 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 our operations. On January 30, 2019, we entered into a long-term
convertible note, which is secured by all of our assets, except for our intellectual property and also includes 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 us to relinquish valuable rights. We may 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.
47
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. We have incurred losses for all periods presented and have a substantial accumulated deficit.
As of May 31, 2019, these factors, among several others, 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 we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain a significant
amount of additional operating capital, complete development of our product candidate, obtain FDA approval, outsource manufacturing of our product,
and ultimately to attain profitability. We intend 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 we will be successful in these endeavors.
Off-Balance Sheet Arrangements
We do 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.
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.
48
Item 8.
Financial Statements and Supplementary Data.
CYTODYN INC.
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2019 AND MAY 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2019, 2018 AND 2017
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY FOR THE YEARS ENDED MAY 31, 2019,
2018 AND 2017
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 2019, 2018 AND 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
50
52
53
54
56
58
49
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, 2019 and 2018 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the
years in the three-year period ended May 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of May 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 14, 2019, expressed an unqualified opinion.
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 $56,187,000 for the year ended May 31, 2019 and has an
accumulated deficit of approximately $229,363,000 through May 31, 2019, 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 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. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated 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, 2019
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CytoDyn Inc.
Opinion on Internal Control over Financial Reporting
We have audited CytoDyn Inc.’s (the Company’s) internal control over financial reporting as of May 31, 2019, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2019, based on criteria established in
Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets and the related consolidated statements of operations, changes in stockholders’ (deficit) equity, and cash flows of the Company, and our
report dated August 14, 2019, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Warren Averett, LLC
Birmingham, Alabama
August 14, 2019
51
CytoDyn Inc.
Consolidated Balance Sheets
Assets
Current assets:
Cash
Restricted cash
Miscellaneous receivables
Prepaid expenses
Prepaid service fees
Total current assets
Furniture and equipment, net
Intangibles, net
Total assets
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Accounts payable
Accrued liabilities and compensation
Accrued license fees
Accrued interest on convertible notes
Accrued dividends on Series C convertible preferred stock
Convertible notes payable, net
Current portion of long-term convertible notes payable
Warrant tender offer proceeds held in trust
Total current liabilities
Long-term liabilities:
Convertible notes payable, net
Derivative liability
Total long-term liabilities
Total liabilities
Commitments and Contingencies
Stockholders’ (Deficit) Equity
May 31, 2019
May 31, 2018
$
2,612,910 $
853,599
90,824
107,211
1,704,876
5,369,420
29,251
15,475,454
$ 20,874,125 $
1,231,445
—
—
227,173
1,862,009
3,320,627
11,228
1,567,143
4,898,998
$ 16,239,434 $ 15,841,859
757,778
133,600
—
—
—
—
—
16,733,237
1,588,552
208,600
212,777
37,351
3,586,035
4,200,000
853,599
26,926,348
454,568
2,407,269
2,861,837
29,788,185
—
—
1,323,732
1,323,732
18,056,969
—
Preferred Stock, $0.001 par value; 5,000,000 shares authorized
Series C convertible preferred stock, $0.001 par value; 5,000 shares authorized; 3,246 issued and outstanding at
May 31, 2019
Series B convertible preferred stock, $0.001 par value; 400,000 shares authorized, 92,100 shares issued and
outstanding at May 31, 2019 and May 31, 2018, respectively
Common stock, $0.001 par value; 700,000,000 and 375,000,000 shares authorized, 329,554,763 and 216,881,790
issued and 329,395,752 and 216,722,779 outstanding at May 31, 2019 and May 31, 2018, respectively
3
92
—
92
329,555
220,119,856
(229,363,407)
(159)
(8,914,060)
216,881
159,764,611
(173,139,396)
(159)
(13,157,971)
4,898,998
$ 20,874,125 $
Additional paid-in capital
Accumulated (deficit)
Less: treasury stock, at par (159,011 shares at $0.001)
Total stockholders’ (deficit)
Total liabilities and stockholders’ (deficit) equity
See accompanying notes to consolidated financial statements.
52
CytoDyn Inc.
Consolidated Statements of Operations
2019
Years ended May 31,
2018
2017
Operating expenses:
General and administrative
Research and development
Amortization and depreciation
Total operating expenses
Operating loss
Other income (expense):
Interest income
Change in fair value of derivative liability
Loss on extinguishment of convertible notes
Interest expense:
Amortization of discount on convertible notes
Amortization of debt issuance costs
Interest related to derivative liability
Inducement interest related to warrant tender offer
Inducement interest related to warrant extension
Inducement interest related to convertible notes
Interest on convertible notes payable
Total interest expense
Loss before income taxes
Income tax benefit
Net loss
Basic and diluted loss per share
Basic and diluted weighted average common shares outstanding
See accompanying notes to consolidated financial statements.
53
7,340,605 $
6,758,606
$ 12,116,743 $
42,490,144 38,222,580 20,205,743
366,385
55,852,054 45,919,313 27,330,734
(55,852,054) (45,919,313) (27,330,734)
1,245,167
356,128
4,306
1,666,469
(1,519,603)
3,620
1,690,935
—
15,167
2,164,533
—
(1,707,068)
(459,085)
—
(195,927)
—
—
(950,617)
(3,312,697)
(1,666,017)
(435,609)
—
(393,685)
(826,252)
(2,352,045)
(251,315)
(5,924,923)
—
—
(540,330)
—
(72,437)
—
—
(612,767)
(59,013,579) (50,149,681) (25,763,801)
—
$(56,186,660) $ (50,149,681) $ (25,763,801)
2,826,919
—
$
(0.21) $
(0.29) $
(0.19)
272,040,933 174,885,422 138,004,461
CytoDyn Inc.
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
Balance May 31, 2016
Interest expense related to warrant extension
Stock-based compensation
Legal fees in connection with registered offerings
Proceeds from private equity offering ($1.00/share)
Proceeds from registered direct offering ($0.75/share)
Offering costs related to equity offering
Debt discount related to convertible notes payable
Conversion of Series B Convertible Preferred ($0.50/share)
Proceeds from warrant exercise ($0.50/share)
Proceeds from warrant exercise ($0.75/share)
Cashless exercise of warrants
Net (loss) for the year ended May 31, 2017
Balance May 31, 2017
Stock-based compensation
Stock issued for board compensation
Stock issued for bonuses and tendered for income tax
Proceeds from private equity offering ($0.50/share)
Offering costs related to private equity offering
Proceeds from registered direct offering ($0.50/share)
Offering costs related to registered direct offering
Legal fees in connection with equity offerings
Proceeds from warrant exercise ($0.50/share)
Offering costs related to warrant tender offer
Debt discount related to convertible notes payable
Interest expense related to warrant extension
Interest expense realted 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
Acquisition of ProstaGene LLC
Issuance of stock payment shares
Issuance of stock for note payable redemption
Proceeds from registered direct offering ($0.50/share)
Offering costs related to registered direct offering
Proceeds from private equity offering ($0.50/share)
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
Offering costs related to private warrant exchange
Inducement interest expense on private warrant exchange
Proceeds from Series C Convertible Preferred offering
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
54
Preferred Stock
Shares Amount
95,100 $
— —
— —
— —
— —
— —
— —
(3,000)
(3)
— —
— —
— —
Shares
Amount
Common Stock
Treasury Stock
Shares Amount
95 123,335,634 $123,336 — $ —
36 — —
—
— — — —
— — — —
730 — —
24,538,994 24,539 — —
— — — —
— — — —
3 — —
730 — —
44 — —
50 — —
40,602
730,765
43,332
49,417
729,500
92,100 $
92 149,468,244 $149,468 — $ —
311 159,011
— — — —
— —
— — — —
— —
— —
(159)
310,526
— — 35,286,904 35,286 — —
— —
— — — —
— — 25,493,853 25,494 — —
— — — —
— —
— — — —
— —
6,322 — —
— — 6,322,263
— — — —
— —
— — — —
— —
— — — —
— —
— — — —
— —
— — — —
— —
92,100 $
92 216,881,790 $216,881 159,011 $ (159)
— — 18,658,000 18,658 — —
8,342 — —
— — 8,342,000
— — 3,756,406
3,757 — —
— — 23,629,480 23,629 — —
— —
— — — —
— — 46,975,170 46,976 — —
— — — —
— —
— — — —
— —
— — — —
— —
— —
— — — —
— — 11,311,917 11,312 — —
— — — —
— —
— — — —
— —
— — — —
3
3,246
— — — —
— —
— — — —
— —
— — — —
— —
95,346
95 329,554,763 329,555 159,011
(159)
CytoDyn Inc.
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
Balance May 31, 2016
Interest expense related to warrant extension
Stock-based compensation
Legal fees in connection with registered offerings
Proceeds from private equity offering ($1.00/share)
Proceeds from registered direct offering ($0.75/share)
Offering costs related to equity offering
Debt discount related to convertible notes payable
Conversion of Series B Convertible Preferred ($0.50/share)
Proceeds from warrant exercise ($0.50/share)
Proceeds from warrant exercise ($0.75/share)
Cashless exercise of warrants
Net (loss) for the year ended May 31, 2017
Balance May 31, 2017
Stock-based compensation
Stock issued for board compensation
Stock issued for bonuses and tendered for income tax
Proceeds from private equity offering ($0.50/share)
Offering costs related to private equity offering
Proceeds from registered direct offering ($0.50/share)
Offering costs related to registered direct offering
Legal fees in connection with equity offerings
Proceeds from warrant exercise ($0.50/share)
Offering costs related to warrant tender offer
Debt discount related to convertible notes payable
Interest expense related to warrant extension
Interest expense realted 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
Acquisition of ProstaGene LLC
Issuance of stock payment shares
Issuance of stock for note payable redemption
Proceeds from registered direct offering ($0.50/share)
Offering costs related to registered direct offering
Proceeds from private equity offering ($0.50/share)
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
Offering costs related to private warrant exchange
Inducement interest expense on private warrant exchange
Proceeds from Series C Convertible Preferred offering
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
See accompanying notes to consolidated financial statements
55
Total
Additional
Paid-In Capital
Accumulated
Deficit
$107,307,933 $ (97,225,914) $ 10,205,450
72,434
—
1,204,791
—
(280,883)
—
—
729,500
— 14,044,252
(1,804,249)
—
91,389
—
—
—
365,383
—
32,500
—
—
—
(25,763,801) (25,763,801)
$121,736,921 $(122,989,715) $ (1,103,234)
72,398
1,204,791
(280,883)
728,770
14,019,713
(1,804,249)
91,389
—
364,653
32,456
(50)
—
1,290,777
260,190
104,394
17,608,165
(1,717,597)
13,585,925
(857,149)
(533,436)
3,154,809
(85,381)
1,645,011
826,252
393,685
2,352,045
—
1,290,777
—
260,190
—
—
104,546
— 17,643,451
—
(1,717,597)
— 13,611,419
(857,149)
—
(533,436)
—
3,161,131
—
(85,381)
—
1,645,011
—
826,252
—
393,685
—
2,352,045
—
(50,149,681) (50,149,681)
$159,764,611 $(173,139,396) $(13,157,971)
11,539,342
(8,342)
1,451,243
11,791,110
(1,129,516)
23,440,608
(2,697,149)
260,636
3,059,159
3,534,992
2,955,200
(266,986)
195,927
3,083,697
—
(242,771)
3,388,095
—
— 11,558,000
—
—
—
1,455,000
— 11,814,739
—
(1,129,516)
— 23,487,584
(2,697,149)
—
260,636
—
3,059,159
—
3,534,992
—
2,966,512
—
(266,986)
—
195,927
—
3,083,700
—
(37,351)
(37,351)
(242,771)
—
3,388,095
—
(56,186,660) (56,186,660)
(8,914,060)
220,119,856 (229,363,407)
CytoDyn Inc.
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation
Amortization of debt issuance costs
Amortization of discount on convertible notes
Loss on extinguishment of convertible notes
Deferred income tax benefit
Inducement interest expense
Interest expense associated with warrant extension
Interest expense association with warrant tender offer
Interest expense associated with conversion of notes
Interest expense associated with derivative liability
Interest expense associated with accretion of convertible notes payable
Change in fair value of derivative liability
Stock-based compensation
Changes in current assets and liabilities:
Decrease (increase) in miscellaneous receivables
Decrease (increase) in prepaid expenses
Increase (decrease) in accounts payable and accrued expenses
Net cash used in operating activities
Cash flows from investing activities:
Furniture and equipment purchases
Intangibles
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from sale of common stock and warrants
Proceeds from sale of preferred stock
Proceeds from warrant exercises
Proceeds from convertible notes payable
Payment of offering costs
Payment of debt issuance costs
Payment of payroll taxes related to tender of common stock
for income tax withholding
Repayment of principal and interest on convertible note
Proceeds from warrant tender offer in process—held in trust
Net cash provided by financing activities
Net change in cash
Cash, beginning of period
Cash, end of period
56
2019
Years ended May 31,
2018
2017
$(56,186,660) $(50,149,681) $(25,763,801)
1,245,167
459,085
1,707,068
1,519,603
(2,826,919)
195,927
—
—
—
—
512,594
(1,666,469)
3,388,095
356,128
435,609
1,666,017
—
—
—
826,252
393,685
2,352,045
—
—
(1,690,935)
1,290,777
366,385
—
—
—
—
72,437
—
—
—
540,330
—
(2,164,533)
1,204,791
—
(90,824)
(464,201)
2,256,173
1,741,370 12,365,959
—
(2,492,789)
1,504,712
(50,466,164) (29,897,971) (26,732,468)
(25,731)
(19,553)
(45,284)
—
—
—
(11,114)
—
(11,114)
38,268,839 25,224,212 19,133,755
—
397,883
1,150,000
(1,804,249)
—
3,083,700
—
15,460,000
(4,336,426)
(583,200)
—
3,161,131
4,888,500
(3,558,789)
—
—
—
853,599
(102,064)
(259,157)
—
—
—
—
52,746,512 29,353,833 18,877,389
(7,866,193)
9,641,776
$ 3,466,509 $ 1,231,445 $ 1,775,583
(544,138)
1,775,583
2,235,064
1,231,445
CytoDyn Inc.
Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Non-cash investing and financing transactions:
Accrued interest converted into note payable
Accrued dividends on Series C Convertible Preferred stock
Common stock issued for acquisition of ProstaGene LLC
Derivative liability associated with convertible notes payable
Beneficial conversion feature and fair value of warrant issued with note payable
Debt discount associated with convertible notes payable
Financing costs associated with investor warrants
Common stock issued in connection with an employment agreement
Common stock issued for accrued bonus compensation
Common stock issued for board compensation
Common stock issued for conversion redemption
Common stock issued upon conversion of convertible debt
Common stock issued for accrued interest payable
Financing costs associated with placement agent warrants
Years ended May 31,
2018
2019
2017
— $
9,157
$
$
225,245
37,351
$11,558,000
$ 2,750,006
$ 3,534,992
—
—
—
—
—
—
—
—
—
—
—
$ 3,059,159 $1,574,628 $
91,389
—
8,342
$
— $ 819,200
—
— $ 214,263
— $ 260,190
$ 1,455,000
—
— $5,788,500
— $ 242,158
$
260,636 $
70,383
—
—
—
—
—
—
—
Derivative liability associated with warrants
—
— $5,179,200
See accompanying notes to consolidated financial statements.
57
CYTODYN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2019
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 clinical-stage biotechnology company developing
innovative treatments for multiple therapeutic indications based on leronlimab, a novel humanized monoclonal antibody targeting the CCR5 receptor.
CCR5 appears to play a key role in the ability of Human Immunodeficiency Virus (“HIV”) to enter and infect healthy T-cells. The CCR5 receptor also
appears to be implicated in human metastasis and in immune-mediated illnesses such as graft-vs-host disease (“GvHD”) and Non-Alcoholic
Steatohepatitis (“NASH”). 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.
The Company has developed a class of therapeutic monoclonal antibodies to address unmet medical needs in the areas of HIV and GvHD. In addition, we
are expanding the clinical focus with leronlimab to include the evaluation in certain cancer and immunological indications where CCR antagonism has
shown initial promise.
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 2019 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 $56,186,660, $50,149,681 and $25,763,801 for the years ended May 31, 2019, May 31, 2018, and
May 31, 2017, respectively, and has an accumulated deficit of $229,363,407 as of May 31, 2019. These factors, among several 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, 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, 2019 and
May 31, 2018 approximated $3.3 million and $1.1 million, respectively, which included restricted cash of approximately $0.9 million and $-0-,
respectively.
58
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, 2019, May 31, 2018, and May 31, 2017. 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 Notes 7 and 9.
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.
Pre-launch Inventory
The Company may scale-up and make commercial quantities of its product candidate prior to the date it anticipates that such product will receive final
FDA approval. The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be approved for
commercial use by the FDA on a timely basis, or ever. This risk notwithstanding, the Company may scale-up and build pre-launch inventories of product
that have not yet received final governmental approval when the Company believes that such action is appropriate in relation to the commercial value of
the product launch opportunity. The determination to capitalize is made once the Company (or its third party development partners) has filed a BLA, that
has been acknowledged by the FDA as containing sufficient information to allow the FDA to conduct its review in an efficient and timely manner and
management is reasonably certain that all regulatory and legal hurdles will be cleared. This determination is based on the particular facts and
circumstances relating to the expected FDA approval of the drug product being considered. As of May 31, 2019 and May 31, 2018, the Company did not
have pre-launch inventory that qualified for capitalization pursuant to U.S. GAAP ASC 330 Inventory.
Fair Value of Financial Instruments
At May 31, 2019 and May 31, 2018, 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 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.
59
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of May 31, 2019 and May 31, 2018 is as follows:
Fair Value Measurement at
May 31, 2019 (1)
Fair Value Measurement at
May 31, 2018 (1)
Using
Level 3
Total
Using
Level 3
Total
Liabilities:
Derivative liability - warrants
Derivative liability - convertible note redemption provision
Total liability
$2,005,137
402,132
$2,407,269
$2,005,137
402,132
$2,407,269
$
—
1,323,732
$1,323,732
$
—
1,323,732
$1,323,732
(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, 2019 and
May 31, 2018.
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, 2019:
Investor warrants issued with registered direct equity offering
Placement agent warrants issued with registered direct equity offering
Fair value adjustments
Balance at May 31, 2018
Inception date value of redemption provisions
Fair value adjustments - convertible notes
Fair value adjustments - warrants
Balance at May 31, 2019
$ 4,360,000
819,200
(3,855,468)
1,323,732
2,750,006
(744,869)
(921,600)
$ 2,407,269
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
On June 7, 2018, at a special meeting of the Company’s stockholders, a proposal was approved to increase the total number of authorized shares of
common stock of the Company from 375,000,000 to 450,000,000. On November 8, 2018, at the 2018 Annual Meeting of Stockholders, a proposal was
approved to increase the total number of authorized shares of common stock of the Company from 450,000,000 to 600,000,000. Subsequently, on May 22,
2019, at a special meeting of stockholders, a proposal was approved to increase the total number of authorized shares of common stock of the Company
from 600,000,000 to 700,000,000.
60
Preferred Stock
The Company’s Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock without stockholder approval. As of May 31, 2019, the
Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock and 5,000 shares of Series C convertible preferred stock,
of which 92,100 shares and 3,246 shares, respectively, were outstanding. The remaining preferred shares authorized have no specified rights.
Treasury Stock
Treasury stock purchases are accounted for under the par value method, whereby the cost of the acquired stock is recorded at par value. As of the year
ended May 31, 2019, the Company has purchased a total of 159,011 shares of $0.001 par value treasury stock.
Debt Discount
During the years ended May 31, 2019, May 31, 2018 and May 31, 2017, the Company incurred approximately $4.2 million, $1.5 million, and $92,000,
respectively, of debt discount related to the issuance of short-term convertible promissory notes issued with detachable warrants, as described in Note 4.
The discount was amortized over the life of the convertible promissory notes and the Company recognized approximately $1.7 million, $1.6 million, and
$-0-, of related amortization expense for the years ended May 31, 2019, May 31, 2018 and May 31, 2017, respectively.
Debt Issuance Costs
During the years ended May 31, 2019 and May 31, 2018, the Company incurred direct costs associated with the issuance of short-term convertible
promissory notes, as described in Note 4, and recorded approximately $1.0 million and $0.4 million, respectively, of debt issuance costs. The Company
recognized approximately $0.5 million, $0.4 million, and -0- of related amortization expense for the years ended May 31, 2019, May 31, 2018 and
May 31, 2017, respectively.
Offering Costs
During the years ended May 31, 2019, May 31, 2018 and May 31, 2017, the Company incurred approximately $4.3 million, $3.5 million, and $1.8 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 10 and 11.
Stock 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 178,591,849, 132,385,269; and 77,859,626 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, 2019,
May 31, 2018 and May 31, 2017, respectively. As of May 31, 2019 shares of Series C and Series B convertible preferred stock in the aggregate of 95,346
shares can potentially convert into 7,413,000 shares of common stock.
61
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.
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 2019 tax year. The net tax expense
for the year ended May 31, 2019, is a benefit of $2.8 million. The Company has a full valuation allowance as of 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 EITF), the American
Institute of Certified Public Accountants and the U.S. Securities and Exchange Commission (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 May 2017, the FASB issued ASU 2017-09 “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.” The amendments in
this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods
for which financial statements have not yet been issued. The adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated
financial statements.
In August 2018, FASB issued Accounting Standards Update (“ASU”) No. 2018-13 “Fair Value Measurement (Topic 820) Disclosure Framework Changes
to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update provides guidance that remove, modify and add to the
disclosure requirements related to fair value measurements. The guidance removes the requirements to disclose the amount and reasons for transfers
between Level 1 and Level 2 assets, the policy for timing and transfers between levels and the valuation process for Level 3 fair value measurements. The
guidance modifies disclosure requirements for investments in certain entities that calculate net asset value and clarifies the purpose of the measurement
uncertainty disclosure. The guidance adds requirements to disclose changes in unrealized gains or losses included in other comprehensive income for
recurring Level 3 fair value measurements and to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair
value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The
Company does not expect the adoption to have a material impact on its consolidated financial statements.
In June 2018, FASB issued ASU No. 2018-07 “Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share Based Payment
Accounting”. The amendments in this Update expand the scope of stock compensation to include share-based payment transactions for acquiring goods
and services from nonemployees. The guidance in this Update does not apply to transactions involving equity instruments granted to a lender or investor
that provides financing to the issuer. The guidance is effective for fiscal years beginning after December 31, 2018 including interim periods within the
fiscal year. The Company is currently assessing the impact this Update may have on its consolidated financial statements.
In March 2018, FASB issued ASU No. 2018-05 “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No. 118”. The amendments in this Update add various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of SEC
Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 to
address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the period
of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of
the financial statements and if possible, to provide a reasonable estimate. The Company has provided a reasonable estimate in the notes to the consolidated
financial statements.
In July 2017, the FASB issued ASU No. 2017-11 “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and
Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or
embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The
amendments also clarify existing disclosure
62
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer
would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down
round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent
beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The
amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in
the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all
entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. Management is currently assessing the impact the adoption of ASU 2017-11 will have on
the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” and subsequent amendments to the initial guidance: ASU No. 2017-13, ASU
No. 2018-10, ASU No. 2018-11, ASU No. 2018-20 and ASU No. 2019-01 (collectively, Topic 842). Topic 842 amends a number of aspects of lease
accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at
the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU
2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The guidance will become
effective for us beginning in the first quarter of 2020. The modified retrospective transition approach is required. The Company does not expect the
adoption to have a material impact on its consolidated financial statements.
Note 4 – Convertible Instruments
Series C Convertible Preferred Stock
On March 20, 2019, the Company authorized 5,000 shares and issued 3,246 shares of Series C, $0.001 par value Convertible Preferred Stock (“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, of which 3,246 shares remain
outstanding at May 31, 2019. The Certificate of Designation provides, among other things, that holders of Series C Preferred Stock shall be 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 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 Preferred Stock does not have redemption
rights. The stated value per share for the Series C Preferred Stock is $1,000 (the “Stated Value”). In the event of any liquidation, dissolution or winding up
of the Company, the Series C Preferred Stock will be paid, 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 Stated Value and the amount of
any accrued and unpaid dividends. The holders of the Series C Preferred Stock will then receive distributions along with the holders of common stock on a
pari passu basis according to the number of shares of common stock the Series C Preferred holders would be entitled if they converted their shares of
Series C Preferred Stock at the time of such distribution. If, at any time while the Series C 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 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 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 Certificate of Designation or as otherwise required by law, the Series C Preferred Stock has no voting rights. As of May 31,
2019, the accrued dividends were approximately $65,000 or 130,000 shares of common stock.
Series B Convertible Preferred Stock
During fiscal 2010, the Company issued 400,000 shares of Series B, $0.001 par value Convertible Preferred Stock (“Series B Preferred Stock”) at $5.00
per share for cash proceeds totaling $2,009,000, of which 92,100 shares remain outstanding at May 31, 2019. Each share of the Series B Preferred Stock is
convertible into ten shares of the Company’s $0.001 par value common stock, including any accrued dividends, with an effective fixed conversion price of
$0.50 per share. The holders of the Series B Preferred Stock can only convert their shares to common shares provided the Company has sufficient
authorized common shares at the time of conversion. Accordingly, the conversion option was contingent upon the Company increasing its authorized
common shares, which
63
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 dividends. Dividends are payable to the Series B Preferred
Stock holders when declared by 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. The Series B Preferred Stock holders
have no voting rights. As of May 31, 2019 and May 31, 2018, the undeclared, accrued dividends were approximately $216,000 or 432,000 shares of
common stock and approximately $199,000 or 387,000 shares of common stock, respectively.
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.
Expected dividend yield
Stock price volatility
Expected term
Risk-free interest rate
Grant-date fair value
2018
0%
69.80%
5 year
1.77 - 1.93%
$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 11, 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. The Company repaid one 2018 Short-term Convertible Note, including accrued interest in the aggregate of approximately
$259,000. During the years ended May 31, 2019 and May 31, 2018, the Company recognized approximately $-0- and $75,000, of interest expense related
to the note.
Activity related to the 2018 Short-term Convertible Notes was as follows:
Face amount of Short-Term Convertible Notes
Unamortized discount
Registered direct offering
Note repayment
Carrying value of Short-term Convertible Notes
64
2018
$ 6,038,500
—
(5,788,500)
(250,000)
—
$
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.
Expected dividend yield
Stock price volatility
Expected term
Risk-free interest rate
Grant-date fair value
2018 - 2019
0%
55.8 - 55.88%
5 year
2.48 - 2.56%
$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. Activity related to the 2019 Short-term Convertible Notes was as follows:
Face value of Short-term convertible Notes
Unamortized discount
Unamortized issuance costs
Carrying value of Short-term Convertible Notes
May 31, 2019
$ 5,460,000
(1,469,625)
(404,340)
$ 3,586,035
May 31, 2018
—
$
—
—
—
$
The Company recognized approximately $213,000 and $-0- of interest expense during the years ended 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 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 $0.55 per share. The
June 2018 Note is convertible in total, or in part, of the outstanding balance, 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. The Investor may redeem any portion of the June 2018 Note, 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 requires 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 are now secured by all of the assets of the Company, excluding the Company’s intellectual property.
65
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, 2019 and May 31, 2018, the Company recognized approximately $386,000 and $-0-, 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. Following the
redemptions, the outstanding balance of the convertible June 2018 Note, including accrued but unpaid interest, was approximately $4.5 million.
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 is convertible in total, or in part, of the outstanding
balance, 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 Note. The Company 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 Investor may redeem any portion of the January 2019 Note, 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 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:
Fair value of redemption provision
Relative fair value of equity classified warrants
Beneficial conversion feature
January 30, 2019
1,465,008
$
858,353
2,676,639
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, 2019 and May 31, 2018, the Company recognized approximately $126,000 and $-0-, respectively, of interest
expense related to the January 2019 Note.
66
Activity related to the June 2018 Note and the January 2019 Note is as follows:
June 2018 Note
Monthly redemption provision
Note amendment, net
Redemptions
Interest accretion - June 2018 and January 2019
Notes
Carrying value of Notes at May 31, 2019
Short Term
$2,100,000
2,100,000
—
—
Long Term
$ 3,600,000
(2,100,000)
111,410
(1,455,000)
Total
$ 5,700,000
—
111,410
(1,455,000)
—
$4,200,000
298,158
454,568
298,158
$ 4,654,568
$
Note 5—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 outstanding common stock). If a fundamental transaction occurs in which
the consideration issued consists principally of cash or stock in a successor entity, then the warrantholder has the option to receive cash equal to the fair
value of the remaining unexercised portion of the warrant. Due to this contingent cash settlement provision, the investor and placement agent warrants
require liability classification as derivatives in accordance with ASC 480 and ASC 815 and are recorded at fair value.
The following tables summarize the fair value of the warrant derivative liability and related common shares as of inception date September 15, 2016,
May 31, 2018 and May 31, 2019:
Inception to date September 15, 2016
Balance May 31, 2018
Balance May 31, 2019
Shares Indexed
7,333,334
7,733,334
7,733,334
Derivative Liability
5,179,200
$
1,323,732
402,132
$
Changes in the fair value of the derivative liability are reported as “Change in fair value of derivative liability” in the Consolidated Statements of
Operations. During the years ended May 31, 2019, May 31, 2018, and May 31, 2017, the Company recognized a net, non-cash gain of approximately
$0.9 million, $1.7 million and $2.2 million, respectively, due to the changes in the fair value of the liability associated with such classified warrants. ASC
820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition.
Fair values for the warrants were determined using a Binomial Lattice Model.
The Company estimated the fair value of the warrant derivative liability as of inception, May 31, 2018 and May 31, 2019, using the following
assumptions:
Fair value of underlying stock
Risk free rate
Expected term (years)
Stock price volatility
Expected dividend yield
Probability of Fundamental Transaction
Probability of holder requesting cash payment
September 15,
2016
$
0.78
1.20%
5
106%
—
50%
50%
May 31,
2018
$ 0.49
2.63%
3.3
64%
—
50%
50%
May 31,
2019
$ 0.39
1.94%
2.29
61%
—
50%
50%
Due to the fundamental transaction provisions, which could provide for early redemption of the warrants, the model also considered subjective
assumptions related to the fundamental transaction provision. The fair value of the warrants will be significantly influenced by the fair value of the
Company’s stock price, stock price volatility, changes in interest and managements assumptions related to the fundamental transaction provision.
As described in Note 4 above, the redemption provision embedded in the June 2018 and January 2019 Notes required bifurcation and measurement at fair
value as a derivative. The fair value of the Note redemption provision derivative liabilities was calculated using a Monte Carlo Simulation which uses
randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision
will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s
assumptions related to the redemption factor. The Company estimated the fair value of the redemptive provision using the following assumptions on the
closing date of November 15, 2018, January 30, 2019 and May 31, 2019:
67
Fair value of underlying stock
Risk free rate
Expected term (in years)
Stock price volatility
Expected dividend yield
Discount factor
November 15,
2018
January 30,
2019
$
0.57
2.78%
1.61
58.8%
—
85%
$
0.49
2.52%
2
61%
—
85%
May 31, 2019
June Note
0.39
$
2.21%
1.07
62.2%
—
85%
January Note
0.39
$
1.95%
1.67
62.2%
—
85%
The following table summarizes the fair value of the convertible note redemption provision derivative liability as of inception dates November 15, 2018,
January 30, 2019 and May 31, 2019:
Inception date June 2018 Note, November 15, 2018
Inception date January 2019 Note, January 30, 2019
Derivative Liability
May 31,
2019
Net Proceeds Inception Date
$5,000,000 $ 1,284,988 $ 847,103
5,000,000 1,465,008 1,158,034
$2,005,137
The Company recognized approximately $745,000 of non-cash gain, due to the changes in the fair value of the liability associated with such classified
redemption provision between the inception date and May 31, 2019.
Note 6 – Stock Options and Warrants
The Company has one active stock-based equity plan at May 31, 2019, the CytoDyn Inc. 2012 Equity Incentive Plan (the “2012 Plan”) and one stock-
based equity plan that is no longer active, but under which certain prior awards remain outstanding, the CytoDyn Inc. 2004 Stock Incentive Plan (the
“2004 Plan” and, together with the 2012 Plan, the “Incentive Plans”). The 2012 Plan was approved by stockholders at the Company’s 2012 annual meeting
to replace the 2004 Plan. The 2012 Plan was amended by stockholder approval in February 2015 to increase the number of shares available for issuance
from 3,000,000 to 5,000,000 shares of common stock and in March 2016 to increase the number of shares available for issuance from 5,000,000 to
7,000,000 shares of common stock. At the annual meeting of stockholders held on August 24, 2017, the stockholders approved an amendment to the 2012
Plan to increase the number of shares available for issuance from 7,000,000 to 15,000,000 shares of common stock. At a special meeting of stockholders
held on May 22, 2019, the stockholders approved an amendment to the 2012 Plan to increase the number of shares available for issuance from 15,000,000
to 25,000,000 shares of common stock. As of May 31, 2019, the Company had 10,374,144 shares available for future stock-based grants under the 2012
Plan, as amended.
Stock Options
During the year ended May 31, 2019, the Company granted annual stock option awards to directors to purchase a total of 1,219,726 shares of common
stock with an exercise prices ranging between $0.49 and $0.57 per share. These option awards vest quarterly over one year and have a ten-year term. The
grant date fair value related to these options ranged from $0.29 per share to $0.31 per share.
During the year ended May 31, 2019, the Company granted, to executive management and employees, stock options covering an aggregate of 3,715,000
shares of common stock, with exercise prices ranging between $0.48 and $0.57 per share. The option awards vest annually over three years, except for one
award covering 950,000 shares, which vests ratably by month over 24 months. All awards have a ten-year term and grant date fair values ranging from
$0.26 per share to $0.41 per share.
On January 4, 2019, in connection with the resignation of a director, the Company’s Board of Directors approved the acceleration of all outstanding
unvested stock options held by the director, to vest immediately upon the effectiveness of his resignation and to retain the stock options’ exercise period
through their respective expiration date. Stock options covering 1,145,834 shares of common stock were subject to acceleration. The other terms of the
accelerated stock options remained otherwise unchanged. In addition, the expiration terms of certain other previously awarded stock options covering an
aggregate of 150,000 shares common stock were extended from five years to 10 years. The other terms of the extended stock options remained otherwise
unchanged.
Warrants
On June 15, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering 1,970,000
shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with the
registered direct offering, the Company also issued warrants covering 133,600 shares of common stock to the placement agent. The placement agent
warrants have a five-year term and an exercise price of $0.55 per share.
68
During the year ended May 31, 2019, in connection with a private equity offering, as fully described in Note 10, the Company issued warrants covering a
total of 23,487,585 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In
connection with this offering, the Company also issued warrants covering 4,446,917 shares of common stock to the placement agent. The placement agent
warrants have a five-year term, an exercise price of $0.50 per share and a cashless exercise provision.
During the year ended May 31, 2019 the Company issued compensable warrants covering an aggregate of 300,000 shares of common stock to consultants.
The warrants have a five-year term, an exercise price of $0.56 per share and a grant date fair value of $0.30 per share. In addition the Company issued a
warrant covering 500,000 shares of common stock to a director. The warrant has a ten-year term, an exercise price of $0.51 per share and a grant date fair
value of $0.28 per share.
During the year ended May 31, 2019 in connection with the offering of 2019 Short-term Convertible Notes, as fully described in Note 4, the Company
issued warrants covering a total of 5,460,000 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of
$0.30 per share. In connection with this offering, the Company also issued warrants covering 972,000 shares of common stock to the placement agent. The
placement agent warrants have a five-year term, an exercise price of $0.50 per share and a cashless exercise provision.
On January 31, February 7 and February 13, 2019, in connection with a registered direct equity offering, the Company issued warrants covering a total of
5,364,240 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.50 per share. In connection with
this offering, the Company also issued warrants covering 965,563 shares of common stock to the placement agent. The placement agent warrants have a
five-year term, an exercise price of $0.50 per share and a cashless exercise provision.
During the year ended May 31, 2019, in connection with a Secured Convertible Promissory Note, the Company issued warrants covering a total of
5,000,000 shares of common stock to an investor. The investor warrants have a five-year term and an exercise price of $0.30 per share.
During the year ended May 31, 2019, in connection with the issuance of Series C Convertible Preferred Stock, the Company issued warrants covering a
total of 3,895,000 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.50 per share. In connection
with this offering, the Company issued warrants to two lead investors covering an aggregate of 1,000,000 shares of common stock. The lead investor
warrants have a five-year term, and an exercise price of $0.50 per share.
On April 5, 2019 and April 15, 2019, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants
covering 5,465,500 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.50 per share. In
connection with the registered direct offering, the Company also issued warrants covering 938,790 shares of common stock to the placement agent. The
placement agent warrants have a five-year term and an exercise price of $0.50 per share.
Compensation expense related to stock options and warrants for the fiscal years ended May 31, 2019, May 31, 2018 and May 31, 2017 was approximately
$3.4 million, $1.3 million and $1.2 million, respectively. The grant date fair value of options and warrants vested during the fiscal years ended May 31,
2019, May 31, 2018 and May 31, 2017 was approximately $2.1 million, $1.4 million and $0.9 million, respectively. As of May 31, 2019, there was
approximately $4.3 million of unrecognized compensation expense related to share-based payments for unvested options, with is expected to be recognized
over a weighted-average period of approximately 2.41 years.
The following table represents stock option and warrant activity for the year ended May 31, 2019:
Options and warrants outstanding - May 31, 2018
Granted
Exercised
Forfeited/expired/cancelled
Options and warrants outstanding - May 31, 2019
Outstanding exercisable - May 31, 2019
Note 7 – Acquisition of patents and intangibles
Number of
Shares
132,385,269
64,834,121
(7,541,279)
(11,086,262)
178,591,849
175,116,515
Weighted
Average
Exercise Price
0.80
$
$
$
$
$
0.57
0.40
0.81
0.71
0.71
Weighted
Average
Remaining
Contractual Life
in Years
3.78
—
—
—
3.75
3.66
Aggregate
Intrinsic Value
3,673
$
—
—
—
896,400
$
896,400
As discussed in Note 9 below, the Company consummated an asset purchase on October 16, 2012, and paid $3,500,000 for certain assets, including
intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the PRO 140 drug substance. The Company followed the
guidance in ASC 805 “Business Combinations” to determine if the Company acquired a business. Based on the prescribed accounting, the Company
acquired assets and not a business. As of May 31, 2019, the Company
69
has recorded and is amortizing $3,500,000 of intangible assets in the form of patents. The Company estimates the acquired patents have an estimated life
of ten years. Subsequent to the acquisition date, the Company has continued to expand, amend and file new patents central to its current clinical trial
strategies, which, in turn, have extended the protection period for certain methods of using PRO 140 and formulations comprising PRO 140 out through at
least 2031 and 2038, respectively, in various countries.
On November 16, 2018, the Company completed the acquisition of substantially all of the assets of ProstaGene, LLC (“ProstaGene”), a biotechnology
start-up company, which included patents related to clinical research, a proprietary CCR5 technology for early cancer diagnosis, and a noncompetition
agreement with ProstaGene’s founder and Chief Executive Officer, Richard G. Pestell, M.D., Ph.D. The Company accounted for the ProstaGene
acquisition as an asset acquisition under ASC 805-10-55 “Business Combinations” because the assets retained from ProstaGene do not include an
assembled workforce, and the gross value of the assets acquired meets the screen test in ASC 805-10-55-5A related to substantially all of the fair value
being concentrated in a single asset or group of assets (i.e., the proprietary technology and patents) and, thus, is not considered a business. Thus,
management concluded that the acquisition did not include both an input and substantive processes that together significantly contribute to the ability to
create outputs. The acquisition of ProstaGene’s assets expands the Company’s clinical development of leronlimab (PRO 140) into cancer indications and
potential commercialization of certain cancer diagnostic tests. The aggregate purchase price paid for the ProstaGene acquisition was $11,558,000 based on
the issuance of 20,278,000 shares of the Company’s common stock at $0.57 per share, including 1,620,000 shares earned, but not yet issued, by the
investment bank for advisory services. In connection with the purchase, the Company entered into a Stock Restriction Agreement (the “Stock Restriction
Agreement”), restricting the transfer of 8,342,000 shares of common stock payable to Dr. Pestell for a three-year period from the closing date of the
ProstaGene transaction (the “Restricted Shares”). In the event Dr. Pestell’s employment with the Company is terminated, as defined in Dr. Pestell’s
employment agreement with the Company, the Company will have an option to repurchase such Restricted Shares from Dr. Pestell at a purchase price of
$0.001 per share. The Restricted Shares will vest and be released from the Stock Restriction Agreement in three equal annual installments commencing
one year after the closing date of the acquisition of ProstaGene.
A summary of the net purchase price and allocation to the acquired assets is as follows:
CytoDyn Inc. Equity
Acquisition Expenses
Release of Deferred Tax Asset
Total Cost of Acquisition
Intangible Assets
Other
Allocation of Acquisition Costs
Prostagene LLC
$ 11,558,000
741,297
2,826,919
$ 15,126,216
$ 15,126,216
—
$ 15,126,216
Assets acquired from ProstaGene include (1) patents issued in the United States and Australia related to “Prostate Cancer Cell Lines, Gene Signatures and
Uses Thereof” and “Use of Modulators of CCR5 in the Treatment of Cancer and Cancer Metastasis,” (2) an algorithm used to identify a 14-gene signature
to predict the likelihood and severity of cancer diagnoses, and (3) a noncompetition agreement in connection with an employment agreement with
Dr. Pestell as Chief Medical Officer of the Company. The fair value of the assets acquired approximates the consideration paid. The Company did not
assume any liabilities. The fair value of the technology acquired is identified using the Income Approach. The fair value of the patents acquired is
identified using the Cost to Reproduce Method. The fair value of noncompetition agreement acquired is identified using the Residual Value Method.
Goodwill is not recorded as the transaction represents an asset acquisition in accordance with ASU 2017-01. Acquisition costs for asset acquisitions are
capitalized and included in the total cost of the transaction. In addition, pursuant to ASC 805, the net tax effect of the deferred tax liability arising from the
book to tax basis differences is recorded as a cost of the acquisition
As of May 31, 2019, the Company has recorded and is amortizing $4,600,000 of intangible assets in the form of patents attributable to the PRO 140
acquisition and the ProstaGene transaction. The Company estimates the acquired patents have an estimated life of ten years. Subsequent to the acquisition
dates, the Company has continued to expand, amend and file new patents central to its current clinical trial strategies, which, in turn, have extended the
protection period for certain methods of using PRO 140 and formulations comprising PRO 140 out through at least 2031 and 2038, respectively, in
various countries.
70
The following presents intangible assets activity, inclusive of patents:
Gross carrying amounts
Intangible asset acquisition:
Prostagene, LLC
Website development costs
Accumulated amortization
Total amortizable intangible assets, net
Patents currently not amortized
Carrying value of intangibles, net
May 31, 2019 May 31, 2018
$ 3,500,000 $ 3,500,000
—
15,126,216
19,553
(3,170,315)
15,475,454
—
(1,968,846)
1,531,154
35,989
$15,475,454 $ 1,567,143
Amortization expense related to all intangible assets was approximately $1,237,000 for the fiscal year ended May 31, 2019 and approximately $350,000
for each of the fiscal years ended May 31, 2018 and May 31, 2017. The estimated aggregate future amortization expense related to the Company’s
intangible assets with finite lives is estimated to be approximately $2 million per year for the next two years, approximately $1.7 million the following
year, and approximately $1.4 million for the next year and $1.2 million for the following year.
Note 8 – License Agreements
The Company has a license agreement with a third-party licensor covering the licensor’s “system know-how” technology with respect to the Company’s
use of proprietary cell lines to manufacture new PRO 140 material. The Company accrues an annual license fee of £300,000 (approximately US$365,000
utilizing current exchange rates), which is payable annually in December. The December 2018 payment date was extended to April 15, 2019 and the
December 2017 date payment was extended to March 15, 2018. Future annual license fees and royalty rate will vary depending on whether the Company
manufactures PRO 140, utilizes the third-party licensor as a contract manufacturer, or utilizes an independent party as a contract manufacturer. The
licensor does not charge an annual license fee when it serves as the manufacturer. In addition, the Company will incur royalties of up to 2% of net sales
when the Company commences their first commercial sale, which will continue as long as the license agreement is maintained.
Note 9 – Commitments and Contingencies
Under the Progenics Purchase Agreement, the Company acquired rights to the HIV viral-entry inhibitor drug candidate PRO 140, a humanized anti-CCR5
monoclonal antibody, as well as certain other related assets, including the existing inventory of bulk PRO 140 drug product, intellectual property, certain
related licenses and sublicenses, and FDA regulatory filings. In connection with purchase, the Company has one remaining milestone payment of
$5.0 million, which will become due 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. In addition, the Company will incur 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.
During the year ended May 31, 2016 the Company paid a milestone obligation of $1.5 million owed to Progenics as a result of the first dosing in a U.S.
Phase 3 trial. To the extent that the 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 the Company thereunder. As of the date of this filing, it is management’s conclusion
that the probability of achieving the subsequent future scientific research milestone is not reasonably determinable, thus the future milestone payments
payable to Progenics and its sub-licensors are deemed contingent consideration and, therefore, are not currently accruable.
Payments to the third-party licensor and 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.) (“PDL”) and Progenics, which was assigned to the Company in the Progenics
Purchase Agreement, pursuant to which the Company has 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 by PDL under the agreement the Company has paid various
milestone obligations, with two remaining milestone payments of $0.5 million each, one payment of $0.5 million upon filing a BLA with the FDA or
non-U.S. equivalent regulatory body and a second payment of $0.5 million, which will become due upon FDA approval or approval by another non-U.S.
equivalent regulatory body. In addition, the Company will incur 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 or until annual royalties paid exceed
that amount. To the extent the remaining milestone payment and royalties are not timely made, under the terms of the PDL License, AbbVie Inc. has
certain termination rights relating to the Company’s license of PRO 140 thereunder. As of the date of this filing, it is management’s conclusion that the
probability of achieving the subsequent future scientific research milestones is not reasonably determinable, thus the future milestone payments payable to
PDL, Progenics and its sub-licensors are deemed contingent consideration and, therefore, are not currently accruable.
71
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. In April 2019 the Company delivered to Samsung a purchase order for
$33 million worth of process validation and technology transfer services related to the manufacture of leronlimab, with payments by the Company
scheduled to be made throughout calendar 2020. Under the Samsung Agreement, the 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 will provide to Samsung. The first forecast will be delivered to
Samsung by March 31, 2020. Thereafter, the Company must provide Samsung with a rolling quarterly forecast 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 $60 million, with approximately $30 million payable over the course of calendar 2020,
and approximately $30 million payable in the first quarter of 2021. 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.
In addition to our manufacturing agreement with Samsung, the Company 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 the Company terminates the agreement
with this manufacturer, the Company may incur certain financial penalties which would become payable to the manufacturer. Conditioned upon the timing
of termination, the financial penalties may total approximately $8.3 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.
The Company has entered into project work orders, as amended, for each of its CRO and related laboratory vendors. Under the terms of these agreements,
the Company incurs execution fees for direct services costs, which are recorded as a current asset. In the event the Company were to terminate any trial, it
may incur certain financial penalties which would become payable to the CRO. Conditioned upon the form of termination of any one trial, the financial
penalties may range up to $0.3 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties
may range from an approximate low of $0.5 million to an approximate high of $1.2 million.
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal
proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the
Company’s financial position.
Note 10—Private Securities Offerings
On November 30, 2017, the Company completed an offer and sale (the “Make-Whole Offering”) of an aggregate of 503,015 shares of Common Stock
(the “Make-Whole Shares”) and warrants to purchase up to 251,504 shares of common stock (the “Make-Whole Warrants” and, collectively with the
Make-Whole Shares, the “Make-Whole Securities”). The Make-Whole Securities issued were unregistered.
The Make-Whole Securities were offered pursuant to a form of Waiver and Subscription Agreement (the “Waiver and Subscription Agreement”). The
Make-Whole Securities represent the difference in the numbers of shares of Common Stock and warrants that would have been sold to investors in the
September 2017 Offering had the reduced purchase price of $0.65 per share of Common Stock and related Warrants in the October 2017 Offering,
registered direct offering (as compared to $0.75 in the September 2017 Offering) and the reduced warrant exercise price of $0.75 in the October 2017
Offering (as compared to $1.00 in the September 2017 Offering) applied to the September 2017 Offering as well. The Make-Whole Securities were offered
as
72
consideration for the release of potential claims by participating investors. In connection with these arrangements, the exercise prices of any warrants
previously sold in the September 2017 Offering to participating investors has also been reduced to $0.75 from $1.00. In addition, warrants previously
issued to the placement agent (or its designees) in respect of participating investors have also been proportionately adjusted to reflect a reduced exercise
price of $0.715 (as compared to $0.825 in the September 2017 Offering) and 26,702 additional shares.
In connection with the November 24, 2017 Offer to amend and exercise certain eligible warrants at a reduced exercise price of $0.50 per share of common
stock, on March 23, 2018, the Company issued 2,470,585 shares of common stock to warrant holders who participated in the Offer, in exchange for their
eligible warrants, in a private securities offering.
During the year ended May 31, 2018, the Company conducted a private equity offering, in which accredited investors purchased unregistered common
stock at $0.50 per share with warrant coverage ratio of 100%, based on the number of shares of common stock purchased. Pursuant to the offering, the
Company sold a total of 35,286,904 shares of common stock for aggregate gross proceeds of $17.6 million and issued warrants covering an aggregate of
35,286,904 shares of common stock with a five-year term and an exercise price of $0.75 per share. In connection with the offering, the placement agent
received a warrant covering 2,813,491 shares of common stock, with a five-year term, an exercise price of $0.55 per share, and include a cashless exercise
provision.
During the year ended May 31, 2019, the Company conducted private equity offerings (the “Equity Offerings”), in which accredited investors purchased
unregistered common stock at $0.50 per share with warrant coverage of 50% based on the number of shares of common stock purchased. Pursuant to the
Equity Offerings, the Company sold a total of 46,975,170 shares of common stock, $0.001 par value, for aggregate gross proceeds of approximately
$23.5 million and issued five-year warrants covering 23,487,585 shares of common stock. In conjunction with the Equity Offerings, the Company paid an
aggregate cash fee of approximately $2.7 million to the placement agent and issued warrants covering an aggregate of 4,446,917 shares of common stock
to the placement agent as additional compensation.
On May 8, 2019, the Company entered into a private warrant exchange in which accredited investors purchased unregistered common stock at the lower of
the stated exercise price on their warrant or $0.40 per share of common stock. The Company sold 7,541,279 shares of common stock, as well as 3,770,638
additional shares as an inducement to exercise their warrants, for a total of 11,311,917 shares of common stock, $0.001 par value. Aggregate gross
proceeds from the private warrant exchange were approximately $3.0 million. In conjunction with the private warrant exchange, the Company incurred a
non-cash inducement interest expense of approximately $0.2 million and paid an aggregate cash fee of approximately $0.3 million to the placement agent.
Note 11—Registered Direct Equity Offerings
On June 15, 2018, the Company entered into subscription agreements with certain investors for the sale of 1,970,000 shares of common stock at a purchase
price of $0.50 per shares in a registered direct offering (the “June 2018 Offering”), pursuant to a registration statement on Form S-3. The investors in the
June 2018 Offering also received warrants to purchase 1,970,000 shares of common stock with an exercise price of $0.75 per share and a five-year term.
The Company received net proceeds from the June 2018 Offering of approximately $0.9 million. In addition, the placement agent received warrants
covering 133,600 shares of common stock (or 8% of total shares sold to investors) with a per share exercise price of $0.55, a five-year term and include a
cashless exercise provision.
Between January 31, 2019 and February 13, 2019 the Company entered into subscription agreements with certain investors for the sale of 10,728,480
shares of common stock at a purchase price of $0.50 per share in a registered direct offering, pursuant to a registration statement on Form S-3. The
investors in this offering also received warrants to purchase 5,364,240 shares of common stock with an exercise price of $0.50 per share and a five-year
term. The Company received net proceeds from the offering of approximately $4.8 million. In addition, the placement agent received warrants covering
965,563 shares of common stock (or 9% of total shares sold to investors) with a per share exercise price of $0.50 and a five-year term and included a
cashless exercise provision.
On April 5, 2019 and April 15, 2019, the Company entered into subscription agreements with certain investors for the sale of 10,931,000 shares of
common stock at a purchase price of $0.50 per share in a registered direct offering, pursuant to a registration statement on Form S-3. The investors in this
offering also received warrants to purchase 5,465,500 shares of common stock with an exercise price of $0.50 per share and a five-year term. The
Company received net proceeds from the offering of approximately $5.0 million. In addition, the placement agent received warrants covering 938,790
shares of common stock (or 9% of the total shares sold to investors) with a per share exercise price of $0.50 and a five-year term and included a cashless
exercise provision.
73
Note 12 – Employee Benefit Plan
The Company has an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), covering all of its
employees. The Company makes a qualified non-elective contribution of 3%, which consequently vests immediately. In addition, participants in the Plan
may contribute a percentage of their compensation, but not in excess of the maximum allowed under the Code. During the year ended May 31, 2019,
May 31, 2018 and May 31, 2017, the Company incurred an expense of approximately $111,000, $61,000 and $40,300, respectively, for qualified
non-elective contributions.
Note 13 – Income Taxes
Deferred taxes are recorded for all existing temporary differences in the Company’s assets and liabilities for income tax and financial reporting purposes.
Other than approximately a $2.8 million benefit from a basis difference in the acquired assets of ProstaGene, due to the valuation allowance for deferred
tax assets, as noted below, there was no other net deferred tax benefit or expense for the periods ended May 31, 2019, May 31, 2018 and May 31, 2017.
Reconciliation of the federal statutory income tax rate of 21% for the year ended May 31, 2019,the federal statutory blended rate of 28.6% for the year
ended May 31, 2018 and the federal statutory rate of 34% for the year ended May 31, 2017, to the effective income tax rate is as follows for all periods
presented:
Income tax provision at statutory rate:
State income taxes net
Rate Change
Loss on debt extinguishment
Derivative gain/loss
Valuation allowance release from Asset Acquisition
Non-deductible debt issuance costs
Non-deductible interest on conversion
Inducement charge
Other
Miscellaneous
Current year credits generated
Credit carry forward generated (released)
Valuation allowance
74
2019
21.0%
—
—
(0.5)
0.6
4.8
—
(0.3)
(0.1)
—
—
—
(3.8)
(16.9)
4.8%
2018
28.6%
—
(34.8)
—
1.0
—
(0.2)
(0.1)
(2.0)
(1.1)
(0.1)
4.4
4.1
0.3
0%
2017
34.0%
—
—
—
2.8
—
—
—
(1.0)
—
(0.1)
—
—
(35.7)
0%
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2019 and 2018:
Deferred tax asset (liability) non-current:
Net Operating Loss
Credits
ASC 718 Expense on NQO’s
Charitable Contribution - Carry forward
Accrued Expenses
Fixed Assets
Amortization
Capitalized Debt Issuance Costs
Debt Discount
Basis difference in acquired assets
Valuation allowance
Noncurrent asset
Valuation Allowance
2019
2018
39,996,561 29,230,279
2,062,692 4,260,470
3,628,085 2,916,585
—
—
117,880
251,293
174
(340)
139,875
329,360
—
—
—
(308,621)
(2,826,919)
—
(43,132,111) (36,665,263)
—
—
43,132,111 36,665,263
(43,132,111) (36,665,263)
—
—
The income tax benefit for the period presented is offset by a valuation allowance established against deferred tax assets arising from operating losses and
other temporary differences, the realization of which could not be considered more likely than not. In future periods, tax benefits and related tax deferred
assets will be recognized when management considers realization of such amounts to be more likely than not.
At May 31, 2019, May 31, 2018 and May 31, 2017 the Company had available net operating loss carry forwards of approximately $190.5 million,
$139.2 million and $95.6 million, respectively, which expire beginning in 2023.
The Company’s income tax returns remain subject to examination by all tax jurisdictions for tax years ended May 31, 2015 through 2018.
75
Note 14 – Related Party Transactions
On July 26, 2017, Jordan G. Naydenov, a director with the Company, participated in the private placement of 2017 Notes, as fully described in Note 4
above. Mr. Naydenov purchased a promissory note, bearing interest of 7%, for $100,000 in aggregate principal and received a warrant covering 66,666
shares of common stock at an exercise price of $1.00. The terms and conditions of Mr. Naydenov’s investment were identical to those offered to all other
investors in the offering and his investment was approved by the Audit Committee of the Board of Directors.
On July 28, 2017, AVCP, participated in the private placement of 2017 Notes, as fully described in Note 4 above. Carl C. Dockery, the principal of AVCP,
is a director of the Company. AVCP purchased a promissory note, bearing interest of 7%, for $50,000 in aggregate principal and received a warrant
covering 33,333 shares of common stock at an exercise price of $1.00. The terms and conditions of the AVCP investment were identical to those offered to
all other investors in the offering and his investment was approved by the Audit Committee of the Board of Directors.
On November 8, 2017, in connection with a private equity offering, a limited liability company in which Anthony D. Caracciolo, Executive Chairman of
the Company, holds a partial ownership interest, purchased $100,000 of common stock and warrants on terms identical to those applicable to the other
investors in the private equity offering.
On January 31, 2018 each of Mr. Caracciolo, Mr. Naydenov and AVCP participated with other investors in the offering of common stock and warrants in
satisfaction of the payment obligations relating to the 2017 Notes, as fully described in Note 11 above.
On July 12, 2018, the Company announced certain leadership changes in connection with the strategic expansion and entry into certain cancer and
immunologic indications. In connection with such leadership changes and effective July 11, 2018, Denis R. Burger, Ph.D. and A. Bruce Montgomery,
M.D., resigned as members the Board of Directors. Dr. Burger also resigned as Chief Science Officer of the Company, which was not an executive officer
position. On July 10, 2018, In connection with the resignations of Dr. Burger and Dr. Montgomery, the Board of Directors determined to accelerate the
vesting of all outstanding and unvested stock options held by Dr. Burger and Dr. Montgomery. Upon the effectiveness of their resignations, stock options
covering 500,000 shares 100,000 shares, held by Dr. Burger and Dr. Montgomery, respectively became fully vested. The stock options retained their
exercise period through their respective expiration dates and the terms of the stock options remained otherwise unchanged.
On November 16, 2018, the Company closed its acquisition of ProstaGene assets, as described in Note 7. In connection with the closing of the acquisition,
the Company hired Dr. Pestell as its Chief Medical Officer. As previously disclosed by the Company, Dr. Pestell is the holder of approximately 77.2% of
the outstanding equity interests in ProstaGene and consequently holds an indirect interest in approximately (i) 8,611,427 of 13,258,000 shares of the
Company’s common stock and (ii) 4,171,013 of 5,400,000 shares of common stock, currently held in escrow for the benefit of ProstaGene and its
members, which are subject to forfeiture to satisfy certain indemnity obligations of ProstaGene and will be released ratably every six months over the
eighteen-month period following the closing date. In addition, as specified in a Stock Restriction Agreement with the Company entered into on the closing
date, 8,342,000 additional shares of common stock previously distributed to Dr. Pestell in the ProstaGene acquisition are currently subject to transfer
restrictions and forfeiture obligations, subject to certain continuing employment obligations of Dr. Pestell, which will vest ratably each year over the three-
years period following the closing date.
As specified in a Confidential Information, Inventions and Noncompetition Agreement between the Company and Dr. Pestell, which was entered into on
the closing date of the ProstaGene acquisition, the Company may participate in the development and license of certain intellectual property created by
Dr. Pestell, in connection with Dr. Pestell’s ongoing research obligations to outside academic institutions. The Company also has the right to work with
Dr. Pestell to manage any potential conflict between the Company’s clinical development activities and such ongoing research obligations.
On December 10, 2018, Anthony D. Caracciolo resigned as the Chairman of the Board of Directors, but remained a director and Scott A. Kelly, M.D., was
named Chairman of the Board of Directors. On December 19, 2018, the Compensation Committee of the Board of Directors approved an amendment to
certain compensation arrangements for Anthony D. Caracciolo, pursuant to which his employment with the Company would be extended through April 16,
2019, at a salary reduced from $16,667 to $5,000 per month, with continuing benefits. In addition, the Compensation Committee approved an extension to
10 years of the expiration terms of certain previously awarded stock options covering an aggregate of 150,000 shares of the Company’s common stock,
provided that such stock options were out-of-the-money upon the date of such extension. These arrangements were conditioned upon Mr. Caracciolo’s
agreement to resign from the Board of Directors upon identification by the Company of an appropriately qualified candidate to fill the vacancy.
Mr. Caracciolo had agreed to the foregoing terms and his resignation was effective January 10, 2019. These arrangements were not the result of any
disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
76
On January 8, 2019, Argonne Trading LLC (“Argonne”), participated in the private placement of convertible promissory notes, as fully described in Note
4. Michael A. Klump, the manager of Argonne, is a director of the Company. Argonne purchased a convertible promissory note, bearing interest of 10%
for $500,000 in aggregate principal and received a warrant covering 500,000 shares of common stock at an exercise price of $0.30 per share. The terms
and conditions of the Argonne investment were identical to those offered to all other investors in the offering and his investment was approved by the
Audit Committee of the Board of Directors.
On May 8, 2019, Dr. David F. Welch entered into Exercise Agreements for warrants beneficially owned by him, covering an aggregate of 1,651,281
shares of common stock and 825,640 additional shares. Additionally, Michael A. Klump entered into Exercise Agreements for warrants beneficially
owned by him, covering an aggregate of 3,625,000 shares of common stock and 1,812,499 additional shares. Dr. Welch and Mr. Klump are members of
the Company’s board of directors and participated on terms identical to those applicable to other investors.
The Audit Committee of the Board of Directors reviews and approves all related party transactions. The above terms and amounts are not necessarily
indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
Note 15 – Subsequent Events
On May 14, 2019, the Company commenced the June 2019 Tender Offer, offering the holders of such warrants the opportunity to amend and exercise
their warrants at the lower of the warrant exercise price or $0.40 per share in exchange for which the Company would issue participating holders an
additional 50% of the number of shares issuable upon exercise of their original warrants. The terms and conditions of the June 2019 Tender Offer were
included in the Company’s Schedule TO-I filed with the SEC on May 14, 2019. The June 2019 Tender Offer closed on June 12, 2019 with net proceeds of
approximately $8.3 million after the payment of placement agent fees of approximately $0.8 million.
From June 3, 2019 to July 26, 2019, the Company received four redemption notices from the holder of the Company’s convertible note, requesting
redemptions in the aggregate amount of $655,000 of the outstanding balance thereof. In satisfaction of the redemption notices, the Company 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.
In connection with the Company’s warrant tender offer (the “June 2019 Tender Offer”) which closed on June 12, 2019, Dr. Scott A. Kelly validly tendered
warrants beneficially owned by him, covering an aggregate of 50,000 shares of common stock, and received 25,000 additional shares of common stock.
Additionally, two entities affiliated with Carl C. Dockery, a director of the Company, validly tendered warrants beneficially owned by him, covering an
aggregate of 1,425,000 shares of common stock, and received 712,500 additional shares. Dr. Kelly and Mr. Dockery are members of the Company’s board
of directors and participated on terms identical to those applicable to other participating warrant holders.
On June 11, 2019, the Compensation Committee of the board of directors approved a stock option award to an employee covering 75,000 shares of
common stock with an exercise price of $0.43 per share. The option vests ratably over three years with a 10-year term.
On June 16, 2019, the Compensation Committee of the board of directors approved a stock option award to two employees covering 25,000 shares of
common stock to each employee with an exercise price of $0.44 per share. Each option vests ratably over three years with a 10-year term.
On June 18, 2019, the board of directors approved a stock option award to an employee covering 100,000 shares of common stock with an exercise price
of $0.52 per share. The option vests ratably over three years with a 10-year term.
On June 18, 2019, the board of directors approved the recommendation from the Compensation Committee to maintain the current non-employee director
compensation plan for the 2020 fiscal year without modification. Accordingly, the board of directors approved an annual stock option award covering
100,000 shares of common stock for each of the six non-employee directors with an exercise price of $0.52 per share. Each option vests in four equal
quarterly installments over one year with a 10-year term. In addition, the board of directors approved a stock option award to an employee covering 50,000
shares of common stock with an exercise price of $0.90 per share. The option was fully vested upon grant date with a 10-year term.
On June 24, 2019, the Company commenced the July 2019 Tender Offer, offering the holders of such warrants the opportunity to amend and exercise their
original warrants upon identical terms as the June 2019 Tender Offer. The terms and conditions of the July 2019 Tender Offer were included in the
Company’s Schedule TO-I filed with the SEC on June 24, 2019, as amended. The July 2019 Tender Offer closed on July 31, 2019 with net proceeds of
approximately $2.5 million after the payment of placement agent fees of approximately $237,000.
On July 15, 2019, the Company entered into a Consulting Agreement with Scott A. Kelly, M.D., who is currently Chairman of the Board of Directors. The
agreement names Dr. Kelly to the non-executive position of Chief Science Officer, with compensation of $20,000 in cash per month payable in arrears and
the grant of a stock option to be determined by the Board of Directors, which are in addition to any fees that Dr. Kelly currently earns as a director. The
Company expects to evaluate the term of the agreement on a month-to month basis.
On July 15, 2019, the Company entered into a Consulting Agreement with David F. Welch, Ph.D. who is currently a member of the Board of Directors.
The agreement names Dr. Welch to the non-executive position of Strategy Advisor, with compensation of $20,000 in cash per month payable in arrears and
the grant of a stock option to be determined by the Board of Directors, which are in addition to any fees that Dr. Welch currently earns as a director. The
Company expects to evaluate the term of the agreement on a month-to month basis.
77
On July 25, 2019, the board of directors of the Company terminated the employment of Dr. Richard G. Pestell, the Company’s Chief Medical Officer, for
cause pursuant to the terms of his employment agreement with the Company and effective immediately. Pursuant to the terms of his employment
agreement, upon such termination, Dr. Pestell resigned from his position as a director of the Company. Dr. Pestell was not a member of any board
committees. As of the date of this filing, the Company does not believe the carrying value of certain intangible assets acquired in the asset acquisition with
ProstaGene, LLC are impaired, including an assessment of the fair value of the non-compete agreement with Dr. Pestell, which effectiveness survives one
year following the termination of his employment for any reason.
In connection with the Company’s warrant tender offer, which closed on July 31, 2019, Dr. David F. Welch tendered Original Warrants beneficially
owned by him, covering an aggregate of 1,000,000 shares of Common Stock, and received 500,000 Additional Shares. Dr. Welch is a member of the
Company’s board of directors and participated on terms identical to those applicable to other holders of Original Warrants.
On August 12, 2019, Gregory A. Gould submitted his resignation from the board of directors effective immediately.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or
submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we
have evaluated the effectiveness of our disclosure controls and procedures as of May 31, 2019. Based on that evaluation, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 31, 2019.
Internal Control Over Financial Reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, our Chief Executive Officer and our Chief Financial Officer and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies
and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures of the Company’s assets are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of May 31, 2019. This evaluation was based on the
framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “2013 COSO Framework”). Based upon that evaluation, our management concluded that our internal control over financial reporting
was effective as of May 31, 2019.
Attestation Report of Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting has been audited by Warren Averett, LLC, an independent registered public
accounting firm, as stated in their report, which appears herein.
78
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting during the quarter ended May 31, 2019.
Item 9B.
Other Information.
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by Item 10 relating to our directors, executive officers and corporate governance is incorporated herein by reference to our
definitive proxy statement for the 2019 Annual Meeting of Stockholders, to be filed with the SEC within 120 days of the end of the Company’s fiscal year
May 31, 2019 (the “2019 Proxy Statement”).
We have adopted a Code of Ethics for our Senior Executive Officers (the Chief Executive Officer, Chief Financial Officer, Treasurer, and
Secretary), as well as an Insider Trading Policy for the Company. Copies are available on our website at www.cytodyn.com.
Item 11.
Executive Compensation.
The information required by Item 11 relating to executive compensation is incorporated herein by reference to our 2019 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 relating to security ownership of certain beneficial owners and management and related stockholders matters is
incorporated herein by reference to our 2019 Proxy Statement.
Item 13.
Certain Relationships and Related Transactions and Director Independence.
The information required by Item 13 relating to certain relationships and related transactions and director independence is incorporated herein by
reference to our 2019 Proxy Statement.
Item 14.
Principal Accountant Fees and Services.
The information required by Item 14 relating to principal accountant fees and services is incorporated herein by reference to our 2019 Proxy
Statement.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following are filed as part of this Annual Report on Form 10-K:
Consolidated Financial Statements
The Consolidated Financial Statements for the years ended May 31, 2019 and 2018 are included under Item 8 of this report.
Exhibits
Exhibits are listed in the Exhibit Index which appears immediately following the signature page of this report.
Item 16.
Form 10-K Summary.
None.
79
Exhibit
Number
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Description
Plan of Acquisition
Asset Purchase Agreement, dated as of July 25, 2012, between CytoDyn Inc. and Progenics Pharmaceuticals, Inc. (incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 30, 2012).
Acquisition Agreement by and among CytoDyn Inc., Point NewCo, Inc., Point Merger Sub, Inc., ProstaGene, LLC, and Dr. Richard Pestell,
dated August 27, 2018 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, as amended, filed August 28,
2018).
Articles of Incorporation and Bylaws
Amended and Restated Certificate of Incorporation of CytoDyn Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K12G3 filed November 19, 2018).
Certificate of Designation, Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report
on Form 8-K filed March 20, 2019).
Amended and Restated Bylaws of CytoDyn Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on
Form 8-K12G3 filed November 19, 2018).
Instruments Defining Rights of Security Holders
Form of Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed June 22,
2017).
Form of Convertible Promissory Note Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed
June 22, 2017).
Form of Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed June 27,
2018).
Amended and Restated Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K12G3 filed November 19, 2018).
Form of Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed
January 3, 2019).
Convertible Promissory Note by and between CytoDyn Inc. and Iliad Research and Trading, L.P. (incorporated by reference to Exhibit 4.1 to
the Registrant’s Current Report on Form 8-K filed January 30, 2019).
Convertible Promissory Note Warrant Agreement by and between CytoDyn Inc. and Iliad Research and Trading, L.P. (incorporated by
reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed January 31, 2019).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K12G3 filed
September 1, 2015).
Form of Warrant Agreement (Private Offerings) (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K filed September 4, 2018).
4.10
Form of Warrant Agreement (Registered Offerings) (incorporated by reference to Exhibit 4.1 to the Form 8-K filed on April 5, 2019).
4.11
4.12
4.13
4.14
4.15
Form of Warrant to Purchase Common Stock (December 2018 Convertible Note Offering) (incorporated by reference to Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K filed January 3, 2019).
Form of Inducement Warrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed June 25, 2015).
Form of Placement Agent Warrant (Private Offerings, as Amended) (incorporated by reference to Exhibit 4.11 to the Registrant’s Annual
Report, as amended, on Form 10-K filed July 27, 2018).
Form of Placement Agent Warrant (Registered Offerings, as Amended) (incorporated by reference to Exhibit 4.12 to the Registrant’s Annual
Report, as amended, on Form 10-K filed July 27, 2018).
Form of Consultant Warrant (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1 filed
February 3, 2016).
4.16
Form of Consultant Warrant (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed June 22, 2017).
4.17
Form of Series C Warrant Agreement (Series C Convertible Preferred Stock Offering) (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed March 20, 2019).
4.18
Description of the Registrant’s Capital Stock
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Material Contracts
Patent License Agreement between Allen D. Allen and CytoDyn of New Mexico Inc. (incorporated by reference to Exhibit 10.2 to the
Registrant’s Annual Report on Form 10-KSB filed September 14, 2004).
Amendment to Patent License Agreement (incorporated by reference to Exhibit 10.6.1 to the Registrant’s Form SB-2/A filed March 21,
2005).
Development and License Agreement between Protein Design Labs, Inc. (to which AbbVie Biotherapeutics Inc. is successor in interest)
and Progenics Pharmaceuticals, Inc. (to which CytoDyn Inc. is successor in interest) effective as of April 30, 1999, as amended by letter
agreement dated November 24, 2003 (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed
August 29, 2013).
License Agreement between CytoDyn Inc. and Lonza Sales AG dated July 29, 2015 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed August 4, 2015, as amended on August 19, 2015).
Development and Manufacturing Services Agreement, dated as of November 9, 2016, by and between CytoDyn Inc. and CMC ICOS
Biologics, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Periodic Report on Form 10-Q filed April 13, 2017).
Work Statement No. 01, dated as of November 9, 2016, by and between CytoDyn Inc. and CMC ICOS Biologics, Inc. (incorporated by
reference to Exhibit 10.5 to the Registrant’s Periodic Report on Form 10-Q filed April 13, 2017).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Periodic Report on Form 10-Q filed on
October 9, 2018).
Escrow Agreement, dated as of November 16, 2018, by and among ProstaGene, LLC, CytoDyn Inc., and Computershare Trust Company,
N.A. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K12G3 filed November 19, 2018).
Stock Restriction Agreement, dated as of November 16, 2018, by and among CytoDyn Inc., ProstaGene, LLC and Dr. Richard G. Pestell
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K12G3 filed November 19, 2018).
Confidential Information, Inventions and Noncompetition Agreement, dated as of November 16, 2018, by and among CytoDyn Inc.,
CytoDyn Operations Inc. and Dr. Richard G. Pestell (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K12G3 filed November 19, 2018).
10.11***
Master Services Agreement between CytoDyn Inc. and Samsung BioLogics Co., Ltd, dated April 1, 2019.
10.12***
Product Specific Agreement between CytoDyn Inc. and Samsung BioLogics Co., Ltd, dated April 1, 2019.
Offering Documents
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.40 to the Registrant’s Registration Statement on Form S-1
filed February 3, 2016).
Form of Securities Purchase Agreement (December 2016 Offering) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed December 12, 2016.
Form of Securities Purchase Agreement (September 2017 Offering) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed September 8, 2017).
Form of Waiver and Subscription Agreement (Make-Whole Offering) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed December 6, 2017).
Securities Purchase Agreement, dated June 26, 2018, by and between CytoDyn Inc. and Iliad Research and Trading. L.P. (incorporated by
reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on June 27, 2018).
Securities Purchase Agreement, dated January 30, 2019, by and between CytoDyn Inc. and Iliad Research and Trading. L.P. (incorporated by
reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on January 30, 2019).
Form of Subscription Agreement (Series C Convertible Preferred Stock Offering) (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed March 20, 2019).
10.20
Form of Exercise Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 9, 2019).
Compensatory Arrangements
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
CytoDyn Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s Amendment No. 1 to Annual Report
on Form 10-K filed August 5, 2011).
CytoDyn Inc. 2004 Stock Incentive Plan (the “2004 Plan”) (incorporated by reference to Exhibit 10.10 to the Registrant’s Amendment No. 1
to Annual Report on Form 10-K filed August 5, 2011).
Form of Stock Option Award for Employees under the 2004 Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report
on Form 10-K filed August 29, 2013).
Form of Stock Option Award Agreement for Employees under the 2012 Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s
Annual Report on Form 10-K filed August 29, 2013).
Form of Stock Option Award Agreement for Non-Employee Directors under the 2012 Plan (incorporated by reference to Exhibit 10.9 to the
Registrant’s Annual Report on Form 10-K filed August 29, 2013).
Form of Stock Option Award Agreement for Employees granted under an arrangement not approved by the Registrant’s shareholders
(incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed August 29, 2013).
Form of Stock Option Award for Non-Employee Directors under the 2004 Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s
Annual Report on Form 10-K filed August 29, 2013).
Form of Stock Option Award Agreement for Non-Employee Directors granted under an arrangement not approved by the Registrant’s
shareholders (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed August 29, 2013).
Consulting Agreement between CytoDyn Inc. and Denis R. Burger dated February 21, 2014. (incorporated by reference to Exhibit 10.25 to
the Registrant’s Annual Report on Form 10-K filed July 10, 2014).
Amended and Restated Employment Agreement by and between CytoDyn Inc. and Nader Pourhassan dated January 6, 2015 (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 7, 2015).
10.31*
10.32*
10.33*
10.34*
10.35*
10.36*
10.37*
21
23
24
31.1
31.2
32**
Employment Agreement by and between CytoDyn Inc. and Michael D. Mulholland dated January 6, 2015 (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 7, 2015).
Amendment to Consulting Agreement between CytoDyn Inc. and Denis R. Burger dated November 3, 2014 (incorporated by reference to
Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K filed July 10, 2015).
Amendment to Consulting Agreement between CytoDyn Inc. and Denis R. Burger dated January 19, 2016 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 22, 2016).
Amended and Restated CytoDyn Inc. 2012 Equity Incentive Plan (the “2012 Plan”) (incorporated by reference to Exhibit 10.1 to the
Registrant’s Registration Statement on Form S-8 filed March 23, 2018).
Consulting Agreement between CytoDyn Inc. and Richard G. Pestell, M.D., Ph.D. dated as of August 27, 2018 (incorporated by reference to
Exhibit 10.3 to the Registrant’s Periodic Report on Form 10-Q filed October 9, 2018).
Employment Agreement, dated as of November 16, 2018, by and among CytoDyn, Inc., CytoDyn Operations Inc. and Dr. Richard G. Pestell
(incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K12G3 filed November 19, 2018).
Employment Agreement by and between CytoDyn Inc. and Dr. Nitya G. Ray, dated December 22, 2018 (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed December 26, 2018).
Subsidiaries of the Registrant.
Consent of Warren Averett, LLC.
Power of Attorney of executive officers and directors.
Other
Certifications
Certification of Chief Executive Officer under Rule 13a-14(a).
Certification of Chief Financial Officer under Rule 13a-14(a).
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
XBRL
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
*
**
***
Management contract or compensatory plan or arrangement.
Furnished herewith.
Certain confidential portions of this Exhibit were omitted by means of marking such portions with asterisks because the
identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
Note: All exhibits incorporated by reference to filings other than registration statements are incorporated by reference to filings that have SEC File
No. 000-49908.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
SIGNATURES
its behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2019
CYTODYN INC.
(Registrant)
By: /s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph. D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on August 14, 2019.
Principal Executive Officer and Director:
/s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph. D.
President and Chief Executive Officer, Director
Principal Financial and Accounting Officer:
/s/ Michael D. Mulholland
Michael D. Mulholland
Chief Financial Officer, Treasurer and Corporate Secretary
Remaining Directors:
Scott A. Kelly, M.D.
Carl C. Dockery
Michael A. Klump
Jordan G. Naydenov
*
*
*
*
*
David F. Welch, Ph.D.
* By /s/ Michael D. Mulholland
Michael D. Mulholland
Attorney-In-Fact
Exhibit 4.18
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 705,000,000 shares of capital stock, including 700,000,000 shares of common stock, par value $0.001 per share, and
5,000,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2019, we had 364,748,563 shares of common stock, 92,100 shares of
Series B Preferred Stock (as defined below) and 3,246 shares of Series C Preferred Stock (as defined below) issued and outstanding.
The additional shares of our authorized stock available for issuance may be issued at times and under circumstances so as to have a dilutive effect on
earnings per share and on the equity ownership of the holders of our common stock. The ability of our board of directors to issue additional shares of stock
could enhance the board’s ability to negotiate on behalf of the stockholders in a takeover situation but could also be used by the board to make a
change-in-control more difficult, thereby denying stockholders the potential to sell their shares at a premium and entrenching current management. The
following description is a summary of the material provisions of our capital stock. You should refer to our certificate of incorporation, as amended and
bylaws, both of which are on file with the SEC as exhibits to previous SEC filings, for additional information. The summary below is qualified by
provisions of applicable law.
Common Stock
Each outstanding share of common stock entitles the holder to one vote, either in person or by proxy, on all matters submitted to a vote of stockholders,
including the election of directors. There is no cumulative voting in the election of directors. All actions required or permitted to be taken by stockholders
at an annual or special meeting of the stockholders must be effected at a duly called meeting, with a quorum present of a majority in voting power of the
shares entitled to vote thereon. Special meetings of the stockholders may only be called by our Board of Directors acting pursuant to a resolution approved
by the affirmative majority of the entire Board of Directors. Stockholders may not take action by written consent. As more fully described in our
Certificate of Incorporation, holders of our common stock are not entitled to vote on certain Amendments to the Certificate of Incorporation related solely
to our preferred stock.
Subject to preferences which may be applicable to any outstanding shares of preferred stock from time to time, holders of our common stock have equal
ratable rights to such dividends as may be declared from time to time by our Board of Directors out of funds legally available therefor. In the event of any
liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in our remaining assets after provision for
payment of amounts owed to creditors and preferences applicable to any outstanding shares of preferred stock. All outstanding shares of common stock
are fully paid and nonassessable. Holders of common stock do not have preemptive rights.
The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any outstanding shares of preferred stock.
Preferred Stock
Our Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock, par value $0.001 per share, in one or more series, 4,595,000 of
which shares are undesignated.
Our Board of Directors has the authority, within the limitations and restrictions prescribed by law and without stockholder approval, to provide by
resolution for the issuance of shares of preferred stock, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preference and the number of shares constituting any series of the designation of such
series, by delivering an appropriate certificate of amendment to our certificate of incorporation to the Delaware Secretary of State pursuant to the Delaware
General Corporation Law (the “DGCL”). The issuance of preferred stock could have the effect of decreasing the market price of the common stock,
impeding or delaying a possible takeover and adversely affecting the voting and other rights of the holders of our common stock.
If we offer a specific series of preferred stock under this prospectus, we will describe the terms of the preferred stock in the prospectus supplement for
such offering and will file a copy of the certificate establishing the terms of the preferred stock with the SEC. To the extent required, this description will
include:
•
the title and stated value;
•
the number of shares offered, the liquidation preference per share and the purchase price;
•
the dividend rate(s), period(s) and/or payment date(s), or method(s) of calculation for such dividends;
•
whether dividends will be cumulative or non-cumulative and, if cumulative, the date from which dividends will accumulate;
•
the procedures for any auction and remarketing, if any;
•
the provisions for a sinking fund, if any;
•
the provisions for redemption, if applicable;
•
any listing of the preferred stock on any securities exchange or market;
•
•
whether the preferred stock will be convertible into our common stock, and, if applicable, the conversion price (or how it will be calculated) and
conversion period;
whether the preferred stock will be exchangeable into debt securities, and, if applicable, the exchange price (or how it will be calculated) and
exchange period;
•
voting rights, if any, of the preferred stock;
•
a discussion of any material and/or special U.S. federal income tax considerations applicable to the preferred stock;
•
•
the relative ranking and preferences of the preferred stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of
CytoDyn; and
any material limitations on issuance of any class or series of preferred stock ranking senior to or on a parity with the series of preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of CytoDyn.
Series B Convertible Preferred Stock
Our Board of Directors previously established a series of preferred stock designated as Series B Convertible Preferred Stock (“Series B Preferred Stock”),
comprising 400,000 shares of Preferred Stock, of which 92,100 shares remain outstanding as of May 31, 2019. Subject to superior rights of any other
outstanding preferred stock from time to time, each outstanding share of Series B Preferred Stock is 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 stock, accrued and unpaid dividends will be paid in cash or with shares of common stock. In the
event we elect to pay dividends with shares of common stock, the shares issued will be valued at $0.50 per share. Series B Preferred Stock does not have
any voting rights. In the event of liquidation, each share of Series B Preferred Stock is entitled to receive, in preference to the common stock, a liquidation
payment equal to $5.00 per share plus any accrued and unpaid dividends. If there are insufficient funds to permit full payment, the assets legally available
for distribution will be distributed pro rata among the holders of the Series B Preferred Stock.
Each share of Series B Preferred Stock may be converted into ten fully paid shares of common stock at the option of a holder as long as we have sufficient
authorized and unissued shares of common stock available. The conversion rate may be adjusted in the event of a reverse stock split, merger or
reorganization.
Series C Convertible Preferred Stock
Our Board of Directors previously established a series of preferred stock designated as Series C Convertible Preferred Stock (“Series C Preferred
Stock”), comprising 5,000 shares of Preferred Stock, of which 3,246 shares remain outstanding as of May 31, 2019. The Series C Preferred Stock
Certificate of Designation provides, among other things, that holders of Series C Preferred Stock shall be 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”).
In the event of any liquidation, dissolution or winding up of the Company, the Series C Preferred Stock will be paid, 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 Stated Value and the amount of any accrued and unpaid dividends. The holders of the Series C Preferred Stock will then
receive distributions along with the holders of Common Stock on a pari passu basis according to the number of shares of Common Stock the Series C
Preferred holders would be entitled if they converted their shares of Series C Preferred Stock at the time of such distribution.
If, at any time while the Series C Preferred Stock is outstanding, we effect any reorganization, merger or sale of the Company or substantially all of
its assets (each a “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
Common Stock determined by dividing the Stated Value by the Conversion Price (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.
Anti-takeover Effects of Delaware Law and our Certificate of Incorporation, as amended
As described above, our Board of Directors is authorized to designate and issue shares of preferred stock in series and define all rights, preferences and
privileges applicable to such series. This authority may be used to make it more difficult or less economically beneficial to acquire or seek to acquire us.
Special meetings of the stockholders may only be called by our Board of Directors acting pursuant to a resolution approved by the affirmative majority of
the entire Board of Directors. Stockholders may not take action by written consent.
The stockholders may, at a special stockholders meeting called for the purpose of removing directors, remove the entire Board of Directors or any lesser
number, but only with cause, by a majority vote of the shares entitled to vote at an election of directors.
Additional Warrants
As of May 31, 2019, we had issued and outstanding warrants to purchase up to 164,089,977 shares of common stock, exercisable at prices ranging from
$0.30 per share to $1.35 per share.
Stock Options
As of May 31, 2019, we had issued and outstanding options to purchase up to 14,501,872 shares of common stock, exercisable at prices ranging from
$0.47 per share to $2.90 per share.
Certain identified information has been excluded because it is both not material and would likely
cause competitive harm if publicly disclosed.
Exhibit 10.11
MASTER SERVICES AGREEMENT
between
SAMSUNG BIOLOGICS CO., LTD.
and
CYTODYN INC.
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Table of Contents
SECTION 1 DEFINITIONS
SECTION 2 RELATED AGREEMENTS AND EXHIBITS
SECTION 3 MANAGEMENT OF SERVICE
SECTION 4 SERVICES
SECTION 5 SERVICE DESCRIPTIONS
SECTION 6
CHANGES TO THE SPECIFICATIONS, ANALYTICAL METHODS, MANUFACTURING PROCESS, FACILITY OR
EQUIPMENT
SECTION 7 REGULATORY APPROVALS AND INSPECTIONS
SECTION 8 QUALITY COMPLIANCE
SECTION 9 CONSIDERATION AND PAYMENT TERMS
SECTION 10 CONFIDENTIALITY
SECTION 11 OWNERSHIP OF MATERIALS AND INTELLECTUAL PROPERTY
SECTION 12 WARRANTIES
SECTION 13
INDEMNIFICATION
SECTION 14 DISCLAIMER OF CONSEQUENTIAL DAMAGES; LIMITATION OF LIABILITY
SECTION 15 TERM AND TERMINATION OF AGREEMENT
SECTION 16 ARBITRATION
SECTION 17 MISCELLANEOUS
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MASTER SERVICES AGREEMENT
This Master Services Agreement (this “MSA”) is made and entered into as of the date of last signature below (the “Effective Date”) by and between
CytoDyn Inc., a Delaware corporation having its principal place of business at 1111 Main Street, Suite 660, Vancouver, WA 98660 (“Client”), and
Samsung BioLogics Co., Ltd., a company with offices at 300, Songdo bio-daero, Yeonsu-gu, Incheon, 21987, Republic of Korea (“SBL”). Client and
SBL are sometimes referred to herein individually as a “Party” and collectively as the “Parties”.
WHEREAS, Client and SBL wish to enter into a business relationship whereby SBL will provide Client with certain biologics manufacturing and/or
development services;
NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth and for other valuable consideration, the
Parties agree as follows:
SECTION 1 DEFINITIONS
Each of the following capitalized terms as used in this MSA, whether in the singular or plural, shall have the respective meanings set forth below.
1.1
1.2
1.3
1.4
“Acceptance Procedure” means the review of the Batch Related Documents and any additional test(s) of a Batch of Product which are performed to
verify that the Product delivered meets the Specifications and complies with Regulatory Authority requirements, which are conducted by Client after
SBL’s release of a Batch of Product, to determine whether to accept the same, in accordance with the applicable PSA and QAG.
“Affected Party” is defined in Section 17.3.
“Affiliate” means any corporation, company, partnership or other entity which directly or indirectly, controls, is controlled by or is under common
control with either Party hereto. A corporation or other entity shall be regarded as controlling another corporation or other entity if it owns or
directly or indirectly controls more than fifty percent (50%) of the voting stock or other ownership interest of the corporation or other entity, or if it
possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or other entity or the
power to elect or appoint more than fifty percent (50%) of the members of the governing body of the corporation or other entity.
“Applicable Laws” means any and all applicable laws of any jurisdiction which are applicable to the Services in this MSA or any PSAs that may be
in effect from time to time, and shall include all statutes, enactments, acts of legislature, laws, ordinances, rules, regulations, notifications,
guidelines, directions, directives and orders of any Regulatory Authority, statutory authority, stock exchange, securities regulatory agency, tribunal,
board, or court or any central or state government or local authority or other governmental entity in such jurisdictions.
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1.5
1.6
1.7
1.8
1.9
“Background IP” means any Intellectual Property related to a Product and/or its use, or the Manufacture of such Product, in each case, which is
owned and/or controlled by a Party prior to the Effective Date or outside or not relating to the performance of the MSA.
“Batch” means the quantity of Product Manufactured by SBL which results from a single run of the applicable Manufacturing Process.
“Batch Record” is defined in the applicable QAG.
“Batch Related Documents” means Manufacturing Documentation in support of the SBL’s release of a Product.
“Binding Year” shall be defined in the applicable PSA.
1.10 “Cell Line” means in respect of a given Product, the cell bank vials supplied or otherwise made available to SBL by Client to perform the Services.
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1.11 “Certificate of Analysis” is defined in the applicable QAG.
1.12 “Certificate of Compliance” is defined in the applicable QAG.
1.13 “Change” is defined in Section 6.1.
1.14 “Client” is defined in the preamble.
1.15 “Client Materials” means Client reagents and other materials supplied by Client or its third party supplier to be used in the Service hereunder, as
each is further defined in the PSA and/or applicable QAG. In the case of a Drug Product PSA, Client Materials shall also include Drug Substance
and/or other active pharmaceutical ingredients, which may or may not be Manufactured by SBL.
1.16 “Client Technology” means know-how, technology, research and other information of Client including and relating to the Manufacturing Process,
analytical methods, quality control analysis, specifications, transportation and storage requirements provided by Client to SBL in connection with
this MSA and applicable PSA.
1.17 “Clinical Product” means a Drug Substance or Drug Product which is Manufactured by SBL pursuant to a PSA and which is to be used by Client in a
research study or studies that prospectively assigns human participants or groups of humans to one or more health-related interventions to evaluate
the effects on health outcomes.
1.18 “Commercial Product” means a Drug Substance or Drug Product which is Manufactured by SBL which is intended for commercial sale and use by
humans and for importation or exportation into countries or regions designated in each PSA.
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1.19 “Commercially Reasonable Efforts” means with respect to an activity to be carried out by a Party pursuant to this MSA, the carrying out of such
activity in a diligent manner, and using efforts and resources comparable to the efforts and resources commonly used in the contract manufacturing of
biologics (in the case of SBL) or in the biopharmaceutical industry (in the case of Client) by companies with resources and expertise similar to those
of such Party. “Commercially Reasonable Efforts” requires prompt assignment of responsibility for such task or activity to specific qualified
employee(s) and allocation of resources designed to advance progress with respect to such task or activity but does not require the taking of actions
(a) which would require or is likely to require a material adverse change in such Party’s existence or solvency, or significant assets,
(b) disproportionate to the benefits received under this MSA, or (c) would require either Party to violate Applicable Laws or materially breach any
existing contractual commitments with third parties which were entered into prior to the Effective Date.
1.20 “Common Raw Materials” is defined in Section 5.3.1.
1.21 “Confidential Information” means any data, know-how and other information, whether technical or non-technical disclosed by one Party (hereinafter
the “Disclosing Party”) or otherwise became known to the other Party (hereinafter the “Receiving Party”) hereunder relating to the subject matter of
the MSA, regardless of form or manner of disclosure, i.e., whether disclosed in writing, in electric file or format or in other tangible manner, or
orally, visually or in other intangible manner.
1.22 “Control” (including, with correlative meanings, “Controlled”) means possession, directly or indirectly, of power to direct or cause the direction of
management or policies (whether through ownership of securities or other ownership interest, by contract or otherwise) of that person or entity
and/or the ownership of more than 50% of the voting shares of that person or entity.
1.23 “Core Team” is defined in Section 3.3.
1.24 “Current Good Manufacturing Practices” or “cGMP” means current good manufacturing practices and regulations applicable to the Manufacture of
Product that are promulgated by any Regulatory Authority, including as promulgated under and in accordance with (i) the U.S. Federal Food, Drug
and Cosmetic Act, Title 21 of the U.S. Code of Federal Regulations, Parts 210, 211, 600, 601 and 610, (ii) relevant EU legislation, including
European Directive 2003/94/EC or national implementations of that Directive, (iii) relevant guidelines, including the EU Guidelines for Good
Manufacturing Practices for Medicinal Products (Eudralex Vol. 4 and Annexes thereto), (iv) International Conference on Harmonisation Good
Manufacturing Practice Guide for Active Pharmaceuticals Ingredients and (v) and any analogous set of regulations, guidelines or standards as
defined, from time to time, by any relevant Regulatory Authority having jurisdiction over the development, manufacture or commercialization of the
Product, as applicable, in each case as in effect as of the date such manufacturing for the Product are or were conducted.
1.25 “Damages” means any direct damages, costs, expenses, fines, penalties (including reasonable attorneys’ fees and costs), losses and liabilities.
1.26 “Dispute” is defined in Section 16.1.
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1.27 “Drug Product” means a finished or intermediate dosage form that contains a Drug Substance, generally, but not necessarily, in association with one
or more other ingredients.
1.28 “Drug Substance” means an active ingredient that is intended to furnish pharmacological activity or other direct effect in the diagnosis, cure,
mitigation, treatment, or prevention of disease or to affect the structure or any function of the human body, but does not include intermediates used
in the synthesis of such ingredient.
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1.29 “Effective Date” is defined in the preamble.
1.30 “EMA” means the European Medicines Agency, or any successor agency.
1.31 “Engineering Batch” means a commercial-scale Batch that is intended to demonstrate the transfer of the Manufacturing Process to the Facility. After
Manufacture, Client shall have the right to make whatever further use of non-cGMP Engineering Batches as it shall determine, provided that Client
pays for such Batches according to this MSA, and such use is not for human use and does not violate any Applicable Laws. SBL makes no warranty
that Engineering Batches will meet cGMP or the Specifications.
1.32 “Facility” means one or more of the manufacturing facilities of SBL where the Services shall be performed, located at 300, Songdo bio-daero,
Yeonsu-gu, Incheon, 21987, Republic of Korea.
1.33 “FDA” means the United States Food and Drug Administration or any successor agency thereto.
1.34 “Firm Period” shall be defined in the applicable PSA.
1.35 “Force Majeure Event” is defined in Section 17.3.
1.36 “Implementation Plan and Budget” is defined in Section 6.2(b).
1.37 “Indemnified Party” is defined in Section 13.3.
1.38 “Indemnifying Party” is defined in Section 13.3.
1.39 “Intellectual Property” is means (a) patents, patent rights, provisional patent applications, patent applications, designs, registered designs, registered
design applications, industrial designs, industrial design applications and industrial design registrations, including any and all divisions,
continuations, continuations-in-part, extensions, restorations, substitutions, renewals, registrations, revalidations, reexaminations, reissues or
additions, including supplementary certificates of protection, of or to any of the foregoing items; (b) copyrights, copyright registrations, copyright
applications, original works of authorship fixed in any tangible medium of expression, including literary works (including all forms and types of
computer software, including all source code, object code, firmware, development tools, files, records and data, and all documentation related to any
of the foregoing), pictorial and graphic works; (c) trade secrets, technology, developments, discoveries and improvements, know-
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how, proprietary rights, formulae, confidential and proprietary information, technical information, techniques, inventions, designs, drawings,
procedures, processes, models, formulations, manuals and systems, whether or not patentable or copyrightable, including all biological, chemical,
biochemical, toxicological, pharmacological and metabolic material and information and data relating thereto and formulation, clinical, analytical and
stability information and data which have actual or potential commercial value and are not available in the public domain; (d) trademarks, trademark
registrations, trademark applications, service marks, service mark registrations, service mark applications, business marks, brand names, trade names,
trade dress, names, logos and slogans, Internet domain names, and all goodwill associated therewith; and (e) all other intellectual property or
proprietary rights, in each case whether or not subject to statutory registration or protection.
1.40 “Joint Steering Committee” or “JSC” is defined in Section 3.2.1.
1.41 “Manufacturing” or to “Manufacture” means the manufacturing of the Product, and any services relating to such manufacturing, including, but not
limited to, testing, quality control, documentations, archiving, and packaging, and up to release of the Product, to be performed by SBL at the
Facility under the MSA and any applicable PSA.
1.42 “Manufacturing Documentation” means with respect to a given Product, the data acquired and generated, documents and records describing or
otherwise related to the Manufacturing Process including, without limitation: documents and records consisting of or containing process
descriptions, requirements and specifications; Client Materials and Specifications; analytical methods, process trend and variability data; validations
protocols and reports; process development reports; Batch Records; Batch Related Documents, and SOPs, including, without limitation, SOP’s for
the Raw Materials handling, the Manufacturing operations, equipment operation, in-process, final Product and stability quality control testing,
quality assurance, validation, storage and shipping.
1.43 “Manufacturing Process” means, with respect to a given Product, the mutually agreed production process and analytical methods for the
Manufacturing of the Product pursuant to the applicable PSA, as summarily described in the applicable QAG and as described in the Manufacturing
Documentation, as such process may be changed from time to time in accordance with the MSA.
1.44 “Non-Affected Party” is defined in Section 17.3.
1.45 “Non-Conforming Product” means an entire Batch of Product that fails to conform to the Specifications, cGMP (if applicable), and any/or other
mutually agreed upon written express requirements for SBL to follow under the applicable PSA and the applicable QAG.
1.46 “Party” and “Parties” is defined in the preamble.
1.47 “Pilot Batch” means a Batch of Product designated as a pilot Batch which shall not comply with cGMP and is not required to meet the
Specifications.
1.48 “Pre-Approval Inspection” or “PAI” means an on-site inspection of the Facility by the Regulatory Authority prior to granting the Regulatory
Approval for a Commercial Product as required by various Regulatory Authorities to ensure that the Manufacturing Process and the Facility meet the
appropriate requirements and comply with cGMP.
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1.49 “Process Validation Batch” means a Batch of Commercial Product produced from a process validation run conducted by SBL hereunder to
(i) demonstrate and document the consistency and reproducibility of the Manufacturing Process at the Facility, and (ii) support the Regulatory
Approval of both the Product Manufactured and the Manufacturing Process at the Facility each as defined in the Project Plan.
1.50 “Product” means Clinical Product or Commercial Product to be Manufactured by SBL pursuant to this MSA and any applicable PSA.
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1.51 “Product Purchase Commitment” is defined in Section 5.7.
1.52 “Product specific agreement” or “PSA” is defined in Section 2.1.
1.53 “Project Management Team Leader” is defined in Section 3.3.2.
1.54 “Project Plan” means a formal, approved document used to guide both project execution and project control. The primary uses of the Project Plan are
to document planning assumptions and decisions, facilitate communication among project stakeholders, and document approved scope, cost, and
schedule baselines. The Project Plan will contain the description and overall objectives of the Services for Manufacturing a Product and may include,
among other things: (a) JSC and Core Team membership rosters, (b) change request procedures, (c) details, intentions, and deliverables for
Technology Transfer, (d) project schedule, (e) detailed procurement plan, as needed, and (f) project budgets and invoicing plans.
1.55 “PSA Effective Date” means the effective date of any PSA governed by this MSA.
1.56 “Purchase Order” is defined in Section 5.6.
1.57 “Quality Agreement” or “QAG” means that certain quality agreement that governs the responsibilities related to quality systems and quality
requirements for the Product(s) Manufactured hereunder, including quality control, testing and release of such Product(s) at the Facility entered into
by the Parties.
1.58 “Quarter” means each period of three (3) consecutive calendar months beginning on January 1, April 1, July 1, or October 1.
1.59 “Raw Materials” means those materials that are used in the Services, including, but not limited to, chemicals, reagents, filters, excipients, disposable
consumables, and secondary packaging materials. Raw Materials exclude the Client Materials.
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1.60 “Reference Standards” means standard materials prepared by Client and/or SBL in accordance with the applicable QAG.
1.61 “Regulatory Approval” means all approvals, licenses, registrations or authorizations thereof of any national, regional, state or local regulatory
agency, department, bureau or other governmental entity in any jurisdiction where the Product is marketed or intended to be marketed, necessary for
the manufacture and sale of the Product, which manufacturing includes the Manufacturing of the Products at the Facility.
1.62 “Regulatory Authority” means any national (e.g., the FDA), supra-national (e.g., the EMA), regional, state or local regulatory agency, department,
bureau, commission, council or other governmental entity, in any jurisdiction responsible for granting the Regulatory Approval.
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1.63 “SBL Assignable Error” means: [***].
1.64 “Service” or “Services” is defined in Section 2.1.
1.65 “Service Fee” is defined in Section 9.1.
1.66 “Specialized Raw Materials” is defined in Section 5.3.1.
1.67 “Specification(s)” means the criteria for the Products, Client Materials, or Raw Materials, as the case maybe, which details are provided in
documentation as reviewed and approved in writing by the Parties.
1.68 “Standard Operating Procedure(s)” or “SOP(s)” means the standard operating procedures established by and mutually agreed upon by both Parties
regarding the Manufacturing Process.
1.69 “Technology Transfer” means the activities by the Parties necessary to Manufacture the Product for Client at the Facility as further described in the
applicable Project Plan which may include: (i) transfer of the Client Technology and Client Material from Client to SBL; (ii) implementation of the
Manufacturing Process at the Facility, including establishing a small scale Manufacturing Process model at SBL; (iii) Manufacturing Process fit
activities, including required small- and large-scale process development and validation work as allocated between the Parties to SBL and process
engineering required to modify / equip, qualify and validate the Facility for the Manufacturing of the Commercial Product; (iv) stability testing, if
applicable, for the Product required for licensure; (v) comparability testing to the appropriate reference product, and (vi) regulatory support for
Regulatory Approvals.
1.70 “Term” is defined in Section 15.1.
1.71 “Warehouse” means SBL’s warehouse for storage of the Product located at 300, Songdo bio-daero, Yeonsu-gu, Incheon, 21987, Republic of Korea.
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SECTION 2 RELATED AGREEMENTS AND EXHIBITS
2.1
2.2
Product specific agreements. Pursuant to one or more product specific agreements entered into and mutually agreed from time to time by duly
authorized representatives of the Parties (“Product specific agreements” or “PSAs”), SBL will perform manufacturing services for Client as
specified in such PSAs and applicable Project Plan and in accordance with the terms and conditions of this MSA (“Services”). Each PSA shall refer
to this MSA and contain as applicable (i) a high level scope of work of the Services to be performed under such PSA which describes key activities,
(ii) the Product for which Samsung will perform such Services for Client, (iii) a description of the Cell Line; (iv) fees to be paid to SBL by Client for
the Services with a general timing plan for invoicing and a more detailed plan to be in the Project Plan, (v) if the Services pertain to the manufacture
of the Product, the number of batches of Product to be manufactured by SBL and delivered to Client and the Specifications, (vi) any other
deliverables, (vii) the Samsung facility where the Services are to be performed, and (viii) the Regulatory Approvals to be obtained by the Parties.
Services shall be governed by the terms and conditions of this MSA, the applicable PSA, and any applicable Quality Agreement. In the event of a
conflict between a Quality Agreement and either any provision of this MSA or any PSA, the MSA or PSA shall control except with respect to
Product quality terms, in which case, the Quality Agreement will control. In the event of a conflict between any provision of this MSA and the PSA,
this MSA shall control, except as explictly specified in the PSA.
Project Plan. Concurrently with the execution of a PSA or within a reasonable time after the PSA effective date, the Parties shall agree upon a
Project Plan which will specify in detail scope and schedule of the Services, including Technology Transfer and Manufacture. The Project Plan shall
also set forth the JSC members (if applicable), Core Team members, and Project Management Team Leader for the Services as well as the frequency
and duration of meetings. The Project Plan may be updated as needed by the mutual agreement of the Client and SBL and is governed by and
incorporated into the applicable PSA by reference. If there is a conflict between the Project Plan and the applicable PSA, the PSA shall control. If
any of the assumptions on which the Parties have relied upon in defining the scope of the activities required to effect the Technology Transfer and/or
other Services including but not limited to Manufacture, and the associated timeframes, fees, expenditures and costs proves to be invalid, or if for
any reason it becomes apparent that additional activities are required as part of or in connection with the Technology Transfer and/or other Services
including but not limited to Manufacture, the Parties shall (acting reasonably and in good faith) discuss and seek to agree appropriate revisions to the
Technology Transfer activities, and associated timelines and pricing.
2.3 Quality Agreement (QAG). The Parties shall agree upon and finalize a Quality Agreement within a reasonable period time after each PSA Effective
Date which shall cover such PSA and such Quality Agreement shall be incorporated into this MSA. The Quality Agreement may be amended from
time to time, subject to the JSC’s approval followed by the Parties’ written agreement pursuant to Section 17.9 (if applicable).
SECTION 3 MANAGEMENT OF SERVICE
3.1
General. Each Party will be responsible for its internal decision making process and for reasonably informing the other Party of decisions affecting
the Service in a regular and timely manner. Without limiting the foregoing, the Parties shall establish the joint committees or teams set forth herein
to advise the Parties on certain matters including, without limitation, the Facility modification, the Technology Transfer, and optimization of the
Manufacturing operation relating to the Product.
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3.2
Joint Steering Committee.
3.2.1 Formation and Composition. The applicable Project Plan will set forth a Joint Steering Committee for that Product (the “Joint Steering
Committee” or “JSC”) if the Parties mutually agree that such JSC is necessary. The JSC will be a cross-functional committee composed of
an equal number of representatives appointed by each of Client and SBL with each of Client and SBL having at least three
(3) representatives, and with one (1) representative from each of Client and SBL having oversight for quality activities, and with one
(1) representative from each of Client and SBL having oversight for manufacturing and supply chain activities, including the transfer and
implementation of the Manufacturing Process at the Facility. Either Party may replace any or all of its representatives at any time. Such
Party shall notify, in writing, of such replacement to the other Party.
3.2.2 Responsibilities. The JSC shall (i) establish and oversee the governance structure for the Service including the formation of the
subcommittee herein; (ii) monitor any Facility modification and the Technology Transfer and Manufacturing strategy of the Product at the
Facility, including strategies for the Regulatory Approval of the Facility to Manufacture the Product; (iii) provide strategic guidance to the
Core Team as required by the Project Plan; (iv) conduct high level project stage reviews with the Core Team as required by the Project Plan
at appropriate milestones or completion of key deliverables or a sequence of event to review and approve key deliverables, evaluate the Core
Team’s progress and performance, all in order to ensure that the Manufacturing Process is being implemented appropriately; (v) advise on
and/or resolve business, manufacturing, supply chain, quality, regulatory or other issues unresolved at the Core Team level; (vi) review and
recommend for approval by the Parties any changes to the MSA or the applicable PSA; (vii) review and approve changes to the
Specifications, analytical methods, the Manufacturing Process, the Facility or equipment as escalated to the JSC by the Core Team or by a
Party pursuant to Section 3.6 below; (viii) review completion of the Service; (ix) settle disputes or disagreements unresolved by a
subcommittee; and (x) perform such other functions as appropriate to further the purposes of the MSA as determined by the Parties.
3.3 Core Team.
3.3.1 Formation and Composition. The applicable Project Plan will set forth a Core Team for that Product (the “Core Team”). The Core Team
shall be composed of an equal number of representatives from each of SBL and Client, with at least four (4) representatives appointed by
each of Client and SBL. Such representatives will include the Project Management Team Leaders of Client and SBL as well as their
representatives from manufacturing, technical operations, supply chain, quality assurance, quality control, regulatory affairs or other
individuals with expertise and responsibilities for those functions required to execute the Facility modification, the Technology Transfer and
Manufacturing. Either Party may replace any or all of its representatives at any time. Such Party shall notify, in writing, of such replacement
to the other Party.
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3.3.2 Appointment of Project Management Team Leader. Each Party shall appoint a Project Management Team Leader (each, a “Project
Management Team Leader”) to act as the primary contact for such Party in connection with matters related to the Service. Each Project
Management Team Leader, unless otherwise mutually agreed, shall serve as the leaders of the Core Team. A Party may replace its Project
Management Team Leader at any time and from time to time for any reason. Such Party shall notify, in writing, of such replacement to the
other Party.
3.3.3 Responsibilities. The Core Team shall (i) develop and maintain the Project Plan and monitor, review and manage the Service according to
the MSA and applicable PSA; (ii) conduct project stage reviews with the JSC as required by the Project Plan at appropriate milestones or
completion of key deliverables or a sequence of event to review key deliverables, review its progress and performance against plans;
(iii) develop a change management process to identify, review and recommend any significant changes in the project scope, time, fee or risk
to the JSC; (iv) investigate and resolve business, manufacturing, supply chain, quality, regulatory or other issues arising during the Service;
(v) review and escalate to the JSC, as needed, changes to the Project Plan or applicable QAG; (vi) review and recommend to the JSC changes
to the Specifications, analytical methods, the Manufacturing Process, the Facility or equipment; (vii) coordinate the activities of the Parties
relating to the Manufacturing hereunder, including but not limited to: managing the technical operations and quality aspects of routine
manufacturing, conducting Product testing technical operations and quality aspects of routine manufacturing, conducting Product testing and
release, and managing supply chain activities including shipping and delivery logistics; (viii) report periodically on operation and quality
progress and performance; and (ix) perform such other tasks and undertake such other responsibilities as may be specifically delegate to the
Core Team by mutual agreement of the Parties.
3.4 Meetings
3.4.1
JSC.The JSC shall meet by audio or video teleconference as agreed by the JSC or as necessary to make determinations as required of it. Any
member of the JSC may designate a substitute to attend and perform the functions of that member at any meeting of the JSC and each Party
may, in its reasonable discretion, invite non-member representatives of such Party to attend such meetings with advance notice to the other
Party.
3.4.2 Core Team.The Core Team shall meet by audio or video teleconference as agreed by the Core Team. Any member of the Core Team may
designate a substitute to attend and perform the functions of that member at any meeting of the Core Team and each Party may, in its
reasonable discretion, invite non-member representatives of such Party to attend such meetings with advance notice to the other Party.
3.4.3 Travel Expenses. Each Party shall be responsible for all of its own expenses of traveling to and participating in any joint committee or team
meeting, including the JSC and Core Team.
3.5 Decisions. All decisions of JSC, the Core Team and any other joint committee or team formed under the MSA or any applicable PSA, except as
expressly set forth herein, shall be made by the unanimous agreement of all of its members or their designated representatives, and shall be reflected
in written
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meeting reports which summarily address topics discussed, delegation of work, schedules and decision of such committee or team. Written reports of
the JSC and Core Team shall be subject to approval by the authorized representatives of the Parties; provided, however, that no joint committee or
team herein may amend or waive any provision of the MSA or applicable PSA, including without limitation, the financial terms set forth in Section 9.
It being understood that the MSA or any PSA may be amended, and provision of the MSA or any PSA may be waived pursuant to Section 17.9 only.
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3.6 Disputes.
3.6.1 General. In the event that the Core Team and any other joint committee or team formed under the MSA or any applicable PSA, is unable,
despite the good faith efforts of all members, to resolve a disputed issue that is within the purview of such joint committee or team within
fourteen (14) days of meeting request by either party, the disputed issue shall be referred immediately by such joint committee or team to the
JSC. If the disputes still cannot be resolved within an additional thirty (30) days of meeting request by the JSC, the matter may be handled in
accordance with Section 16.
3.6.2 Project Management Team Leaders. Subject to Section 3.6.1, the Project Management Team Leaders (or their respective designee) will in
good faith attempt to mutually resolve in a timely fashion any disagreement with respect to the Service hereunder, which could reasonably
affect the quality of the Manufacturing of the Product, including without limitation, the related management processes and operations,
control of production planning and scheduling, prioritization decisions, allocation of resources, timing of in-process and release testing,
oversight of auxiliary facilities (e.g., in-process tests that need to be conducted at laboratories other than those at the Facility), Facility
modification, the Technology Transfer, registration and troubleshooting decisions, and any other matters relating to implementation of the
Manufacturing Process and the Manufacturing of the Product hereunder.
SECTION 4 SERVICES
4.1
Services. During the Term, in accordance with and subject to the terms and conditions set forth in this MSA, applicable PSA, and the applicable
QAG, SBL shall provide the Services to Client relating to the Product(s). SBL and Client shall at all times make Commercially Reasonable Efforts to
complete the Services in accordance with the timelines set forth in the applicable PSA. Except as otherwise expressly set forth in the MSA,
applicable PSA, or the applicable QAG or as otherwise mutually agreed in writing by the Parties.
4.2 Compliance with Applicable Law. Subject to the provisions of Section 6 below, SBL shall maintain the Facility in accordance with cGMP and in
such condition as will allow SBL to Manufacture the Products in accordance with the terms of the MSA and the applicable QAG. SBL shall perform
the Services under the MSA in conformance of cGMP, if applicable, the Specifications, any requirements of the Regulatory Authorities that shall be
mutually agreed upon by the Parties, and all Applicable Laws.
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4.3
Project Personnel. SBL shall adequately staff the Facility with personnel necessary (including consultants and contractors), and with sufficient
technical expertise to perform its obligations under the MSA. Notwithstanding anything to the contrary and in addition to the JSC and Core Team
meetings described in Section 3 above, Client and SBL may arrange for core project personnel to have regular meetings, which shall be by audio or
video teleconference. The Project Plan shall specify the frequency and duration of such meetings; provided that the associated costs for meetings
requested solely by Client in excess of the agreed amount shall be passed through to Client by SBL.
4.4
Subcontract. SBL may not subcontract any portion of the Services without prior approval from the Client. In the event SBL subcontracts any
portion of the Services, SBL shall be primarily obligated to Client for any subcontracted services as if it were providing the Services itself. All costs
associated with activities outsourced to 3rd party contractors will be passed through to Client with an additional [***] handling fee (e.g. [***]).
4.5 Development and Manufacturing Site. Unless otherwise agreed by Client, all Services shall be performed by SBL at the Facility.
4.6 Manufacturing Documentation. SBL shall maintain Manufacturing Documentation to be true and accurate, and shall keep in strict confidence and
shall not use for purposes other than providing or performing the Service or other obligations hereunder. SBL shall maintain all such Manufacturing
Documentation for at least that period specified in the applicable QAG. Upon written request of Client and at mutually agreeable times, Client shall
have the right to review Manufacturing Documentation, including the Batch Records, at the Facility as further defined in the applicable QAG. Client
may also request scanned or printed copies of such Manufacturing Documentation, but shall be responsible for reasonable costs associated therewith.
SBL shall record and maintain such records, data, documentation and other information in the language as so required in the applicable QAG or as
so required by a Regulatory Authority and in compliance with Applicable Law. To the extent necessary, SBL may redact or withhold Manufacturing
Documentation provided pursuant this MSA or any applicable PSA to protect the confidential information of its other clients or third parties. The
form and style of Batch documents, including, but not limited to, Batch production records, lot packaging records, equipment set up control,
operating parameters, and data printouts, raw material data, and laboratory notebooks are the exclusive property of SBL. Notwithstanding anything
to the contrary, SBL SOPs not specific to the Client’s Products may be provided to Client for on-site review if deemed necessary by both SBL and
Client. Such SOPs cannot be removed from the SBL premises, copied, photographed or otherwise replicated.
SECTION 5 SERVICE DESCRIPTIONS
5.1 Technology Transfer.The Parties shall make their personnel available at the Facility to enable the transfer and implementation in accordance with
the Project Plan. Client shall transfer to and [***] to SBL in accordance with the plan, timelines and quantities set forth in the Project Plan. In the
event that Client agrees to utilize SBL’s [***] portal for Technology Transfer, Client agrees that (a) in the event of any relevant change that affects a
Client user’s authorization to use such portal, Client shall immediately notify SBL so that SBL may disable their usernames and remove / change
passwords in order to secure the SBL Portal and (b) Client shall ensure that all of Client’s users have up-to-date antivirus software installed on the
computer devices used to access such portal.
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5.2
Facility Modification and Equipment. Except as otherwise specifically provided herein to the contrary, and upon mutual agreement of the Parties,
Client and SBL will agree on what equipment in the Facility is necessary to perform the Services, and if it is necessary or Client deems it necessary
to procure additional equipment beyond that which is in the Facility as of the applicable PSA Effective Date, the Core Team shall determine
equitable allocation of costs including, as applicable, procurement, validation, installation, maintenance, commissioning, and
decommissioning/validation (which determination shall be escalated to the JSC if in dispute). Thereafter, if any additional equipment is necessary,
such costs shall be dealt with by the Change provisions of this MSA. Except as provided in this MSA or any applicable PSA, the Facility, Warehouse
and all the equipment shall be mantained, tested, validated, calibrated and qualified for their intended use by SBL at SBL’s expenses.
5.3 Raw Materials.
5.3.1 Management. SBL shall procure and maintain a reasonable quantity of the Raw Materials, required for the Services in accordance with the
MSA and any applicable PSA. On a per-Product basis, the Core Team shall finalize the categorization of the Raw Materials into Raw
Materials which shall be used for that specific Product only (“Specialized Raw Materials”), Raw Materials which can be used across
multiple products and/or customers (“Common Raw Materials”), and Raw Materials which will not be charged on a cost-plus basis to the
Client, and shall attach such list to the applicable PSA. Such list of common and specialized Raw Materials may be amended from time to
time, subject to the Parties’ approval. During Technology Transfer, the Core Team shall agree on estimates for Raw Materials anticipated to
be consumed in the Manufacture of each Batch. Although SBL will make Commercially Reasonable Efforts to use no more than those
amounts, SBL will not be responsible for Raw Materials used in excess of the agreed-upon estimate; provided, however, that SBL shall be
responsible for [***]. Client shall agree to SBL’s strategies regarding Raw Material safety stock and sourcing from qualified vendors. In the
event SBL is not able to utilize any capacity reserved to Manufacture Product according to an agreed-upon forecast or manufacturing plan
due to Client’s failure to agree to such strategies, then Client shall be responsible for the costs of such reserved capacity regardless of whether
it is utilized or not.
5.3.2 Raw Material Specifications. Client and SBL shall agree on the Specifications of the Raw Materials, including without limitation analytical
methods, supplier information including supplier site information, and other information concerning the stability, storage, and safety thereof
that are required for the Manufacturing hereunder, as further described in the applicable QAG.
5.3.3 Testing and Evaluation. SBL or vendors qualified by SBL shall perform all testing and evaluation of the Raw Materials as required by the
Specifications for the Raw Materials and the cGMPs, as further described in the applicable QAG, if applicable.
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5.3.4 Storage. SBL shall secure sufficient and suitable cGMP storage for the Raw Materials; provided that such storage requirements shall be
customary within SBL’s industry. SBL shall exercise reasonable care to preserve and protect the Raw Materials [***], Client shall be
responsible for the risk of loss of the Raw Materials. At the end of each calendar year of the relevant PSA, Client shall be responsible for the
loss of Raw Material to the extent purchased in reliance on a Purchase Order, Firm Period, or Binding Year which expires or becomes
obsolete because Client fails to honor such Purchase Order, Firm Period or Binding Year and SBL cannot reasonably otherwise utilize such
Raw Material.
5.3.5 Service Fee Related to Raw Material. Common Raw Materials and Specialized Raw Materials will be charged on a cost-plus basis to
Client in accordance with Sections 9.1(ii) and 9.2.2, subject to any changes in the scope of work.
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5.4 Client Materials.
5.4.1 Management. Client shall provide, either by itself or through its third party supplier, to SBL free of charge, Client Materials in amounts
reasonably necessary to carry out the Services as agreed by the Parties. The applicable PSA shall set forth the exact timing of such provision
of Client Materials to SBL. SBL shall make Commercially Reasonable Efforts to import the Client Materials to the Republic of Korea in a
timely manner, provided that Client provides reasonable assistance. Delivery conditions for the Client Materials shall be [***]. During
Technology Transfer, the Core Team shall agree on estimates for Client Material anticipated to be consumed in the Manufacture of each
Batch. Although SBL will make Commercially Reasonable Efforts to use no more than those amounts, SBL will not be responsible for Client
Materials used in excess of the agreed-upon estimate; provided, however, that (a) SBL shall be responsible for [***] and (b) notwithstanding
anything to the contrary, SBL will not in any circumstance be responsible for [***]. Client shall agree to SBL’s strategies regarding Client
Material safety stock and sourcing from qualified vendors. In the event SBL is not able to utilize any capacity reserved to Manufacture
Product according to an agreed-upon forecast or manufacturing plan due to Client’s failure to agree to such strategies, then Client shall be
responsible for the costs of such reserved capacity regardless of whether it is utilized or not.
5.4.2 Client Materials Specifications. Client shall provide SBL with the Specifications of the Client Materials, including without limitation
analytical methods, supplier information, and other information concerning the stability, storage, and safety thereof that are required for the
Manufacturing hereunder, as further described in the applicable QAG.
5.4.3 Testing and Evaluation. SBL shall perform testing of the Client Materials in accordance with the applicable QAG and/or Client’s
instruction prior to the performance of the Manufacturing hereunder, in order to determine whether such Client Materials meet the
Specification described in the applicable QAG (if applicable). SBL shall inform Client of (a) any damage to the Client Materials received
that is visually obvious (e.g., damaged or punctured containers and temperature monitoring results outside of predetermined Specifications)
within [***] after SBL’s receipt of the Client Materials and (b) any non-conformance of the Client Materials to Specification either: (i) within
[***] of SBL’s discovery of such non-conformance; or (ii) within [***] days after SBL’s receipt of the Client Materials or (iii) if release
testing of
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Client Materials is not performed until it is needed for Manufacture, within [***] days after such release testing is performed; or (iv) as other
wise agreed between the Parties. If, prior to performing any Service on the Client Materials, SBL determines that such Client Materials are
defective or damaged, SBL shall not perform the Service on such Client Materials and shall follow Client’s written instructions regarding
disposal or return of such Client materials to Client, such disposal or return to be at Client’s discretion and cost.
5.4.4 Storage. SBL shall secure sufficient and suitable cGMP storage for the Client Materials; provided that such storage requirements shall be
customary within SBL’s industry. SBL shall exercise reasonable care to preserve and protect the Client Materials from [***], Client shall be
responsible for the risk of loss of the Client Materials.
5.4.5 Service Fee Related to Client Material. Handling fees relating to the Client Material will be charged to Client in accordance with Sections
9.1(iii) and 9.2.3.
5.5
5.6
5.7
Forecasts. For each Commercial Product, the Parties shall determine a mutually agreeable mechanism for forecasting of each Product, which shall
be detailed in writing and attached to each relevant PSA. For Clinical Product, the Parties shall agree upon the number and schedule of Batches to be
Manufactured by SBL in the applicable PSA. In the event SBL is not able to utilize any capacity reserved to Manufacture Product according to an
agreed-upon forecast or manufacturing plan due to a reason attributable to Client, then Client shall be responsible for the costs of such reserved
capacity regardless of whether it is utilized or not to the extent that SBL is not able to reassign such reserved capacity.
Purchase Orders. For each Clinical Product or Commercial Product, Client shall notify SBL in a binding form and procedure to be agreed upon in
the applicable PSA requesting a specific amount of Product to be Manufactured (a “Purchase Order”).
Product Purchase Commitment. As further set forth in a PSA, during the Term the Parties may agree that Client will purchase a minimum quantity
of batches of a certain Product in a given year (a “Product Purchase Commitment”).
5.8 Batch Failure during Manufacture
5.8.1
If, during Manufacture of a Batch and prior to SBL’s batch release, the Core Team determines that all of a Batch is Non-Conforming
Product (a “Batch Failure”), SBL shall use Commercially Reasonable Efforts to promptly re-Manufacture and deliver to Client a
replacement Batch on a date to be mutually agreed by the Parties, which Service Fees and associated costs/fees (as set forth in Section 9.1
below) shall be invoiced and paid for by the Client. Client shall ensure that SBL has adequate Client Materials to Manufacture such Batches.
The remedies contained in Section 5.8 of this MSA shall be the sole and exclusive remedies of Client regarding a Batch Failure and a Batch
Failure shall not constitute a material breach of this MSA or a PSA unless SBL fails to provide the remedies contained in this Section 5.8.
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5.8.2 The Parties shall conduct a root cause analysis of the Batch Failure, which shall be done through SBL’s deviation process and which result
will be reviewed and confirmed by the JSC. If either the Core Team does not agree on the Batch Failure root cause, or the JSC does not agree
on the results of the Core Team’s Batch Failure root cause analysis, the Parties shall refer to an independent mutually agreed-on laboratory or
firm with international repute, acting as a neutral arbiter, to conduct a root cause analysis of the Batch Failure. The costs of the independent
laboratory will be shared by the Parties equally; provided, however, that the Party that is determined to be incorrect as to the Batch Failure
will be responsible for those reasonable costs and must reimburse the correct Party for its share of the reasonable costs incurred. The decision
of the independent laboratory must be in writing and will be binding on the Parties.
5.8.3 The PSA applicable to such Product Batch Failure shall set forth responsibility among the Parties of the following costs in the event of a
Batch Failure: [***]. Notwithstanding anything to the contrary, SBL shall not be responsible in the event of Batch Failure for: [***].
5.8.4
In the event that any of the foregoing procedures results in a Batch being delivered in a different year than the year in which the original
Batch was ordered for delivery by Client, the Service Fee for such re-Manufactured Batch shall be the Service Fee in effect in the Year in
which such re-Manufactured Batch is actually delivered by SBL.
5.9
Storage, Packaging and Delivery.
5.9.1 Service Deliverables other than Products.Storage, packaging and delivery of the Service deliverables other than Products Manufactured,
and the Products Manufactured hereunder shall be made in accordance with the terms of this MSA, applicable PSA, Project Plan, applicable
QAG and the Applicable Laws.
5.9.2 Products.
(a) Release by SBL and Acceptance by Client.
(i)
(ii)
SBL shall perform all testing in accordance with the Specifications of the Product and release Product satisfying the
Specifications in accordance with the terms of the applicable QAG. Upon such release SBL shall deliver to Client copy of
Manufacturing Documentation in support of the SBL’s release of the Product for each Batch (“Batch Related Documents”),
including a Certificate of Analysis and Certificate of Compliance, in accordance with the applicable QAG;
Acceptance of Product. Client will complete the Acceptance Procedure and determine the acceptability of such Product in
accordance with the applicable QAG and notify SBL of the result within [***] of Client’s receipt of the Batch Related
Documents. Upon Client’s acceptance, SBL will have no liability for such Product, except as set forth in Section 5.9.2(a)(iv)
regarding Latent Defects. If Client does not reject such Product within the [***] period, the Product will be deemed to have
been accepted by Client.
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(iii)
(iv)
Non-Conforming. If, during the Acceptance Procedure, any Product is determined by Client as Non-Conforming Product, and
SBL confirms such non-conformity, such non-conformity shall be treated as a Batch Failure, and the remedy set forth in
Section 5.8 above shall apply to the Non-Conforming Product mutatis mutandis. The remedies contained in this Section 5.9.2
shall be the sole and exclusive remedy of client in the event of Non-Conforming Product.
Latent Defect.After completion of review of the Batch Related Documents, if Client finds any hidden defects of the Product
which could not have been reasonably discovered through the review of the Batch Related Documents (“Latent Defect”),
Client shall promptly give notice of such claim in writing to SBL. In such case, if the Latent Defect is solely due to SBL
Assignable Error, the above Section 5.9.2(a)(iii) and Section 13.1 shall apply. If no written claim for Latent Defect of the
Product is received by SBL within [***], the Product shall be deemed as irrevocably accepted. Notwithstanding anything to the
contrary; such claim for Latent Defect must be made within [***] from Client’s initial acceptance of the Product.
(b) Delivery. Shipping conditions for the Product Manufactured hereunder shall be [***], unless otherwise agreed to in the applicable
PSA. The title to Product hereunder shall be transferred from SBL to Client when the Product is made available at the point of delivery
consistent with [***] or the Incoterm set forth in the PSA. The Parties further agree as follows:
(i)
(ii)
(iii)
(iv)
After SBL’s release of the Product and prior to each pick-up by Client or Client’s designated carrier, SBL shall propose to
Client a delivery schedule of the Product, in order for the Parties to agree on it in advance for each pick-up. SBL shall schedule
Delivery with the carrier selected and paid for by Client;
SBL shall not deliver the Product until it has been instructed to by Client in accordance with the applicable QAG. Client shall
confirm specific delivery instructions with SBL prior to SBL release. Upon SBL’s release of Product, SBL shall store the
Manufactured Product as described in Section 5.9.2(c) and Client shall compensate SBL for storage costs for the Manufactured
Product as set forth in the applicable PSA;
SBL shall provide Client with invoice, packing lists, supporting export documents as specified by Client by separate delivery
and shipment documentation instructions, together with each shipment of the Product (or such other deliverables); and
In cooperation with Client and subject to the delivery schedule agreed by the Parties, SBL shall adhere to the
first-expire-first-out (FEFO) principle in shipping all released Product.
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(c)
Storage, Packaging and Shipping Container.
(i)
(ii)
(iii)
Pursuant to the terms of this MSA and any applicable PSA, and subject to the availability of space and storage conditions, SBL
shall store the Products Manufactured hereunder.
SBL shall store, package, label and prepare shipment according to the Specifications for the Product Manufactured hereunder,
the applicable QAG and the SOPs, and using storage and/or shipping containers determined in the applicable PSA.
If Client does not direct SBL to prepare Manufactured Product to be picked up by Client or Client’s designated carrier with a
pick-up [***] days of Client’s receipt of the Batch Related Documents, SBL shall store the Product at the Warehouse, subject
to the availability of space and storage conditions, and Client shall pay storage fees to SBL as set forth in Section 9.1 for the
period of storage at the Warehouse until the actual delivery date. SBL shall be responsible for [***].
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SECTION 6 CHANGES TO THE SPECIFICATIONS, ANALYTICAL METHODS, MANUFACTURING PROCESS, FACILITY OR
EQUIPMENT
6.1 Approval for Change. SBL shall not make any change to the Manufacturing Process, the Services, or the Specifications (a “Change”), without the
prior written consent of Client in accordance with the applicable QAG.
6.2 Changes Required by cGMP, Regulatory Authorities or Requested by Client. Except as otherwise expressly set forth to the contrary in the
applicable QAG, in the event that cGMP, a Regulatory Authority, Applicable Law, or any other regulatory or legal authority requires, or Client
requests, a Change, SBL shall accommodate such requirements or requests, subject to the following:
(a) Client shall promptly notify SBL in writing of the required and/or requested Change(s), and provide information necessary for SBL to
evaluate the effect of such Change(s), and SBL shall promptly advise Client as to any (i) additional equipment required, modifications
to the Facility or equipment, and/or additional equipment and the Facility qualification and validation requirements; (ii) Manufacturing
Process development, transfer, scale-up, testing, qualification, or validation requirements; (iii) regulatory requirements pursuant to
such Changes; (iv) changes to the Manufacturing scheduling and/or Product delivery schedule; and (v) other impacts on the Facility or
SBL’s ability to manufacture products (including the Products) in the Facility, if any, which may result from such Change(s). The
notification and formal approval procedure of such Changes shall be in accordance with the applicable QAG (i.e., change control
procedures) (if applicable). The Parties shall meet in a timely manner to identify and discuss such Changes as appropriate;
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(b)
Prior to implementation of any such Change(s), SBL shall provide Client with an estimated plan and budget of the reasonable and
necessary costs that would be incurred by SBL as a result of the implementation of any such Change(s), including, but not limited to
for (i) process and analytical development; (ii) equipment and/or the Facility modifications, qualification, validation, maintenance, and
decommissioning/disposal; (iii) process and analytical validation; (iv) document revisions or changes, the Facility, equipment, and
system modifications or changes; (v) additional stability testing; and (vi) preparing submissions to Regulatory Authorities
(collectively, the “Implementation Plan and Budget”). Following review and approval by Client of such Implementation Plan and
Budget, subject to the Core Team’s approval and agreement followed by the Parties’ written agreement pursuant to Section 17.9 (if
applicable), SBL shall commence implementation of such Change(s);
(c) During any such implementation, SBL shall provide Client with regular updates on the progress of implementation. Subject to any
timeframe imposed by Applicable Law, SBL shall implement the Change according to the Implementation Plan and Budget’s target
completion date. SBL shall provide written notice to Client if SBL becomes aware of any cause which may create delay with the
implementation of Changes. Following any such notice, both Parties shall discuss an amendment of Implementation Plan and Budget;
and
(d) Upon the approval of the Implementation Plan and Budget for Change(s), both Parties shall negotiate in good faith to determine the
allocation of the costs incurred by SBL for the implementation of any such Change(s) between the Parties, in accordance with the
following principles:
(i)
(ii)
(iii)
the costs for the general Facility Changes required by cGMP, any Regulatory Authority, or any Applicable Laws related to the
maintaining the Manufacturing Facility by SBL as set forth in Section 7.2, shall be borne by SBL, provided that where the
Change relates exclusively or partially to the Manufacture of Product in which case the costs shall be borne by Client fully or
proportionally, respectively;
the costs for the Changes other than (i) above, and requested by Client and required uniquely to the Manufacture of the Product
and beneficial solely to Client shall be borne by Client; and
the costs for the Changes other than (i) and (ii) above shall be discussed in good faith by the Parties to achieve equitable
allocation of costs.
SECTION 7 REGULATORY APPROVALS AND INSPECTIONS.
7.1 Regulatory Approvals. SBL shall provide reasonable assistance and cooperation in order for Client to obtain and maintain the Regulatory
Approvals. The costs and fees associated with such assistance and cooperation, to the extent not detailed in the MSA or PSA shall be borne by Client,
or as otherwise mutually agreed between the Parties. As specified in the applicable PSA, the Parties shall agree on which Regulatory Approvals are
to be obtained.
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7.2 Regulatory Approvals for the Facility. SBL shall obtain and maintain all approvals, licenses, registrations or authorizations of any federal, state or
local regulatory agency, department, bureau or other governmental entity (other than the Regulatory Approvals, which will be obtained or
maintained by Client) that are required to Manufacture and ship the Product at the Facility and perform the Services.
7.3 Regulatory Inspections. SBL shall facilitate on-site inspections of the Facility conducted by Regulatory Authorities. SBL shall notify Client
according to the applicable QAG provisions of any contacts or inquiries by the Regulatory Authorities, including inspections, Pre-Approval
Inspections, sample requests, and written correspondence and its result, related to the Product, as further defined in the applicable QAG. Any
expenses or costs incurred by SBL for such inspections including Pre-Approval Inspections at the Facility shall be borne by Client.
SECTION 8 QUALITY COMPLIANCE
8.1 Quality Agreement. Both Parties shall adhere to the provisions of the applicable QAG and the Parties agree that all elements of quality assurance,
quality control and the like shall be governed by the terms and conditions of the applicable QAG. In the event of a conflict between the MSA and the
applicable QAG, the MSA shall prevail over those of the applicable QAG with the exception of Product quality-related matters, cGMP and related
regulatory requirements in which case, the terms of the applicable QAG shall prevail.
8.2 Audit. Upon Client’s request, but no more than [***], except in the event of a for-cause audit, SBL shall accept a formal audit of the Facility and, if
necessary, the Warehouse, by Client to allow Client to inspect the Manufacture of the Product during provision of the Services solely to ascertain
compliance by SBL with the terms of this MSA or any applicable PSA; provided, however that in the event Client uses a designee, SBL must
provide prior written consent. SBL shall be reimbursed for its reasonable costs for audits beyond the audit described in the first sentence of this
Section 8.2.1. SBL will make Commercially Reasonable Efforts to require vendors or subcontractor to accept an audit or visit to the their facilities by
Client upon similar notice as described in Section 8.3.2 below. Client will provide SBL with written notice at least [***] prior to any visits, and the
Parties shall decide on a mutually agreeable date, duration, visitor list, and agenda prior to the audit. While at the Facility, all such Client personnel
shall have reasonable access to all areas as are relevant to SBL’s performance of the Service hereunder, provided that SBL may reasonably restrict
Client personnel’s access to the Facility as it deems necessary and visitors pursuant to this Section shall comply with all applicable SBL policies and
procedures including but not limited to safety, confidentiality, and cGMP.
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SECTION 9 CONSIDERATION AND PAYMENT TERMS
9.1 Consideration. In consideration for SBL’s performing the Service and other obligations undertaken by SBL pursuant to a PSA, Client shall pay SBL
amounts as set forth in the applicable PSA (the “Service Fee”); (ii) a handling surcharge of a certain percentage or certain amount to be set forth in
the applicable PSA of the costs of Raw Materials paid by SBL (including but not limited to taxes and customs duties/fees); (iii) a handling surcharge
of a certain percentage or certain amount to be set forth in the applicable PSA related to the Client Materials (which shall be based on the actual
costs of such materials as supported by reasonable documentary evidence as opposed to the market value thereof and which may include taxes and
customs duties/fees); and (iv) storage fees as set forth in the relevant PSA.
9.2
Invoices.
9.2.1 Service Fee of the Project Stages and Batches. Batches of Product shall be invoiced upon SBL’s release of a Batch of Product.
Otherwise, Service Fees shall be invoiced according to the invoicing plan set forth in the applicable Project Plan or applicable PSA. SBL’s
invoices pursuant to this MSA shall be electronic, unless otherwise agreed by the Parties.
9.2.2 Raw Materials. With respect to the Raw Materials, SBL shall submit invoices to Client for the applicable Raw Materials cost (including any
agreed upon safety stock) as set forth according to Section 9.1 as follows. SBL shall submit an invoice to Client (i) for the cost of Specialized
Raw Materials [***]; and (ii) for the cost of Common Raw Materials [***]. Notwithstanding the foregoing, the Parties shall collaborate in
the selection of the vendors of the Raw Materials. All such vendors shall be approved by Client before supplying SBL with Raw Materials
for Product.
9.2.3 Client Materials.With respect to the Client Materials, which shall be supplied by Client to SBL at no cost during SBL’s performance the
Service, SBL shall submit an invoice to Client in an amount as set forth in Section 9.1 upon SBL’s completion of such project stage of the
Service SBL’s release of a Batch of Product, as applicable.
9.3
Payment.
9.3.1 Mode of Payment; Foreign Exchange. All payments to SBL due under the MSA or any applicable PSA shall be made in USD $ within
[***] from the receipt of SBL’s invoice in USD $ by means of telegraphic transfer to the account with the bank designated by SBL in the
foregoing invoice. For the purpose of computing payment amounts incurred by SBL in a currency other than USD $, such currency shall be
converted into USD $ using the basic exchange rate published by the Korean Exchange Bank (or its successor institution) at the opening of
business on such invoice date.
9.3.2 Taxes. All prices and charges are exclusive of any applicable taxes, levies, imposts, duties and fees of whatever nature imposed by any law
or regulations in any country in respect of the Services, importation or exportation of Raw Materials, Client Materials, Batches, and Product,
which shall be paid by Client. For the avoidance of doubt, the foregoing shall not include any taxes imposed on the income or profit of SBL
and any withholding tax lawfully levied on any payment to be made by Client to SBL, each of which shall be solely borne by SBL. Client
shall pay or reimburse SBL for all customs duties and taxes in connection with the purchase, sale, importation or exportation of any Raw
Materials, Client Materials, Batches, or Product or the provision of Services, except to the extent such duties and taxes are recoverable by or
refundable to SBL. SBL agrees to assist Client in claiming exemption under double taxation or similar agreement or treaty from time to time
in force to obtain a refund of any customs duties, value added taxes, and other taxes payable by SBL.
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9.3.3 Price Adjustments. The Service Fees as set forth in the applicable PSA, shall be adjusted annually on January 1 of each year during the
Term, effective immediately, by the percentage change in the consumer price index as published by the Bank of Korea for the immediately
preceding twelve (12) months. The relevant date for price adjustment under this Section shall be the issue date of SBL’s invoice.
9.3.4 Default Interest. Any reasonably undisputed amount that is not paid by a Party to the other when due under the MSA or any PSA shall bear
default interest at the rate of [***]. In the event there is a reasonably undisputed amount which is invoiced by SBL but not paid by Client for
more than [***] after the due date, such event shall be considered a material breach of the relevant PSA.
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SECTION 10 CONFIDENTIALITY
10.1 Confidential Information. If a Party intends to disclose such information in writing, in electric file or format or in other tangible manner, such Party
will make reasonable efforts to indicate it is confidential; and if to disclose orally, visually or in other intangible manner, such Party will make
reasonable efforts to reduce it in writing or in electric file or format, identified as confidential and delivered to another Party within thirty (30) days
after such oral or visual disclosure: provided, however, that, in each case of the foregoing, a failure to do so shall not constitute a breach of this term
nor shall deny, negate or destroy the confidential nature thereof, and no such failure shall serve as conclusive evidence that the disclosed information
shall not be considered Confidential Information by and between the Parties. Furthermore, the existence and terms of the MSA shall be deemed to
be the Confidential Information of both Parties.
Notwithstanding the foregoing, Confidential Information shall not include the information, which as evidenced by written records:
(a) was at the time of disclosure by the Disclosing Party hereunder publicly known or available;
(b)
after disclosure by the Disclosing Party hereunder, became publicly known or available by publication or otherwise, other than by an
authorized act or omission by the Receiving Party;
(c) was in the possession of the Receiving Party without confidentiality restriction at the time of the disclosure by the Disclosing Party
hereunder;
(d) was lawfully received from any third party having the lawful right to make such disclosure, without obligation of confidentiality; or
(e) was independently developed by the Receiving Party’s directors, officers or employees without reference to the Confidential
Information, as demonstrated by records contemporaneous with such development.
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10.2 Confidentiality. The Receiving Party recognizes the proprietary and confidential nature of the Disclosing Party’s Confidential Information and
agrees that no right, title, ownership, license, or interest of any character in the Disclosing Party’s Confidential Information other than as specifically
granted herein, is conveyed or transferred to the Receiving Party. Both Parties further agree to maintain the Disclosing Party’s Confidential
Information in confidence and not to disclose or divulge the Disclosing Party’s Confidential Information, in whole or in part, to any third party, and
not use the Disclosing Party’s Confidential Information for any purpose other than pursuing the MSA. Each Party shall guard such Confidential
Information using the same degree of care as it normally uses to guard its own confidential or proprietary information of like importance, but in any
event no less than reasonable care. The Receiving Party shall limit disclosure of the Disclosing Party’s Confidential Information to its and those of
its Affiliates’ directors, officers, employees, consultants and agents (“Representatives”) who have a need to know the Disclosing Party’s
Confidential Information for performance of the Service and implementation of the MSA, provided that, the Receiving Party shall undertake
procedures to ensure that each of its Representatives to whom the Disclosing Party’s Confidential Information is disclosed understands (i) the
confidential nature of the Disclosing Party’s Confidential Information and (ii) that he or she is under an obligation similar to those contained herein
to hold the Disclosing Party’s Confidential Information disclosed strictly confidential.
10.3 Authorized Disclosures. Disclosure is permitted in the event that (a) the Disclosing Party’s Confidential Information is reasonably required to
obtain or maintain any Regulatory Approvals for the Products in any or all jurisdictions or (b) the Disclosing Party needs to disclose such
Confidential Information to comply with Applicable Law; provided that such Receiving Party shall exercise its Commercially Reasonable Efforts to
limit disclosure of the Disclosing Party’s Confidential Information to that which is necessary for compliance and to otherwise maintain the
confidentiality of the Confidential Information.
10.4 Survival of confidential obligations. The confidential obligations of the Receiving Party shall survive for a period of five (5) years from the
expiration or termination of this MSA.
10.5 Return of the Confidential Information. All written, printed or other tangible Confidential Information of the Disclosing Party disclosed under the
MSA, and all copies thereof shall be returned to the Disclosing Party (or destroyed at the Disclosing Party’s request) by the Receiving Party within
thirty (30) days from the written request by the Disclosing Party. All Confidential Information disclosed electronically shall be completely deleted
and destroyed by the Receiving Party within thirty (30) days from the written request by the Disclosing Party. Notwithstanding the foregoing,
(i) digital backup files automatically generated by the Receiving Party’s customary electronic data processing system may be retained and properly
stored as confidential files for the sole purpose of backup and will be deleted in accordance with the Receiving Party’s retention policy, and (ii) a
single copy of the Confidential Information may be retained in the secured files of the Receiving Party for the sole purpose of determining the scope
of obligations incurred by it under the MSA provided that the Receiving Party shall keep such Confidential Information in confidence and will use
the Confidential Information solely to comply with the terms of the MSA as well as the applicable law, rule and regulation.
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SECTION 11 OWNERSHIP OF MATERIALS AND INTELLECTUAL PROPERTY
11.1 Reference Standard, Client Technology, Client Materials, Cell Line, and Product. SBL hereby understands and agrees that all rights to, titles of
and interests in the Reference Standards, Client Technology, Client Materials, and Cell Line belong to Client, unless otherwise provided herein.
11.2 Background Intellectual Property.It is acknowledged that each Party possesses Background IP. Any Intellectual Property relating to the Reference
Standards, Client Technology, Client Materials and Cell Line owned and/or controlled by Client as of the date of provision of such Reference
Standards, Client Technology, Client Materials and Cell Line by Client to SBL pursuant to Section 5.1, shall be deemed to be included in the
Background IP of Client. Client hereby grants SBL [***] license to use such Intellectual Property relating to such Reference Standards, Client
Technology, Client Materials, Cell Line, during the Term for the sole purposes of Manufacturing of the Product or Services in accordance with the
MSA.
11.3 Inventions.Any Intellectual Property arising out of or resulting from the Service under the MSA, including but not limited to those contained in the
Manufacturing Documentation, shall be hereinafter collectively called an “Invention”.
11.3.1 Client Invention. Any Invention that [***] shall be a “Client Invention”. SBL shall notify Client of such Client Invention(s) to Client
immediately after SBL, the Project Management Team Leader, respective project personnel, SBL employees or officers or other applicable
third parties working for SBL hereunder makes, conceives or reduces to practice such Client Invention, and shall take all necessary measures
so that Client would have [***] of any and all Client Invention. Client may use any Client Invention for any purpose, including filing patent
application and SBL shall provide reasonable cooperation to Client at the expense of Client (as to all reasonable out-of-pocket expenses
incurred by SBL that are supported by adequate documentation).
11.3.2 SBL Invention. Any Invention that [***], shall be the property of SBL (“SBL Invention”), and shall not be deemed to be Client Invention
or Joint Invention for the purposes of the MSA.
11.3.3 Client-SBL Joint Invention. Any Invention that [***] and which is not a Client Invention shall be jointly owned by Client and SBL (a
“Joint Invention”), and shall not be a Client Invention or SBL Invention for the purposes of the MSA. Subject to the terms and conditions of
the MSA, any such Joint Invention may be exploited by SBL or Client without compensation and liability of other obligation (including
accounting obligations) to the other Party, and each Party has a [***]. This license shall continue for the life of the applicable right.
SECTION 12 WARRANTIES.
12.1 The Parties General Warranties. Each Party warrants and represents that: (i) it has the corporate power and authority to enter into this MSA and
has taken all necessary action on its part required to authorize the execution, delivery and performance of this Agreement; (ii) it is aware of no legal,
contractual or other restriction, limitation or condition that might adversely affect its ability to enter into this MSA and perform its obligations
hereunder; (iii) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated; (iv) this MSA
(a) has been duly executed and delivered by a duly authorized representative of it, and (b) is the legal,
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valid and binding obligation of it, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors’ rights generally;
and (v) the execution, delivery and performance of this Agreement by it does not and will not (a) violate any Applicable Laws applicable to it, or
(b) violate or conflict with any provision of its Articles of Incorporation or By-laws or other organizational documents.
12.2 Client’s Warranties. Client represents and warrants to SBL that as of the Effective Date of the MSA and during the Term: (a) the formulation and
composition of the Product shall comply with all Applicable Laws and that during the Term, Client will perform all obligations and take other
necessary actions to be in compliance with such requirements, Applicable Laws, rules and regulations, including applicable cGMPs; (b) Client will
comply with all Applicable Laws, and that it will keep SBL informed of any information known to Client which would affect SBL’s provision of the
Service hereunder; (c) all Reference Standard, Client Technology, Client Materials, and Cell Line provided to SBL by or on behalf of Client will be
suitable for the Manufacture of the Product; and (d) SBL’s use of the Client Materials, Manufacturing Process and Client Technology for the purpose
of the Service and to the extent as set forth in the MSA will not infringe any third party’s Intellectual Property rights.
12.3 SBL’s Warranties. SBL represents and warrants that:
12.3.1 As of the Effective Date and during the Term, (i) SBL is the lawful owner, lessee, operator, or licensee of the Facility, equipment, machinery,
as has all licenses, consents or permissions required, to enable SBL to perform its obligations under this MSA, and (ii) none of the SBL
Inventions or SBL Background IP infringes any third party Intellectual Property Right
12.3.2 All Product Batches, at the time of delivery to Client’s designated carrier, shall (a) conform to the Specifications (except for Pilot Batches
and Engineering Batches unless otherwise agreed); (b) be Manufactured, packaged, handled and stored in compliance with the requirements
of cGMPs (except for Pilot Batches and Engineering Batches unless otherwise agreed) and all Applicable Laws; (c) comply with the Standard
Operating Procedures; (d) be Manufactured in compliance with the Quality Agreement; and (e) be transferred free and clear of any liens,
claims or encumbrances of any kind.
12.4 No Other Warranties. THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS SECTION ARE EXPRESSLY IN LIEU OF
AND EXCLUDE, AND THE PARTIES HEREBY EXPRESSLY DISCLAIM AND NEGATE, TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAWS, ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED (ARISING BY
OPERATION OF LAW OR OTHERWISE), INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, EVEN IF THAT PURPOSE IS KNOWN.
SECTION 13 INDEMNIFICATION
13.1 Indemnification by SBL. SBL shall indemnify and hold harmless Client, its Affiliates, and their officers, directors, employees or agents from and
against any Damages arising or resulting from any third party (which shall exclude Client Affiliates) claims to the extent such Damages are relating
to, arising out of, in connection with, or resulting from claims, demands, or actions based upon negligence or willful misconduct, or breach of cGMP
of SBL or its officers, directors, employees or agents with respect to Services under this MSA, except to the extent that such Damages are caused by
the causes as set forth in Section 13.2 for which Client is obliged to indemnify.
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13.2 Indemnification by Client. Client shall indemnify and hold harmless SBL, its Affiliates, and their officers, directors, employees or agents from and
against any Damages arising or resulting from any third party (which shall exclude SBL Affiliates) claims to the extent such Damages are relating
to, arising out of, in connection with, or resulting from claims, demands or actions based upon (i) negligence or willful misconduct of Client or its
officers, directors, employees or agents, or (ii) any claim that any SBL activity undertaken for the purposes of or in relation to the Services pursuant
to the MSA or any PSA (including but not limited to use of the Client Materials, Manufacturing Process and Client Technology, as well as any tests,
studies, experiments, or other activities undertaken at the request of, or with the consent of, Client) infringes any third party’s Intellectual Property
rights; in each case (i) and (ii) except to the extent that such Damages are caused by the causes as set forth in Section 13.1 for which SBL is obliged
to indemnify.
13.3 Indemnification Procedure.The foregoing indemnification by SBL or Client shall be conditioned, if and to the extent Damages are based on or
related to a third party claim, upon a Party who intends to claim indemnification under Sections 13.1 and 13.2 (the “Indemnified Party”) (i)
providing written notice to the other Party (“Indemnifying Party”) within twenty (20) calendar days after the Indemnified Party have been given
written notice of such third party claim, provided that absence or delay of such prior written notice will not relieve the Indemnifying Party of its
obligation to indemnify except to the extent such absence or delay materially prejudices the Indemnifying Party’s ability to defend the third party
claim; (ii) permitting the Indemnifying Party, upon timely notice by the Indemnified Party, the opportunity to assume full responsibility (at the
Indemnifying Party’s cost and expense) for the investigation and defense of any such claim with counsel reasonably satisfactory to the Indemnified
Party, provided, however, that the Indemnifying Party shall keep the Indemnified Party informed as to the progress of the defense of any claim and
that the Indemnified Party shall cooperate in such defense and shall make available all records, materials and witness reasonably requested by the
Indemnifying Party in connection therewith; and (iii) not settling or compromising any such claim without the Indemnifying Party’s prior written
consent, with such consent not to be unreasonably denied, withheld or conditioned.
SECTION 14 DISCLAIMER OF CONSEQUENTIAL DAMAGES; LIMITATION OF LIABILITY
14.1 Disclaimer of Consequential Damages. EXCEPT IN THE EVENT OF A PARTY’S [***], NEITHER PARTY WILL BE LIABLE UNDER THIS
AGREEMENT FOR ANY SPECIAL, PUNITIVE, CONSEQUENTIAL, INCIDENTAL OR OTHER INDIRECT DAMAGES OF ANY TYPE OR
NATURE, WHETHER BASED IN CONTRACT, TORT, STRICT LIABILITY, NEGLIGENCE OR OTHERWISE, INCLUDING LOSS OF
PROFITS OR REVENUES.
14.2 Limitation of Liability. Specific caps on Damages shall be set forth in the applicable PSA.
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SECTION 15 TERM AND TERMINATION OF AGREEMENT
15.1 Term. This MSA will become effective as of the Effective Date and will be in effect for as long as a PSA is in effect (the “Term”). Each PSA will
have its own initial term as stated therein and shall automatically renew for successive terms of two (2) years each unless either Party gives written
notice to the other Party of its intention to terminate the Product Agreement at least six (6) months prior to the end of the then current PSA term.
15.2 Termination. This MSA or a PSA may be earlier terminated as set forth in this Section 15.2.
15.2.1 Material Breach. A Party may terminate any PSA for a material breach by the other Party; provided, however, that the non-breaching Party
shall give the breaching Party written notice of such breach and if the breaching Party [***] after receipt of such written notice, then the
non-breaching Party may terminate this Agreement on [***] written notice after expiration of such [***] period. This MSA shall terminate if
all effective PSAs are terminated.
15.2.2 Insolvency. This MSA may be terminated by either Party upon written notice at any time during the MSA if the other Party: (a) files in any
court pursuant to any statute a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a
receiver or trustee of such Party, or of its assets; (b) proposes a written agreement of composition for extension of its debts; (c) is served with
an involuntary petition against it, filed in any insolvency proceeding which is admitted in the court; or (d) makes an assignment for the
benefit of its creditors. The Party affected shall immediately notify the other Party in writing of the occurrence of any of the foregoing
events.
15.2.3 Termination for Market Withdrawal. If during the period starting from the date of completion of Manufacture of the last Process
Validation Batch until the end of the Term, Client decides or is required to withdraw from all markets in the world for any scientific, medical
or efficacy reasons, Client may terminate the applicable PSA for the Product upon one and a half (1.5) year prior written notice to SBL,
subject to Section 15.3 below.
15.2.4 Force Majeure. Either Party may terminate a PSA if a Party is unable to perform its obligations pursuant to a PSA in the event of a Force
Majeure Event in accordance with Section 17.3.
15.3 Effect of Expiration or Termination.
15.3.1 Payment of Amounts Due. Expiration or termination of the MSA or PSA for any reason shall not exempt any Party from paying to any
other Party any amounts owing to such Party at the time of such expiration or termination.
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15.3.2 Decommissioning. Upon expiration or termination of a PSA for any reason, SBL shall cease and refrain from the Services described in any
applicable PSA (including the Manufacturing and supplying the Product) for Client unless otherwise provided in the following Sections
15.3.2(a) to 15.3.2(d), and both Parties shall pursue decommissioning activities as set forth hereunder.
(a)
Fully Manufactured Product.
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(i)
(ii)
If Client terminates a PSA pursuant to Section 15.2.1 or 15.2.2, upon Client’s election, SBL shall, at Client’s election,
(i) deliver already fully Manufactured Product to Client in accordance with the terms and conditions of the MSA and applicable
PSA or (ii) destroy such Product. If Client elected (i) above, Client shall pay the Service Fees and any related costs or fees for
the Service relating to such Product in accordance with the terms and conditions of the MSA and applicable PSA, and if Client
elected (ii) above, SBL shall bear the costs and expenses for such destruction.
If SBL terminates a PSA pursuant to Section 15.2.1 15.2.2 or, Client terminates a PSA pursuant to Section 15.2.3, upon
payment of any amounts owed to SBL under the applicable PSA, SBL shall deliver the fully Manufactured Product to Client in
accordance with the terms and conditions of the MSA and applicable PSA (including the current Firm Period period or Binding
Year in the PSA). Client shall pay the Service Fee and any related costs or fees for the Service relating to such Product in
accordance with the terms and conditions of the MSA and applicable PSA.
(iii)
If either Party terminates a PSA pursuant to Section 15.2.4, both Parties shall negotiate in good faith manner for the handling of
the fully Manufactured Product and the allocation of costs and expenses between the Parties.
(iv)
If a PSA is naturally expired or terminated pursuant to Section 15.1, the provisions of (ii) above shall apply.
(b) Client Materials being used for the Service (Product in Process).
(i)
If Client terminates a PSA pursuant to Section 15.2.1 or 15.2.2, upon Client’s election, SBL shall (i) continue to use the Client
Materials being used for the Manufacturing hereunder (the Product in process) and deliver the fully Manufactured Product to
Client in accordance with the terms and conditions of the MSA and applicable PSA, or (ii) deliver to Client or destroy such
Product in process. If Client elected (i) above, Client shall pay the Service Fee and any related costs or fees for the Service
relating to the fully Manufactured Product in accordance with the terms and conditions of the MSA and applicable PSA, and if
Client elected (ii) above, SBL shall bear the costs and expenses for such activities.
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(ii)
(iii)
If SBL terminates a PSA pursuant to Section 15.2.1, 15.2.2, or Client terminates a PSA pursuant to Section 15.2.3, upon
payment of any amounts owed to SBL under the applicable PSA, SBL shall continue to use the Client Materials being used for
the Manufacturing hereunder (the Product in process) and deliver the fully Manufactured Product to Client in accordance with
the terms and conditions of the MSA and applicable PSA. Client shall pay the Service Fee and any related costs or fees for the
Service relating to the fully Manufactured Product in accordance with the terms and conditions of the MSA.
If either Party terminates a PSA pursuant to Section 15.2.4, both Parties shall negotiate in good faith manner for the handling of
the Client Materials being used for the Manufacturing hereunder (Product in process) and the allocation of costs and expenses
between the Parties.
(iv)
If a PSA is naturally expired or terminated pursuant to Section 15.1, the provisions of (ii) above shall apply.
(c) Client Materials, Cell Line, and Reference Standards.Upon expiration or termination of a PSA, upon Client’s election, SBL shall
deliver to Client and/or destroy all remaining Client Materials (subject to Sections 15.3.2(a) and 15.3.2(b)), all remaining Cell Line
vials, Reference Standards and other materials required for Manufacturing.
The costs and expenses for such activities shall be borne by the Parties as follows:
(i)
(ii)
(iii)
If Client terminates aPSA pursuant to Section 15.2.1 or 15.2.2, SBL shall deliver or dispose at no additional cost to Client and
SBL shall bear such costs and expenses for such activities;
If SBL terminates a PSA pursuant to Section 15.2.1, 15.2.2, or Client terminates the PSA pursuant to Section 15.2.3, Client
shall bear such costs and expenses for such activities;
If either Party terminates a PSA pursuant to Section 15.2.4, both Parties shall negotiate in good faith manner the allocation of
all such costs and expenses for such activities; and
(iv)
If a PSA is naturally expired or terminated pursuant to Section 15.1, the provisions of (ii) above shall reply.
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(d) Raw Materials.
(i)
(ii)
If Client terminates a PSA pursuant to Section 15.2.1 or 15.2.2 and if Client so elects, SBL shall deliver the remaining Raw
Materials to Client for Client’s payment of SBL’s cost to procure such Raw Materials, or dispose of them at Client’s election.
SBL shall bear the costs and expenses for the delivery of the Raw Materials.
If SBL terminates a PSA pursuant to Section 15.2.1 or 15.2.2, or Client terminates a PSA pursuant to Section 15.2.3, SBL shall
deliver the remaining Specialized Raw Materials to Client. Client shall pay SBL’s cost to procure such Specialized Raw
Materials and bear the costs and expenses for the delivery of such Specialized Raw Materials by SBL. In the case of Common
Raw Materials, the Parties shall discuss in good faith whether to have SBL keep, send to Client, or dispose of the remaining
Common Raw Materials.
(iii)
If either Party terminates a PSA pursuant to Section 15.2.4, both Parties shall negotiate in good faith manner for the handling of
the Raw Materials and the allocation of costs and expenses between the Parties.
(iv)
If a PSA is naturally expired or terminated pursuant to Section 15.1, the provisions of (ii) above shall apply.
(e) Outstanding Obligations Regarding Purchase of Product.
(i)
(ii)
(iii)
(f)
If Client terminates a PSA pursuant to Section 15.2.1 or 15.2.2, Client shall [***].
If SBL terminates a PSA pursuant to Section 15.2.1 or 15.2.2, or Client terminates a PSA pursuant to Section 15.2.3, [***].
For all other cases of termination of a PSA, subsection (ii) shall apply, and the Parties will discuss in good faith the extent to
which Client will be released from such obligations.
Survival. Any termination or expiration of this MSA shall not affect any outstanding obligations due hereunder prior to such
termination or expiration, nor shall it prejudice any other remedies that the parties may have under this MSA. For greater
certainty, except as otherwise expressly provided, termination or expiration of this MSA, irrespective of the cause, shall not
affect any rights or obligations which, from the context thereof, are intended to survive termination or expiration of this MSA,
including but not limited to Sections 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17.3.
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SECTION 16 ARBITRATION
16.1 Informal Discussions. Except as otherwise provided herein, in the event of any controversy or claim arising out of or relating to this MSA, or the
rights or obligations of the Parties hereunder, the Parties shall first try to settle their differences amicably between themselves through the Core
Team and then JSC level. Thereafter, either Party may initiate informal dispute resolution on the Executive level by sending written notice of the
dispute to the other Party, and within thirty (30) days after such notice appropriate Executives of the Parties shall meet for attempted resolution by
good faith negotiations. If such representatives are unable to resolve promptly such disputed matter within the said thirty (30) days, either Party may
refer the matter by written notice to the Chief Executive Officer of the other Party, or his/her designee, and the Chief Executive Officer of such
Party, for discussion and resolution. If such individuals or their designees are unable to resolve such dispute within thirty (30) days of such written
notice, either Party may initiate arbitration proceedings in accordance with the provisions of this Article 16.
16.2 Arbitration. If the Parties do not fully settle a dispute pursuant to Section 16.1, and a Party wishes to pursue the matter, each such dispute,
controversy or claim shall be finally resolved by binding arbitration in accordance with the Commercial Arbitration Rules of the International
Chamber of Commerce (“ICC”), and judgment on the arbitration award may be entered in any court having jurisdiction thereof to enforce the
arbitration award. The arbitration shall be conducted by a panel of three persons experienced in the pharmaceutical business, and within thirty
(30) days after initiation of arbitration, each Party shall select one person to act as arbitrator and the two Party-selected arbitrators shall select a third
arbitrator within thirty (30) days of their appointment. If the arbitrators selected by the Parties are unable or fail to agree upon the third arbitrator, the
third arbitrator shall be appointed by the ICC. The place of arbitration shall be New York, New York, United States and all proceedings and
communications shall be in English. Either Party may apply to the arbitrators for interim injunctive relief until the arbitration award is rendered or
the controversy is otherwise resolved. Either Party also may, without waiving any remedy under this Agreement, seek from any court having
jurisdiction any injunctive or provisional relief necessary to protect the rights or property of that Party pending the arbitration award. The arbitrators
shall have authority to award punitive any other type of damages not measured by a Party’s direct compensatory damages, and in all cases, any
decision or determination by the arbitrators shall comply with Article 14, as applicable. The Parties agree that, in the event of a good faith dispute
over the nature or quality of performance under this Agreement, neither Party may terminate this Agreement until final resolution of the dispute
through arbitration or other judicial determination. The Parties further agree that any payments made pursuant to this Agreement pending resolution
of the dispute shall be refunded if an arbitrator or court determines that such payments are not due.
16.3 Costs and Fees. Each Party shall bear its own attorneys’ fees, costs, and disbursements arising out of the arbitration, and shall pay an equal share of
the fees and costs of the arbitrators. Absent the filing of an application to correct or vacate the arbitration award as permitted by Applicable Law,
each Party shall fully perform and satisfy the arbitration award within fifteen (15) days after the service of the award on such Party.
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SECTION 17 MISCELLANEOUS
17.1 Notices. Any notice required or permitted under the MSA shall be in writing with duly authorized signature and made to the following addresses or
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facsimile numbers:
If to Client:
CytoDyn Inc.
1111 Main Street
Suite 660
Vancouver, WA 98660
Attention:
Facsimile: (360) 980-8549
If to SBL:
Samsung BioLogics Co., Ltd.
300, Songdo bio-daero, Yeonsu-gu
Incheon 21987, South Korea
Attention: Head of Corporate Business Planning
Facsimile: +82-32-455-3242
With copy to: SBL Legal & Compliance Team
Either Party may change its designated address and facsimile number by notice to the other Party in the manner provided in this Section 17.1.
Any notice shall be deemed to have been delivered on the date of delivery of delivered personally, or on the next day of sending if sent by facsimile, or
on the fifth day of posting if sent by registered or certified mail with return receipt requested and postage prepaid.
17.2 Governing Law. This MSA shall be construed and interpreted in accordance with the laws of State of New York, United States and all rights and
remedies shall be governed by such laws without regard to principles of conflicts of law. The United Nations Convention on Contracts for the
International Sale of Goods shall not apply to the transactions contemplated by the MSA.
17.3 Effect of Force Majeure Event. Except as set forth in this Section 17.3, neither Party (the “Affected Party”) shall be liable to the other Party (the
“Non-Affected Party”) for failure or delay to perform its obligation under the MSA or any applicable PSA when such failure or delay is due to riots,
storms, fires, explosions, floods, earthquakes, war, embargoes, blockades, insurrections, an act of God or any other cause which is beyond the
reasonable control of the Affected Party including those affected upstream suppliers (“Force Majeure Event”).
Each Party agrees to give the other Party prompt written notice of the occurrence of any Force Majeure Event, the nature thereof, and the extent to
which the affected Party will be unable fully to perform its obligations under the MSA. If a condition constituting Force Majeure Event as defined
herein exists for more than [***], the Parties shall negotiate a mutually satisfactory solution to the problem, if practicable, including termination of this
MSA upon [***] written notice from the failure of reaching a mutually satisfactory solution to the Force Majeure Event, or the use of a third party to
fulfill the obligations hereunder of the party invoking Force Majeure Event, at the expense of the party invoking Force Majeure Event.
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17.4 Assignment. Neither Party shall assign, in whole or in part, the MSA without the prior written consent of the other Party, such approval not to be
unreasonably withheld, except in the event of a sale of all, or substantially all of the assets of a Party to which this MSA relates, in which case no
consent shall be required, in which case, the Party shall provide a written notice to the other Party within one (1) month of the sale. For clarity, in the
event that any Party assigns the MSA as permitted under this Section 17.4, it shall be required to contemporaneously assign any and all PSAs which
are then in effect together with this MSA.
17.5 No Grant of License. Nothing in the MSA shall affect, or grant any right to, patents, know-how or other intellectual property owned by either Party
prior to the commencement of the MSA unless otherwise expressly provided in the MSA.
17.6 No Right to Use Names. Except as expressly provided herein, no right, expressed or implied, is granted by the MSA to use in any manner the name
of either of the Parties or any other trade name, symbol, logo or trademark of the other Party in connection with the performance of the MSA,
without the prior written consent of the other Party.
17.7 Independent Contractors. The Parties hereto are independent contractors and nothing contained in the MSA shall be deemed or construed to create
a partnership, joint venture, employment, franchise, agency or fiduciary relationship between the Parties.
17.8 Integration. This MSA constitutes the entire agreement between the Parties relating to the subject matter of the MSA and supersedes all previous
oral and written communications between the Parties with respect to the subject matter of the MSA.
17.9 Amendment; Waiver. Except as otherwise expressly provided herein, no alteration of or modification to the MSA shall be effective unless made in
writing and executed by an authorized representative of both Parties. No course of dealing or failing of either Party to strictly enforce any term, right
or condition of the MSA in any instance shall be construed as a general waiver or relinquishment of such term, right or condition. The observance of
any provision of the MSA may be waived (either generally or any given instance and either retroactively or prospectively) only with the written
consent of the Party granting such waiver.
17.10 Severability. The Parties do not intend to violate any applicable law. However, if any sentence, paragraph, clause or combination of the MSA is in
violation of any law or is found to be otherwise unenforceable, such sentence, paragraph, clause or combination of the same shall be deleted and the
remainder of the MSA shall remain binding, provided that such deletion does not alter the basic purpose and structure of the MSA.
17.11 Construction. The Parties mutually acknowledge that they have participated in the negotiation and preparation of the MSA. Ambiguities, if any, in
the MSA shall not be construed against any Party, irrespective of which Party may be deemed to have drafted the MSA or authorized the ambiguous
provision.
35
Execution Copy
17.12 Interpretation. The captions and headings to the MSA are for convenience only, and are to be of no force or effect in construing or interpreting any
of the provisions of the MSA. Unless context otherwise clearly requires, whenever used in the MSA: (a) the words “include” or “including” shall be
construed as incorporating, also, “but not limited to” or “without limitation”; (b) the words “hereof,” “herein,” “hereby” and derivative or similar
words refer to the MSA; (c) the word “law” or “laws” means any applicable, legally binding statute, ordinance, resolution, regulation, code,
guideline, rule, order, decree, judgment, injunction, mandate or other legally binding requirement of a governmental authority (including a court,
tribunal, agency, legislative body or other instrumentality of any (i) government or country or territory, (ii) any state, province, county, city or other
political subdivision thereof, or (iii) any supranational body); and (d) all references to the word “will” are interchangeable with the word “shall” and
shall be understood to be imperative or mandatory in nature. All references to days, months, quarters or years are references to calendar days,
calendar months, calendar quarters, or calendar years. Whenever any matter hereunder requires consent or approval, such consent or approval shall
not be unreasonably withheld or delayed.
17.13 Counterparts. This MSA may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed the MSA as of the date first above written.
CYTODYN INC.
Signature:
Name:
Title:
/s/ Nader Pourhassan
Dr. Nader Pourhassan
President and CEO
Date:
30 March 2019
SAMSUNG BIOLOGICS CO., LTD.
Signature:
Name:
Title:
/s/ Dr. Tae Han Kim
Dr. Tae Han Kim
Representative Director and President
Date:
April 1, 2019
36
Exhibit 10.12
Certain identified information has been excluded because it is both not material and would likely
cause competitive harm if publicly disclosed.
SAMSUNG BIOLOGICS CO., LTD.
PRODUCT SPECIFIC AGREEMENT
COMMERCIAL DRUG SUBSTANCE
This Product Specific Agreement (this “PSA”) is made effective as of the date of last signature below (the “PSA Effective Date”) by and between
CytoDyn Inc., a Delaware corporation having its principal place of business at 1111 Main Street, Suite 660, Vancouver, WA 98660 (“Client”) and
Samsung BioLogics Co., Ltd., a company with offices at 300, Songdo bio-daero, Yeonsu-gu, Incheon, 21987, Republic of Korea (“SBL”). Client and SBL
are sometimes referred to herein individually as a “Party” and collectively as the “Parties”.
WHEREAS, Client and SBL entered into a Master Services Agreement effective on the Effective Date (the “MSA”) and whereas pursuant to
Section 2.1 of the MSA, the Parties wish to enter into this PSA whereby SBL will provide certain Services as detailed herein;
NOW, THEREFORE, the Parties agree as follows:
Relationship to the MSA. All capitalized terms not defined in this PSA will have the meanings given to them in the MSA. This PSA is hereby
incorporated by reference into the MSA.
Definitions
1.
2.
a.
b.
c.
d.
e.
f.
g.
“Annual Forecast” is defined in Section 5(f)(i)(1).
“Campaign” shall mean a series of Batches of the Product that are produced in sequence using the same manufacturing equipment (including
but not limited to the same bioreactor) followed by validated cleaning of such equipment and purification suite, and for the purposes of
counting the number of Product batches in a Campaigns in a given period, the start date of such Campaign shall be the determining factor. A
Campaign will be deemed to end upon the completion of such cleaning.
“Firm Period” has the meaning set forth in Section 5(e)(i)(1).
“New Batch” has the meaning set forth in Section 5(e)(iii)(1).
“Product Purchase Commitment Shortfall” has the meaning set forth in Section 5(e)(iv).
“Quarterly Forecast” is defined in Section 5(f)(ii).
“Year” means each one (1) year period that begins on January 1 and ends on December 31.
3.
General Information.
a.
b.
Product: PRO-140 drug substance
Product Specification: The Product Specification will be contained in mutually agreed upon cGMP documentation.
c.
d.
Cell Line: CHO Cell Line expressing PRO-140
Manufacturing Facility: SBL 15kL scale facilities in [***], located at 300, Songdo bio-daero, Yeonsu-gu, Incheon 21987, Republic of Korea.
4.
Raw Materials.
a.
Client Materials. Client Materials to be supplied by Client to SBL free of charge by itself or a third party designee.
i.
ii.
List: See Exhibit A: Client Materials.
Handling Fee: [***].
iii.
Timing of provision of Client Materials to SBL: [***]
b.
Raw Materials. The Parties shall finalize the categorization of Raw Materials to be used in performing the Services of this PSA into
Specialized Raw Materials and Common Raw Materials pursuant to Section 5.3 of the MSA, and shall attach this list to this PSA as Exhibit
B.
i.
ii.
Handling Fee for Common Raw Materials to be procured by SBL at Client’s expense: [***].
Handling Fee for Specialized Raw Materials to be procured by SBL at Client’s expense: [***].
5.
Technology Transfer, Manufacturing, and Supply Services. SBL shall perform the Services as set forth in this Section 5.
a.
Services.
i.
ii.
SBL shall provide the Services as set forth in Exhibits C, D, and E in accordance with this PSA and the Project Plan.
Fees and invoicing.
1.
Services shall be invoiced upon completion of activities by SBL, or otherwise as agreed by the Parties in this PSA or a Project
Plan. Notwithstanding Section 9.3.1 of the MSA, the Parties agree that payment for all Specialized Raw Materials ordered prior
to June 1, 2020, inclusive of Specialized Raw Materials used for small scale runs, plus applicable handling fee, shall be due
[***] days from the receipt of SBL’s invoice.
2.
Batches of Product shall be invoiced upon release by SBL pursuant to MSA Section 5.9.2(a)(i).
b.
c.
Service Fees. In consideration for SBL’s performance of the Services pursuant to this Section 5(b), Client shall pay the Service Fees as set
forth in Exhibit C. Additional Service Fees and costs may be detailed in an amendment to this PSA or in a Change Implementation Plan and
Budget pursuant to Section 6.2(b) of the MSA.
Excess Production. If, in the course of manufacturing pursuant to a Client Purchase Order, SBL manufactures more than the amount ordered
in the Client Purchase Order due to the mutually agreed manufacturing plan, such additional batches shall be purchased by Client as if
manufactured pursuant to a Client Purchase Order.
d.
Forecasts / Purchase Orders
i.
Annual Forecast – Drug Substance
1.
2.
3.
Each Year of the PSA term, Client shall provide to SBL a rolling five (5) Year Forecast (the “Annual Forecast”) at least by the
December 1 of the previous Year. The first three (3) Years shall be binding or partially binding as set forth in this Section, and
the fourth (4th) and fifth (5th) Years shall be non-binding, good-faith estimates of Product to be delivered by SBL in such
Years. The first Annual Forecast shall be provided by March 31, 2020. Any binding forecasts will be dependent on FDA
approval of the Post Approval Submission for manufacturing at SBL. If the approval immediately above is delayed or does not
occur, Client will not be liable for committed volume for 2021 and 2022. Upon receipt, SBL shall provide a written
confirmation or comments on the Annual Forecast within thirty (30) days of receipt, upon which the first two (2) Years of each
Annual Forecast (the “Firm Period”) shall be [***] firm and binding as to the total number of Batches of Product that are to be
delivered in each Year of the Firm Period. The third (3rd) Year of each Annual Forecast shall be partially binding on Client as
follows: when the third (3rd) Year of any Annual Forecast becomes the second (2nd) Year of the next Annual Forecast, such
second (2nd) Year must forecast between [***] and [***] of the third (3rd) Year of the previous Annual Forecast, rounded up
to the nearest batch. By way of example, if Client submits an Annual Forecast on December 1, 2017 which forecasts ten
(10) Batches of Product for 2020, when Client submits the next Annual Forecast on December 1, 2018, it must forecast
between [***] and [***] Batches of Product for 2020.
Each Annual Forecast issued by Client shall be consistent with the Product Purchase Commitment and the previously issued
Annual Forecast in terms of Batches of Product forecasted for each Year falling in the Firm Period.
Notwithstanding anything to the contrary, SBL shall use Commercially Reasonable Efforts to Manufacture Batches in excess
of the number of Batches set forth in any Firm Period subject to SBL’s existing commitments.
ii.
Quarterly Forecast.
1.
Each Quarter of the PSA term, Client shall provide to SBL a rolling eight (8) Quarter Forecast (the “Quarterly Forecast”) at
least by thirty (30) days before the end of the then-current Quarter. The first Quarterly Forecast shall be provided by March 31,
2020.
2.
The Quarterly Forecast shall set forth Batches of Product that are requested by Client to be delivered in each Quarter of the
Quarterly Forecast. Quarterly Forecasts shall be consistent with the then-current Annual Forecast when requesting Batches to
be delivered in a Quarter falling in the Firm Period of any Annual Forecast. If there is a conflict between any Quarterly
Forecast and any Annual Forecast, the Annual Forecast shall supersede unless agreed to by SBL.
iii.
Purchase Orders
1.
2.
Each time Client submits a Quarterly Forecast to SBL pursuant to Section 5(e)(ii), SBL and Client shall discuss in good-faith
the Manufacturing schedule for any Batches of Product that are requested to be delivered in such new Quarter entering the
Quarterly Forecast (each a “New Batch”). The Parties shall discuss in good-faith for up to [***] and shall agree upon a
manufacturing schedule for the New Batches covered by the Quarterly Forecast, upon which Client shall issue a binding
Purchase Order for each New Batch which is consistent with the Parties’ agreement and the Quarterly Forecast. The Purchase
Order shall detail the Batch requested, and estimated delivery date(s) for such Batch, which delivery date shall be finalized
upon SBL’s release of the Batch pursuant to Section 5.9.2(b)(i) of the MSA.
When deciding a manufacturing schedule for the New Batches, the Parties agree that (a) all Manufacturing shall be on a [***]
Campaign per Year basis, [***], (b) if there are more than one (1) Campaigns per Year scheduled as a result of a Quarterly
Forecast then Client will be subject to a changeover fee of [***] per additional Campaign, provided that SBL Manufactures the
full number of Batches specified by Client per Campaign in the applicable Quarterly Forecast and Purchase Order(s). The
changeover fee [***]. If the Parties agree to add the New Batches to a Campaign that was already scheduled pursuant to a
previous Quarterly Forecast, Client shall re-issue the previously issued Purchase Orders to align with such new agreement.
e.
Product Purchase Commitment.
i.
ii.
Notwithstanding anything to the contrary, during [***], both inclusive, Client shall pay SBL, on a minimum take or pay basis, for the
greater of (a) [***] Batches of Product and (b) the number of Batches Forecasted by Client for the [***] period, and .
Notwithstanding anything to the contrary, during [***], both inclusive, Client shall pay SBL, on a minimum take or pay basis, for the
greater of (a) [***] Batches of Product and (b) the number of Batches Forecasted by Client for each Year (commitments in Sections
5(e)(i) and (ii) each, the “Product Purchase Commitment”).
iii. Upon execution of this PSA, Client shall issue Purchase Orders for the following pre-commercial Batches, which shall be fully
binding and on a minimum take or pay basis and the pricing for which shall be as set forth in Exhibit C: [***], [***], and [***]. The
[***]. In addition, upon completion of the Engineering Batch, the JSC will [***]. The JSC may determine [***].
iv.
Each Year, Client shall pay to SBL the price set forth in this PSA for each of the number of Batches of Product falling short of the
Product Purchase Commitment (the “Product Purchase Commitment Shortfall”) for Client’s reserved but unused capacity. For any
Year for which a Product Purchase Commitment Shortfall payment is owed to SBL, such payment shall be made either: (a) on
January 1 of such Year if Client notifies SBL prior to such Year that there will be a Product Purchase Commitment Shortfall, or (b) on
December 31 of the Year when there is a Product Purchase Commitment Shortfall for such Year.
f.
Batch Failure. Pursuant to Section 5.8.3 of the MSA, the Parties shall be responsible for costs related to Batch Failure as follows:
i.
ii.
To the extent the Batch Failure is caused solely as a result of SBL Assignable Error, SBL shall be responsible for [***]. Such cost
responsibility shall be issued as a credit against future invoices by SBL.
In all Batch Failure cases other than solely as a result of SBL Assignable Error, Client shall be responsible for costs (1)-(4) in
Section 5(f)(i) above.
iii. Notwithstanding anything to the contrary, SBL shall not be responsible in the event of Batch Failure for Cell Line that is Client
Material pursuant to this PSA, and SBL shall meet its cost reimbursement obligations pursuant to this Section 5(f) solely through
providing Client with a credit of equivalent value to be used against future invoices by SBL.
6.
7.
8.
Regulatory Approvals. The Regulatory Approvals covered by this PSA are the FDA. SBL shall use Commercially Reasonable Efforts to support
Client’s submissions or applications to any new Regulatory Authority, provided Client has provided SBL with reasonable notice, the Parties agree on
an implementation plan, and Client pays SBL additional fees and costs, if applicable. Details of the scope of SBL’s Service in regards to Regulatory
Approvals shall be detailed in the Project Plan.
Equipment Investment. Pursuant to Section 5.2 of the MSA, Client and SBL will agree on the new equipment in the Facility that is necessary to
perform the Services (the “Specialized Equipment”), as shown in Exhibit E of this PSA. Client shall be responsible for the purchase price and any
supplier provided services related to the Specialized Equipment. SBL shall be responsible for [***] the Specialized Equipment. [***] SBL.
Storage. Pursuant to Section 5.9 of the MSA, if Client does not direct SBL to prepare Manufactured Product to be picked up by Client or Client’s
designated carrier with a pick-up date within [***] days of Client’s receipt of the Batch Related Documents, SBL shall store the Product at the
Warehouse and Client shall pay storage fees to SBL for the period of storage at the Warehouse until the actual delivery date, provided, however, that
such storage period shall not exceed [***] days.
9.
Limitation of Liability. In addition to the limitation of liability in Section 14.1 of the MSA for special, punitive, indirect or consequential damages,
the Parties’ liability under the PSA shall be as set forth in this Section 9. Except for (i) [***] of the MSA or [***] of the MSA; (ii) [***] of the MSA;
and (iii) Damages arising out of the attributable Party’s [***], a Party’s maximum aggregate liability to compensate the other Party for all Damages
under this PSA will be set on a per calendar year basis and for the calendar year in which the cause of such liability lies or exists (whether in
contract, tort, strict liability, statute, or otherwise) and shall be limited to [***] paid or payable by Client to SBL in such calendar year (excluding
costs of Raw Materials, SBL handling fees, and other expense or cost reimbursements). For Damages relating to (i), (ii) and (iii) in the immediately
preceding sentence, a Party’s maximum aggregate liability to compensate the other Party for Damages under this PSA will be unlimited.
10. Term. This PSA will commence as of the PSA Effective Date and will continue in full force and effect until December 31, 2027 or unless earlier
terminated in accordance with the provisions of this PSA and/or Section 15.2 of the MSA.
The Parties have entered into this PSA as of the PSA Effective Date by their respective duly authorized representatives.
SAMSUNG BIOLOGICS CO., LTD.
CYTODYN INC.
/s/ Dr. Tae Han Kim
By:
Name: Tae Han Kim
Title:
Date:
Representative Director & President
April 1, 2019
By:
/s/ Nader Pourhassan
Name: Dr. Nader Pourhassan
Title: President and CEO
Date: 30 March 2019
1.
[***]
Other Client Materials may be identified at a future date if agreed upon by the Parties.
Exhibit A: Client Materials
Specialized Raw Material is defined [***]. This definition may be further refined with mutual agreement from the Parties. All other Raw Materials will be
defined as Common Raw Materials.
Exhibit B: Categorization of Raw Materials
Service
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Comments
Exhibit C: Services
Price (USD)
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Note: DS Pricing based on Pricing Assumptions below
PRICING AND PAYMENT ASSUMPTIONS
Pricing includes labor and use of facilities. Standard pricing and payment terms are listed below.
•
The pricing chart above is based on information provided in the RFP regarding the product and manufacturing process. Further communication
between Samsung BioLogics and CytoDyn regarding the specifics of the project may result in changes to the scope of work and associated price.
•
Commercial batch pricing is based on [***].
•
Pricing is based [***]. Additional charges will apply [***].
•
DS Batch price is based on [***].
•
Increasing or decreasing the length of commercial term will effect batch price.
•
The proposed prices are valid for year 2019 and will be adjusted annually based on the Korean Consumer Price Index.
•
DS Batch prices do not include the cost of all raw materials and consumables ([***])
•
Common Raw Materials will incur a [***] handling surcharge.
•
Specialized Raw Materials (typically [***] requires alignment between both parties) will incur a [***] handling charge.
•
The prices are based on regulatory requirements that complies with FDA regulation. Prices may change depending on the additional requirements
necessary to comply with other regulatory authorities.
•
Invoices will be issued at completion of agreed upon milestones and deliverables.
•
Invoices are expected to be paid by CytoDyn within [***] days of receipt.
•
Balance due for each batch shall be invoiced upon [***].
•
All costs associated with activities outsourced to 3rd party contractors will be passed through to CytoDyn with a [***] handling surcharge.
•
All prices exclude freight charges, insurance, duties, taxes, travel expenses, etc.
NOTE: Timeline is based on current availability at the time proposal is issued and subject to change based on conditions at time of contract.
Exhibit D: Estimated Timeline and Scope of Work
[***]
DS SCOPE OF WORK (15,000L)
[***]
[***]
[***]
Scope of Work APPENDIX A: PRODUCT/PROJECT INFORMATION
1
Key Product Information
Product Name
Product Description
[***]
[***]
[***]
[***]
[***]
[***]
2
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
PRO 140 (Leronlimab)
Human monoclonal antibody produced in CHO cell line
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
•
•
[***]
[***]
Name
Cytodyn Operations Inc.
Advanced Genetic Technologies, Inc.
CytoDyn Veterinary Medicine LLC
SUBSIDIARIES
Jurisdiction of Incorporation or Organization
Delaware
Florida
Florida
Exhibit 21
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (333-206813 and 333-223884) and Registration
Statements Form S-3 (Nos. 333-213866 and 333-228991 and 333-223195 and 333-223563) of our reports dated August 14, 2019, with respect to the
consolidated financial statements of CytoDyn Inc., and the effectiveness of internal control over financial reporting of CytoDyn Inc., included in this
Annual Report on Form 10-K for the year ended May 31, 2019. Our report on the consolidated financial statements contains an explanatory paragraph
regarding CytoDyn, Inc.’s ability to continue as a going concern.
Exhibit 23
/s/ Warren Averett, LLC
Birmingham, Alabama
August 14, 2019
POWER OF ATTORNEY
Exhibit 24
WHEREAS, the undersigned officers and directors of CytoDyn Inc. desire to authorize Nader Z. Pourhassan and Michael D. Mulholland to act as
their attorneys-in-fact and agents, for the purpose of executing and filing the registrant’s Annual Report on Form 10-K for the year ended May 31, 2019,
including all amendments and supplements thereto,
NOW, THEREFORE,
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Nader Z. Pourhassan and
Michael D. Mulholland, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to sign
the registrant’s Annual Report on Form 10-K for the year ended May 31, 2019, including any and all amendments and supplements thereto, and to file the
same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this power of attorney in the following capacities as of August 14, 2019.
Signatures
/s/ Scott A. Kelly, M.D.
Scott A. Kelly, M.D.
/s/ Carl C. Dockery
Carl. C. Dockery
/s/ Michael A. Klump
Michael A. Klump
/s/ Jordan G. Naydenov
Jordan G. Naydenov
/s/ David F. Welch, Ph.D.
David F. Welch, Ph.D.
/s/ Nader Z. Pourhassan, Ph.D.
Nader Z. Pourhassan, Ph.D.
/s/ Michael D. Mulholland
Michael D. Mulholland
Title
Director
Director
Director
Director
Director
Director, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer, Treasurer and Corporate Secretary
(Principal Financial Officer and Principal Accounting Officer)
Exhibit 31.1
I, Nader Z. Pourhassan, certify that:
1. I have reviewed this Annual Report on Form 10-K of CytoDyn Inc.;
Certification of Chief Executive Officer
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
d. disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the registrant’s most-recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control
over financial reporting.
Date: August 14, 2019
/s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph. D.
President and Chief Executive Officer
Exhibit 31.2
I, Michael D. Mulholland, certify that:
1. I have reviewed this Annual Report on Form 10-K of CytoDyn Inc.;
Certification of Chief Financial Officer
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
d. disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the registrant’s most-recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control
over financial reporting.
Date: August 14, 2019
/s/ Michael D. Mulholland
Michael D. Mulholland
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of CytoDyn Inc. (the “Company”) on Form 10-K for the year ended May 31, 2019 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to 18 U.S.C. § 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph. D.
President and Chief Executive Officer
August 14, 2019
/s/ Michael D. Mulholland
Michael D. Mulholland
Chief Financial Officer
August 14, 2019
A signed original of this written statement required by Section 906 has been provided to CytoDyn Inc. and will be retained by CytoDyn Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.