CYTODYN INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Certain information included in this quarterly report on Form 10-Q contains, or incorporates by reference, forward-looking statements within the meaning of Section 21E of the Exchange Act. 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 vary materially from those contained in or expressed by such statements. In evaluating all such statements, we urge you to specifically consider various risks identified in this quarterly report, and those set forth in Item 1A. Risk Factors in our 2022 Form 10-K, 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 about current business plans. Forward-looking statements include, among others, statements about leronlimab, its ability to have positive health outcomes, the Company's ability to resolve the clinical holds imposed by the
U.S. Food and Drug Administration(the "FDA") and information regarding future operations, future capital expenditures and future net cash flows. You should not place undue reliance on our forward-looking statements, which are subject to risks and uncertainties relating to, among other things: the regulatory determinations of leronlimab's safety and effectiveness by the FDA and various drug regulatory agencies in other countries; the Company's ability to raise additional capital to fund its operations; the Company's ability to meet its debt and other payment obligations; the Company's ability to enter into or maintain partnership or licensing arrangements with third-parties; the Company's ability to retain key employees; the timely and sufficient development, through internal resources or third-party consultants, of analyses of the data generated from the Company's clinical trials required by the FDA or other regulatory agencies in connection with the Company's Biologic License Application ("BLA") resubmission or other applications for approval of the Company's drug product; the Company's ability to achieve approval of a marketable product; the design, implementation and conduct of the Company's clinical trials; the results of the Company's clinical trials, including the possibility of unfavorable clinical trial results; the market for, and marketability of, any product that is approved; the existence or development of vaccines, drugs, or other treatments that are viewed by medical professionals or patients as superior to the Company's products; regulatory initiatives, compliance with governmental regulations and the regulatory approval process; legal proceedings, investigations or inquiries affecting the Company or its products; general economic and business conditions; changes in foreign, political, and social conditions; stockholder actions or proposals with regard to the Company, its management, or its Board of Directors; and various other matters, many of which are beyond the Company's control. Should one or more of these risks or uncertainties develop, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated, or otherwise indicated by our forward-looking statements. 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 quarterly report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events that may cause actual results to differ from those expressed or implied by these forward-looking statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K (the "2022 Form 10-K"), and the other sections of this Form 10-Q, including our consolidated financial statements and related notes set forth in Part I, Item 1. This discussion and analysis contain forward-looking statements, including information about possible or assumed results of our financial condition, operations, plans, objectives and performance that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated and set forth in such forward-looking statements.
The Company is a biotechnology company focused on the clinical development and potential commercialization of its product candidate, leronlimab, which is being studied for the treatment of HIV infection, NASH, and solid tumors in oncology. Our current business strategy is to seek the removal of the partial and full clinical holds imposed by the
US FDAin March 2022, evaluate the feasibility of the resubmission of the clinical section of the BLA for leronlimab as a 26
combination therapy for highly experienced HIV patients, and to seek further development of leronlimab in NASH, NASH-HIV and solid tumors in oncology.
As further discussed in Part I, Item 1, Note 2, Summary of Significant Accounting Policies - Inventories, Note 3, Inventories, net, and Note 9, Commitments and Contingencies, the Company capitalized procured or produced pre-launch inventories in preparation for product launches. The Company considers anticipated future sales, shelf-lives, and expected approval date when evaluating realizability of prelaunch inventories. The shelf-life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory, the Company considers the stability data of all inventories. As inventories approach their shelf-life expiration, the Company may perform additional stability testing to determine if the inventory is still viable, which may result in an extension of its shelf-life. Further, in addition to performing additional stability testing, certain raw materials inventory may be sold in its then current condition prior to reaching expiration. In determining whether pre-approval inventory remains salable, the Company considers a number of factors, including potential delays in obtaining regulatory approval, the introduction of competing products that may negatively impact the demand for our product, the likelihood that physicians would be willing to prescribe leronlimab to their patients, and whether the target patient population would be willing to try leronlimab as a new therapy.
First Quarter Overview
BLA HIV and clinical developments
The remaining BLA section to be completed and submitted remains in the clinical section as of the date of this report. The Company is in a dispute with its former contract research organization ("CRO"); the Company obtained an order requiring the CRO to release the Company's clinical data related to the BLA and other clinical trials, which the CRO had been withholding, thereby preventing the Company from completing necessary clinical data submissions to the FDA. The order granted the Company access to the data and the right to perform an audit of the CRO's services. In
March 2022, the FDA notified the Company that it had placed a partial clinical hold on the Company's HIV program; the Company was not enrolling any new patients in the trials placed on hold. The partial clinical hold on the HIV program impacted patients enrolled in HIV extension trials. The affected patients have been transitioned to other available therapeutics. No clinical studies can be initiated or resumed until the partial clinical hold is resolved, which may affect our ability to resubmit the BLA. The Company's efforts are focused on activities that will allow us to resolve the partial clinical hold and potentially resume the BLA resubmission process. The Company will update the feasibility of the resubmission of the clinical section of the BLA once it completes its evaluation of the clinical data, results of the CRO audit, and the timelines of the clinical holds.
NASH Clinical Developments
Non-alcoholic steatohepatitis (NASH) is a chronic liver disease characterized by the presence of hepatic inflammation and cell. Patients with advanced fibrosis due to NASH are at significantly higher risk of liverrelated mortality. There is currently no approved drug for NASH. Liver disease is one of the leading causes of non-AIDS-related death in HIV patients. The Company is identifying the next steps in clinical development to continue the investigation of leronlimab in the NASH indication and HIV patients with NASH. In NASH, liver homeostasis is impaired due to an accumulation of toxic lipids which can activate both Kupffer cells (KCs) and tissue-resident macrophages resulting in the production of fibrogenic cytokines and chemoattractant chemokines such as transforming growth factor-beta (TGF-?) and monocyte chemoattractant protein-1 (MCP-1). Not only do these cytokines/chemokines promote transdifferentiation of hepatic stellate cells (HSCs) into myofibroblasts (the primary source for fibrillary collagens), but they also amplify the immune response by recruiting additional cells into the damaged area. Recruitment of extra-hepatic inflammatory cells to the site of hepatic injury is typically mediated by interactions between cytokines/chemokines and their receptors. It has also been shown that patients with NASH also have high levels of C-C chemokine receptor 5 (CCR5) and the associated ligand, CCL5, thus demonstrating a potential role of CCR5 and its ligands in liver fibrosis.
The potential of leronlimab in the treatment of NASH has been demonstrated in a preclinical model of fatty liver disease. Immunodeficient NOD-SCID Gamma (NSG) mice were fed a NASH-inducing high-fat diet, transplanted with
human stem cells to repopulate the deficient immune system, and treated with leronlimab. Sixteen (16) male NOD.Cg-Prkdcscid Il2rgtm1Wjl/SzJ, commonly known as the NOD scid IL-2 receptor gamma knockout mice (NSG) were first humanized by intravenous inoculation with normal human umbilical cord blood cells (105). After 5 weeks on normal mouse chow, mice were successfully humanized, demonstrating >25% human CD45 cells in peripheral blood. Mice were switched to high fat (52%) high cholesterol (1.25%) diet (FPC diet: fructose, palmitate, cholesterol, trans-fat; Envigo-Teklad TD.160785). Leronlimab and control antibody (normal human IgG, Sigma) were administered i.p. at a dose of 2mg i.p. twice weekly, n=8 mice/group. The results showed that leronlimab inhibited fatty liver development, a key characteristic of early-stage NASH, such that treatment of humanized NSG mice with leronlimab caused a three fold reduction in hepatic steatosis compared to control in an animal model of high fructose, high palmitate, high cholesterol diet. The Company has reported clinical data from patients with NASH from the CDI-NASH-01 trial which was designed as a multi-center Phase 2a study and was subsequently converted into an exploratory study to evaluate the dose, efficacy, and safety of leronlimab at 350 mg and 700 mg, versus placebo. The study also included an expansive biomarker program designed to inform future clinical trials and to more fully understand leronlimab's mechanism of action within the NASH setting. CDI-NASH-01 was run in two parts, Part 1 of the study was to assess the efficacy of leronlimab 700 mg (n=22) in improving NAFLD/NASH measures in adult patients diagnosed with NASH compared to placebo (n=28). Part 2 was subsequently added to assess leronlimab 350 mg in improving NAFLD/NASH measures in adult patients diagnosed with NASH (n=22). In Part 1 of the study, eligible subjects were randomized 1:1 to one of the two study arms to receive either leronlimab 700mg (Group A), or placebo (Group B), given once per week (±1day) at the study site for up to 13 weeks during the treatment period (with up to 60 participants). In Part 2 of the study, eligible subjects enrolled to receive leronlimab 350 mg open-label given once per week (±1day) at the study site for up to 13 weeks during the treatment period (with up to 28 participants). The primary efficacy objective was percent change from baseline in hepatic fat fraction, as assessed by magnetic resonance imaging-derived proton density fat fraction (MRI-PDFF) at week 14. The secondary efficacy objective was absolute change from baseline in fibro-inflammatory activity in the liver as assessed by MRI-corrected T1 imaging (MRI-cT1) at week 14. MRI-cT1 is obtained by multiparametric magnetic resonance imaging of the liver and is a quantitative metric for assessing a composite of liver inflammation and fibrosis, expressed in milliseconds (msec). MRI-PDFF is being studied as an imaging surrogate endpoint for the fat density in the liver. MRI-cT1 is being studied as an imaging surrogate endpoint for hepatic fibro-inflammation. This is a critical unmet need in the NASH space, as many agents have been unable to show reductions in fibro-inflammation despite reductions in hepatic steatosis. All analyses performed were exploratory. Treatment with leronlimab was well tolerated in both Part 1 and Part 2 compared to placebo. In Part 1 of the study, leronlimab 700 mg did not reduce mean change in PDFF and cT1 from baseline to week 14 vs. placebo. In Part 2, leronlimab 350 mg reduced mean change in PDFF and cT1 from baseline to week 14 vs. the placebo group from Part 1, despite increased degree of baseline fibro-inflammation. In the combined group of patients with moderate (? 875 msec) and severe (? 950 msec) cT1 values at baseline, leronlimab 350 mg reduced cT1 from baseline to week 14 vs. placebo. Based on post hoc CCR5 haplotype analysis of a small subgroup (n=5), we are considering further investigation of the 700mg dose of leronlimab for specific haplotypes. Cancer Clinical Developments
The Company identifies the next steps in clinical development and explores potential commercial opportunities to further investigate leronlimab for solid tumors in oncology based on the data generated to date by the Company.
Summary of TNBC Data To assess the impact of leronlimab treatment on mTNBC patients, we pooled the data from 3 studies: CD07_TNBC Phase 1b/2, CD07_TNBC_Compassionate Use, and CD-09 Basket. The study population for pooled efficacy analysis was a total of 28 subjects (10 subjects from the Phase 1b/2 study, 16 subjects from the Compassionate Use Study, and 2 subjects were from the Basket Study). To explore the impact of leronlimab in the mTNBC patients' disease progression, investigator assessed Progression Free Survival (PFS) was analyzed in the 28 subjects. There was a total of 19 subjects dosed between 525 mg and 700 mg (4 subjects increased dose from 350 mg to 525 mg and were included in the higher dose cohort). The median PFS 28
(mPFS) for the 525 mg - 700 mg cohort was 6.2 months (95% CI 2.6 months - 7.5 months). There were 9 subjects dosed at 350 mg, mPFS was 2.2 months (95% CI 0.7 months - 12+ months). There was a meaningful PFS advantage at the higher doses when compared with the lower, 350 mg dose cohort. Furthermore, the preliminary results of the leronlimab studies also showed similarity in the PFS outcomes of mTNBC patients treated with leronlimab + carboplatin compared to overall leronlimab treated population. Of the 28 subjects enrolled, 13 subjects received leronlimab + carboplatin treatment. The mPFS for leronlimab + carboplatin population was 3.9 months (95% CI 2.3 months - 6.0 months). The subgroup analysis of PFS based on the individual subjects in each study were also reviewed. The mPFS for Phase 1b/2 study was 3.9 months (95% CI 2.3 months - 6.2 months), mPFS for the Compassionate Use study was 3.3 months (95% CI 1.3 months - 7.5 months), and mPFS for the Basket Study was 2.8 months (95% CI N/A). Combined, the overall mPFS for all 28 patients treated with leronlimab in the population of mTNBC patients regardless of dosage, conjunction therapy type, brain or bone metastases that have failed more than one line of previous therapy was 4.1 months (95% CI 2.5 months - 7.0 months). The mean PFS was 3.7 ± 2.93 standard deviation (SD). To explore the impact of leronlimab in the mTNBC patients' disease progression, Overall Survival (OS) was analyzed in the same 28 subjects. The median OS (mOS) for leronlimab + carboplatin population was 12+ months (95% CI 5.4 months - 12+ months).
The mOS for the 350 mg cohort was 4.6 months (95% CI 1.1 months -12+ months). The mOS for the 525-700 mg cohort was 12+ months (95% CI 5.5 months – 12+ months).
The overall median OS for leronlimab treated population of mTNBC patients regardless of brain or bone metastases that have failed more than one line of previous therapy was 6.5 months (95% CI 5.0 months - 12+ months). The mean value for OS was 5.5 ±4.31 standard deviation (SD).
COVID-19 Clinical Developments
The Company has made the business decision to currently discontinue its investigation of leronlimab for the COVID-19 indications due to challenges in clinical enrollment in the severe/critical COVID-19 population, and the unclear path for regulatory approval of COVID-19 post-acute sequelae SARS-CoV-2 infection (PASC).
June 2022, the Company concluded a private placement of common stock and warrants through a placement agent, selling approximately 50.7 million additional shares of common stock for gross proceeds of $12.9 millionand net proceeds of $11.3 million. Refer to Note 6, Equity Awards and Warrants - Private Placement of Common Stock and Warrants through Placement Agent for details. Effective July 9, 2022, Cyrus Arman, Ph.D. was appointed President, and Antonio Migliareseceased his role as interim President. Dr. Armanpreviously held positions with a number of biotechnology companies, most recently serving as Chief Business Officer of Nimble Therapeutics, Inc., a company focused on engineering peptides. Prior to Nimble he was Vice President of Corporate Development and Strategy of NEUVOGEN, Inc., an 29mmune-oncology company, developing therapeutic whole cell cancer vaccines, from 2019 until 2021. Beginning in 2017, he served as co-founder and managing partner of BioVega Capital, LLC, a life sciences hedge fund. From 2014 through 2019, he served in a variety of strategy roles at Amgen (NASDAQ: AMGN), a leading independent biotechnology company, including as Director of Corporate Strategy and Global Director and Head of Competitive Intelligence and Strategy. Prior to Amgen he was a Principal at Deallus Consulting, a global lifesciences competitive strategy consulting firm. He received an M.S. degree in biomedical engineering and a Ph.D. in neuroscience from the University of Southern Californiaand an M.B.A from the UCLA Anderson School of Management. On August 24, 2022, Ryan Dunlapwas appointed to the Company Board of Directors and was subsequently appointed chair of the Audit Committee. Mr. Dunlaphas over 25 years' experience in accounting, finance and operations leadership, developing significant expertise in strategy setting, improving operational efficiency and effectiveness, fundraising and investor relations, financial reporting and compliance, and risk management. Mr. Dunlapcurrently serves as the CFO of Gurobi Optimization, a private, equity backed software company offering customers decision intelligence solutions utilizing mathematical optimization, where he started in October 2019. Prior to that, he spent 7 29
years as a CFO in the biotech and life science industries, including at MolecularMD (now
ICON Specialty Labs), a growth equity-backed molecular diagnostics company, and Galena Biopharma, a publicly-traded oncology drug development company. Earlier in his career, Mr. Dunlapheld various financial and operational leadership roles in large, multinational organizations, and spent 11 years with public accounting firms such as PwC, KPMG, and Moss Adams, where he provided business assurance and advisory services to both public and private companies predominately in the software, technology, and life sciences industries. Mr. Dunlapearned a B.S. degree in Accounting from the University of Oregonand is an active licensed CPA in the state of Oregon. On August 31, 2022, the Company's stockholders approved a proposal to increase the total number of authorized shares of common stock from 1.0 billion shares to 1.35 billion shares at a special stockholders' meeting.
Fluctuations in operating results
The Company's operating results may fluctuate significantly depending on the outcomes of clinical trials, patient enrollment and/or completion rates in clinical trials, entering into new clinical trial protocols, and their related effect on research and development expenses, regulatory and compliance activities, activities related to the HIV BLA, general and administrative expenses, professional fees, and legal proceedings and the related outcomes. We require a significant amount of capital to continue to operate; therefore, we regularly conduct offerings to raise capital, which can create various forms of non-cash interest expense or other expenses. Additionally, we periodically negotiate settlement of debt payment obligations in exchange for equity securities of the Company and enter into warrant exchanges or modifications that may create non-cash charges. Our ability to continue to fund operations will depend on our ability to raise additional capital. Refer to Risk Factors, Liquidity and Capital Resources, and Going Concern sections included in this quarterly report.
Operating results are as follows for the periods presented:
Three months ended August 31, Change (in thousands, except for per share data) 2022 2021 $ % (Restated) (1) Revenue $ - $ 41
$ (41)(100) Cost of goods sold - 1 (1) (100) Gross margin - 40 (40) (100) Operating expenses: General and administrative 6,333 7,617 (1,284) (17) Research and development 576 12,020 (11,444) (95) Amortization and depreciation 99 276 (177) (64) Inventory charge 2,704 1,764 940 53 Total operating expenses 9,712 21,677 (11,965) (55) Operating loss (9,712) (21,637) 11,925 55 Interest and other expense: Interest on convertible notes (1,146) (1,686) 540 32 Amortization of discount on convertible notes (576) (952) 376 39 Amortization of debt issuance costs (16) (28) 12 43 Loss on induced conversion - (18,530) 18,530 100 Finance charges (940) (35) (905) (2,586) Inducement interest expense - (528) 528 100 Legal settlement - (1,941) 1,941 100 Loss on derivatives (8,601) - (8,601) (100) Total interest and other expense (11,279) (23,700) 12,421 52 Loss before income taxes (20,991) (45,337) 24,346 54 Income tax benefit - - - - Net loss (20,991) (45,337) 24,346 54 Basic and diluted: Weighted average common shares outstanding 787,856 632,597 $ 155,25925 Loss per share $ (0.03) $ (0.07)0.04 55
(1) See Note 2, Summary of main accounting policies.
Product Revenue, Cost of Goods Sold (“COGS”) and Gross Margin
We had no revenue in the three months ended
August 31, 2022as compared to approximately $41.0 thousandin the comparable period of the previous year. Revenue was related to the fulfillment of orders under a Compassionate Special Permit ("CSP") in the Philippinesfor the treatment of COVID-19 patients. Sales were made under the April 2021exclusive supply and distribution agreement granting Chiral the right to distribute and sell up to 200,000 vials of leronlimab through April 15, 2022. At the time of the sales, FDA approval had not yet been received for leronlimab and the product sold was previously expensed as research and development expense due to its being manufactured prior to the commencement of the manufacturing of commercial grade pre-launch inventories. Therefore, COGS consists only of the costs of packaging and shipping of the vials, including related customs and duties.
General and administrative expenses
General and administrative expenses consisted of the following items:
Three months ended August 31, Change (in thousands) 2022 2021 $ % Salaries, benefits, and other compensation $ 1,278 $ 385
$ 893232 Stock-based compensation 1,341 2,597 (1,256) (48) Legal fees 1,453 2,351 (898) (38) Other 2,261 2,284
(23) (1) Total general and administrative expenses $6,333 $7,617
General and administrative expenses decreased approximately
$1.3 million, or 17%, for the three months ended August 31, 2022, compared to the same period in the prior year primarily due to a reduction in stock-based compensation expense and legal fees, offset by an increase in salaries, benefits, and other compensation. The decrease in stock-based compensation expense was the result of fewer equity awards granted during the three months ended August 31, 2022. Legal fees decreased due to legal expenses paid by the Company's insurance carrier. The increase in salaries, benefits, and other compensation was the result of a reclassification in the three-months ended August 31, 2021of approximately $1.6 millionof previously accrued incentive compensation to stock-based compensation due to the compensation being issued in shares of common stock.
Research and development costs
Research and development costs consist of the following items:
Three months ended August 31, Change (in thousands) 2022 2021 $ % Clinical $ 20 $ 9,227
$ (9,207)(100) CMC 323 2,559 (2,236) (87) License and patent fees 233 234 (1) (0)
Total research and development $ 576 $ 12,020
For the three months ended
August 31, 2022, research and development expenses decreased approximately $11.4 million, or 95%, compared to the same period last year, primarily due to lower clinical trial expenses as a result of clinical trials related to US COVID-19, oncology, and NASH having been completed that were active in the same period last year; the pausing of the Brazilian COVID-19 trials; and the closing of HIV extension studies in March 2022due to clinical holds placed on the Company by the FDA. The future trend of such expenses is dependent on the timing of FDA clearance from the clinical holds, the future clinical development of leronlimab in the treatment of HIV, NASH, NASH-HIV and oncology, the outcome of pre-clinical studies for additional cancer indications, the outcome or cessation of the Brazilian COVID-19 trials, and the feasibility of the resubmission of the clinical section of the BLA. The decrease in CMC-related expenses from the same period last year was the result of the Company having concluded the majority of its CMC manufacturing and HIV BLA related activities in the prior year.
Amortization and depreciation charges
Amortization and depreciation expense totaled approximately
$0.1 millionfor the three months ended August 31, 2022, a decrease of approximately $0.2 million, or 64% from the same period in the prior year. The decrease was 31
attributable to the intangible write-off of a proprietary algorithm intangible asset during the fiscal year ended
May 31, 2021and the ProstaGene noncompete intangible asset becoming fully amortized as of November 30, 2021, resulting in decreased amortization expense of intangibles. 32 Table of Contents Interest and other expense
Interest and other charges consisted of the following items:
Three months ended August 31, Change 2022 2021 $ % (in thousands) (Restated) (1) Interest on convertible notes payable
$ 1,146$ 1,686 $ (540)(32) Amortization of discount on convertible notes 576 952 (376) (39) Amortization of debt issuance costs 16 28 (12) (43) Loss on induced conversion - 18,530 (18,530) (100) Finance charges 940 35 905 2,586 Inducement interest expense - 528 (528) (100) Legal settlement - 1,941 (1,941) (100) Loss on derivatives 8,601 - 8,601 100 Total interest and other expense $ 11,279$ 23,700 $ (12,421)(52)
See Note 2, Summary of Significant Accounting Policies.
For the three months ended
August 31, 2022, interest and other expenses decreased approximately $12.4 million, or 52%, compared to the same period last year. The decrease was primarily due to a decrease in loss on induced conversion and legal settlement offset by an increase in loss on derivatives. The decrease in non-cash loss on induced conversions resulted from the Company not issuing any common stock to settle any outstanding convertible debt during the current period as compared to the same period last year (refer to Part II, Item 8, Note 14, Restatement in the 2022 Form 10-K). The decrease in legal settlement expense was the result of the Company having no legal settlements during the three months ended August 31, 2022. The increase in loss on derivatives was attributable to the change in the fair value of liability classified warrants related to the Surety Bond Backstop Agreement and placement agent warrants issued in connection with a recent offering. These warrants became equity classified upon the stockholders' approval of an increase in authorized shares on August 31, 2022.
Cash and capital resources
August 31, 2022, we had a total of approximately $4.7 millionin cash and approximately $122.3 millionin short-term liabilities. We expect to continue to incur operating losses and require a significant amount of capital in the future as we continue to develop and seek approval to commercialize leronlimab. Despite the Company's negative working capital position, vendor relations remain relatively accommodative, and we do not currently anticipate significant delays in our business initiatives schedule due to liquidity constraints. We cannot be certain, however, that future funding will be available to us when needed on terms that are acceptable to us, or at all. We sell securities and incur debt when the terms of such agreements are deemed favorable to both parties under then current circumstances and as necessary to fund our current and projected cash needs. Cash
The Company's cash position of approximately
$4.7 millionas of August 31, 2022, increased by approximately $0.5 million, when compared to the balance of $4.2 millionas of May 31, 2022. This increase was primarily the result of approximately $11.5 millionin cash provided by financing activities offset by approximately $11.1 millionin cash used in our operating activities during the three months ended August 31, 2022. Refer to Item 1, Note 2, Summary of Significant Accounting Policies - Going Concern, and the Going Concern discussion below for information regarding the Company's ability to continue to fund its operations and satisfy its payment obligations and commitments. Summary of cash flows and changes between the periods presented is as follows: Three months ended August 31,
(in thousands) 2022 2021
Net cash (used in) provided by: Net cash used in operating activities
$ (11,074) $ (31,741) $ 20,667Net cash used in investing activities $ - $ (8) $ 8 Net cash provided by financing activities $ 11,519$ 4,348 $ 7,17133 Table of Contents
Cash flows used in operating activities
Net cash used in operating activities totaled approximately
$11.1 millionduring the three months ended August 31, 2022, representing an improvement of approximately $20.7 millioncompared to the three months ended August 31, 2021. The decrease in the net amount of cash used was due primarily to a decrease in our net loss, attributable to decreased G&A expense, R&D expense, and non-cash interest and other expense, and working capital fluctuations, all of which are highly variable. Refer to General and Administrative, Research and Development, and Interest and Other Expense sections for the discussion.
Cash used in investing activities
Net cash used in investing activities for the three months ended
compared to the same period of the previous year has not changed significantly.
Cash provided by financing activities
Net cash provided by financing activities totaled approximately
$11.5 million, an increase of approximately $7.2 millioncompared to the three months ended August 31, 2021. The increase in net amount of cash provided was the result of receiving approximately $11.3 millionthrough the private placement of common stock and warrants through a placement agent and approximately $0.2 millionthrough the exercise of warrants (Refer to Note 6, Equity Awards and Stock-Based Compensation). Pre-launch inventories During the fourth fiscal quarter of 2022, the Company concluded that a significant portion of inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration. This is due to delays experienced from the originally anticipated BLA approval date from the FDA. Although these inventories are no longer being capitalized as pre-launch inventories for US GAAP accounting purposes, the inventories written-off for accounting purposes continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives are extended as the result of the performance of on-going continued stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. The Company also concluded that, due to delays of future production, certain raw materials would expire prior to production and as such no longer qualify for capitalization. Specifically, the Company evaluated its raw materials, which consist of specialized raw materials, resins, and other, against the anticipated production date and determined that while the next production date is indeterminable as of May 31, 2022, specialized raw materials have remaining shelf-lives ranging from 2023 to 2026. Therefore, a reserve of $10.2 millionfor the entire remaining value of specialized and other raw materials was recorded as of May 31, 2022. The Company also concluded that approximately $29.1 million, composed of five batches of drug product, out of total of nine manufactured, is likely to expire prior to the anticipated date the product may be approved for commercialization. Additionally, the Company anticipates that approximately $34.2 millionof the drug product comprising the remaining four manufactured batches, with shelf-lives lasting into 2026, may expire prior to receiving approval for commercialization. The Company wrote-off the entire remaining balance of the drug product, in the amount of $63.3 million, as of May 31, 2022. During the first quarter of fiscal 2023, the Company reviewed purchase commitments made by its manufacturing partner, Samsung BioLogics Co., Ltd. ("Samsung"), under the master agreement between the Company and Samsung, and its vendors for specialized raw materials for which the Company made a prepayment in the amount of $2.7 millionin the third quarter of fiscal 2022, which were recorded as other assets in the consolidated financial statements as of May 31, 2022. The Company and its manufacturing partner have been in discussions, among other things, about cancelling the commitments to the suppliers, which have been unsuccessful to date. These additional specialized raw materials are estimated to have shelf-lives ranging from 2023 to 2026. The entire amount was reserved for as of August 31, 2022. During the fourth fiscal quarter of 2022, the Company completed its validation of the resins' properties based on the number of cycles they have been used for, and the remaining number of manufacturing cycles they may be used for; the 34
Company did not identify any resins that failed suitability validation. As of
August 31, 2022, the remaining life of resins remained unchanged, ranging between 37 and 62 cycles. The Company will continue to present its resins inventory based on the remaining shelf-lives until a new shelf-life is assigned based on the results of usability testing.
April 2, 2021, we issued a convertible note with a principal amount of $28.5 millionresulting in net cash proceeds of $25.0 million, after $3.4 millionof debt discount and $0.1 millionof offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of $10.00per share, and matures in April 2023. The April 2, 2021Note required monthly debt reduction payments of $7.5 millionfor the six months beginning in May 2021, which could also be satisfied by payments on other notes held by the noteholder or its affiliates. Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to $3.5 million. As of August 31, 2022, the outstanding balance of the April 2, 2021Note, including accrued interest, was approximately $12.4 million.
April 23, 2021, we issued a convertible note with a principal amount of $28.5 millionresulting in net cash proceeds of $25.0 million, after $3.4 millionof debt discount and $0.1 millionof offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of $10.00per share, and matures in April 2023. Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to $7.0 million. As of August 31, 2022, the outstanding balance of the April 23, 2021Note, including accrued interest, was approximately $31.6 million.
We have 1,350.0 million common shares authorized. The table below summarizes the intended uses of the Common Shares.
As of (in millions)
August 31, 2022Issuable upon: Warrants exercise 176.2
Convertible preferred stock and undeclared dividends conversion 32.2 Outstanding stock options exercise or vesting of outstanding RSUs 17.4
Reserved for issuance under future equity-based awards under an equity incentive plan
26.1 Reserved and issuable upon conversion of outstanding convertible notes 12.0 Total shares reserved for future uses
263.8 Common stock outstanding 812.3 As of
August 31, 2022, we had approximately 273.9 million unreserved authorized shares of common stock available for issuance. Our ability to continue to fund our operations depends on our ability to raise capital. The funding necessary for our operations may not be available on acceptable terms, or at all. If we deplete our cash reserves, we may have to discontinue our operations and liquidate our assets, in extreme cases, we could be forced to file for bankruptcy protection, discontinue operations or liquidate assets.
Off-balance sheet arrangements
35 Table of Contents Contractual Obligations Refer to Note 4, Accounts Payable and Accrued Liabilities, Note 5, Convertible Instruments and Accrued Interest, and Note 9, Commitments and Contingencies included in Part I, Item 1 of this Form 10-Q, and in Item 7 in the 2022 Form 10-K. Legal Proceedings The Company is a party to various legal proceedings described in Part I, Item 1, Note 9, Commitments and Contingencies - Legal Proceedings of this Form 10-Q. We are unable to predict the outcome of these proceedings, including the defense and other litigation-related costs and expenses that may be incurred by the Company, as the outcomes of legal proceedings are inherently uncertain. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a recognized accrual, if any, could be material to the Company's consolidated financial statements. As of
August 31, 2022, the Company did not record any legal accruals related to the outcomes of the matters discussed
in this Form 10-Q. Regulatory Matters
FDA Refusal Letter to File HIV BLA Application
July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA submission for leronlimab as a combination therapy with HAART for highly treatment-experienced HIV patients. The FDA informed the Company the BLA did not contain certain information and data needed to complete a substantive review and therefore, the FDA would not file the BLA. The deficiencies cited by FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. In November 2021, the Company resubmitted the non-clinical and CMC sections of the BLA and is currently reevaluating the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. Additionally, in March 2022the FDA placed the HIV program on a partial clinical hold, which may affect our ability to resubmit the BLA. The Company is in dispute with its former contract research organization ("CRO"), as described in Note 9, Commitments and Contingencies - Legal Proceedings in this Form 10-Q. The Companypreviously obtained a court order requiring the CRO to release the Company's clinical data related to the BLA and other clinical trials, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO's services. The Company is in the process of evaluating the data, results of the audit, and implications of the partial clinical hold. The Company will update the feasibility of the resubmission of the clinical section of the BLA once it completes its evaluation.
FDA Warning Letter Regarding Improper COVID-19 Branding of Investigational Drug
January 2022, the Company received a Warning Letter from the United StatesFDA alleging that its former CEO had made references in a video interview to COVID-19 and leronlimab in a promotional context to the effect that leronlimab, an investigational new drug, is safe and effective for the purpose for which it is being investigated or otherwise promoted the drug. The FDA warned the Company that leronlimab has not been approved or authorized by the FDA, its safety and effectiveness has not yet been established, and that the related clinical trial data was mischaracterized in the video. The FDA further alleged the video misbranded leronlimab under section 502(f)(1) of the FD&C Act and in violation of section 301(a) of the FD&C Act, as the claims in the video made representations in a promotional context regarding the safety and efficacy of an investigational new drug that has not been approved or authorized by the FDA. This matter was resolved with the FDA on September 26, 2022.
FDA Partial Clinical Waiting Letters for HIV and Full Clinical Waiting Letters for COVID-19
March 2022, the United States FDA placed a partial clinical hold on the Company's HIV program and a full clinical hold on its COVID-19 program in the United States. The Company was not enrolling any new patients in the trials placed on hold in the United States. Under the full clinical hold on the COVID-19 program, no new clinical studies may be initiated until the clinical hold is resolved. As discussed above, the Company has made a business decision not to 36 Table of Contents currently pursue the use of leronlimab in COVID-19 patients and has no plans for further trials under the COVID-19 indication. CytoDynis working closely with the FDA to resolve the partial clinical hold as soon as possible. As of the date of this filing, the Company has submitted the updated Investigator Brochure to the FDA in connection with the lifting of the clinical hold. The Company is in the process of completing additionally requested materials and will submit them as soon as possible. Under the full clinical hold on the COVID-19 program, no new clinical studies may be initiated until the clinical hold is resolved. The Company is not currently conducting any COVID-19 trials in the United States, and the Company has made the business decision to discontinue its investigation of leronlimab for COVID-19. Going Concern
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. As presented in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of approximately
$21.0 millionin the three months ended August 31, 2022and has an accumulated deficit of approximately $782.9 millionas of August 31, 2022. 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 assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has operated at a loss since inception. The Company's continuation as a going concern is dependent upon its ability to obtain a significant amount of additional operating capital, to continue to fund operations and pay its liabilities and commitments, its research into multiple indications for and development of its product candidate, to obtain FDA approval of its product candidate for use in treating one or more indications, to outsource manufacturing of its product, and ultimately to attain profitability. We intend to seek additional funding through equity or debt offerings, licensing agreements, supply and distribution agreements, and strategic alliances to implement our business plan. There are no assurances, however, that we will be successful in these endeavors. If we are not able to raise capital on a timely basis on favorable terms, if at all, we may need to significantly change or scale back operations, including our efforts related to the BLA and other development and commercialization initiatives or to adequately fund legal proceedings, all of which individually or in combination could materially impede our ability to achieve profitability. The Company's failure to raise additional capital could also affect our relationships with key vendors, including Samsung, disrupting our ability to timely execute our business plan. In extreme cases, the Company could be forced to file for bankruptcy protection, discontinue operations or liquidate assets. Since inception, the Company has financed its activities principally from the public and private sale of equity securities as well as with proceeds from issuance of convertible notes and related party notes payable. The Company intends to finance its future operating activities and its working capital needs largely from the sale of equity and debt securities. The sale of equity and convertible debt securities to raise additional capital is likely to result in dilution to stockholders and those securities may have rights senior to those of common shares. If the Company raises funds through the issuance of additional preferred stock, convertible debt securities or other debt or equity financing, the related transaction documents could contain covenants restricting its operations. During fiscal 2021, the Company entered into long-term convertible notes that are secured by all of our assets (excluding our intellectual property), and include certain restrictive provisions, including limitations on incurring additional indebtedness and future dilutive issuances of securities, any of which could impair our ability to raise additional capital on acceptable terms. During fiscal 2022, in exchange for warrants, the Company entered into a backstop arrangement, as amended, with an accredited investor whereby the Company pledged its patents and the investor agreed to indemnify the issuer of the surety bond in the Amarex dispute with respect to the Company's obligations under the surety bond. Future third-party funding arrangements may also require the Company to relinquish valuable rights. Additional capital, if available, may not be available on reasonable or non-dilutive terms. 37
New accounting statements
Refer to Part I, Note 2, Summary of Significant Accounting Policies – Recent Accounting Pronouncements of this Form 10-Q for discussion.
Significant Accounting Policies and Estimates
We capitalize inventories procured or produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when the results of clinical trials have reached a status sufficient to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and we have determined that it is probable that these capitalized costs will provide some future economic benefit in excess of capitalized costs. The material factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive Phase 3 clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the compilation of the regulatory application. We closely monitor the status of the product within the regulatory review and approval process, including all relevant communication with regulatory authorities. If we are aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory may no longer qualify for capitalization. We value inventory at the lower of cost or net realizable value using the average cost method. Inventories currently consist of raw materials, bulk drug substance, and drug product in unlabeled vials to be used for commercialization of the Company's biologic, leronlimab, which is in the regulatory approval process. Inventory purchased in preparation for product launches is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory, in light of the status of the product within the regulatory approval process. The Company evaluates its inventory levels on a quarterly basis and writes down inventory that has become obsolete or has a cost in excess of its expected net realizable value, and inventory quantities in excess of expected requirements. In assessing the lower of cost or net realizable value to pre-launch inventory, the Company relies on independent analysis provided by third parties knowledgeable of the range of likely commercial prices comparable to current comparable commercial product. For inventories capitalized prior to FDA marketing approval in preparation of product launch, anticipated future sales, shelf-lives, and expected approval date are considered when evaluating realizability of pre-launch inventories. The shelf-life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory the Company considers the stability data of all inventories. As inventories approach their shelf-life expiration, the Company may perform additional stability testing to determine if the inventory is still viable, which can result in an extension of its shelf-life. Further, in addition to performing additional stability testing, certain raw materials inventory may be sold in its then current condition prior to reaching expiration. We also consider potential delays associated with regulatory approval in determining whether preapproval inventory remains salable. In determining whether pre-approval inventory remains salable, the Company considers a number of factors ranging from potential delays associated with regulatory approval, whether the introduction of a competing product could negatively impact the demand for our product and affect the realizability of our inventories, whether physicians would be willing to prescribe leronlimab to their patients, or if the target patient population would be willing to try leronlimab as a new therapy. Although the Company may conclude that certain inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration, and are therefore written-off for accounting purposes, we may continue to physically maintain them and may use them for clinical trials, or may sell them if the shelf-lives can be extended as a result of the performance of on-going continued stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. 38 Table of Contents Stock-based compensation
We use the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant utilizing certain assumptions that require judgments and estimates. These assumptions include estimates for stock price volatility, expected term and risk-free interest rates in determining the fair value of the stock options. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the equity award. The expected volatility is based on the historical volatility of the Company's common stock at monthly intervals. The computation of the expected option term is based on the "simplified method," as the options issued by the Company are considered "plain vanilla" options. In accordance with ASC 718, Compensation - Stock Compensation, the Company has elected to recognize the effect of forfeitures as they are incurred, and as such does not estimate future unvested forfeitures for all periods presented. Quarterly expense is reduced during the period when grants are forfeited, such that the full expense is recorded at the time of grant and only reduced when the grant is forfeited. We at times issue restricted common stock and/or restricted stock units to executives or third parties as compensation for services rendered. Such awards are valued at fair market value on the effective date of the Company's obligation. From time to time, we also issue stock options and warrants to consultants as compensation for 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.
We have significant license and contingent milestone and royalty liabilities. We estimate the likelihood of paying these contingent liabilities periodically based on the progress of our clinical trials, BLA approval status, and status of commercialization. We are also party to various legal proceedings. We recognize accruals for such proceedings to the extent a loss is determined to be both probable and reasonably estimable. The best estimate of a loss within a possible range is accrued; however, if no estimate in the range is more probable than another, then the minimum amount in the range is accrued. If it is determined that a material loss is not probable but reasonably possible it is disclosed and if the loss or range of loss can be estimated, the possible loss is also disclosed. It is not possible to determine the ultimate outcome of these proceedings, including the defense and other litigation-related costs and expenses that may be incurred by the Company, as the outcomes of legal proceedings are inherently uncertain, and the outcomes could differ significantly from recognized accruals. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a recognized accrual, if any, could be material to the Company's consolidated financial statements. We periodically reassess these matters when additional information becomes available and adjust our estimates and assumptions when facts and circumstances indicate the need for any changes. Refer to Part I, Item 1, Note 9, Commitments and Contingencies of this Form 10-Q for additional information.
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