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 hold imposed by theU.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 recruit and 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 regulatory submissions or 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 clinical trials; the results of any such 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.
Overview
The Company is a clinical stage biotechnology company focused on the clinical development and potential commercialization of its product candidate, leronlimab, which is being studied for NASH, NASH-HIV, solid tumors in oncology, and other HIV indications. Our current business strategy is to seek the removal of the partial clinical hold imposed by theUS FDA inMarch 2022 . InOctober 2022 , the Company voluntarily withdrew its Biologic License Application ("BLA") submission, for leronlimab as a combination therapy for highly treatment experienced HIV 27 Table of Contents patients, due to management's conclusion that a significant risk existed that the BLA would not receive FDA approval due to the inadequate process and performance around the monitoring and oversight of the clinical data from its clinical trials by its former contract research organization ("CRO"). As further discussed in Part I, Item 1, Note 2, Summary of Significant Accounting Policies - Inventories, and Note 3, Inventories, net, the Company previously capitalized procured or produced pre-launch inventories in preparation for product launches. The Company has reserved for or written off$96.4 million in previously capitalized pre-launch inventories. Although these inventories have been written off from an accounting perspective, they may
still have clinical use. Second Quarter Overview HIV BLA
InOctober 2022 , the Company voluntarily withdrew its BLA submission after concluding that a significant risk existed that the BLA would not receive FDA approval due to its former CRO's inadequate process and performance around the monitoring and oversight of the clinical data. The Company is engaged in litigation with its former 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, which has been completed.
Partial Clinical Hold on HIV Program
InMarch 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 who were transitioned to other available therapeutics. No clinical studies can be initiated or resumed until the partial clinical hold is resolved. The Company's efforts are focused on activities that will allow us to resolve the partial clinical hold.
InDecember 2022 , researchers fromOregon Health and Sciences University , an academic research collaboration partner of the Company, presented at theHIV DART Conference and theHIV Persistence During Therapy Conference results from two pre-clinical studies performed on macaque monkeys for two different potential longer-acting therapeutics targeting the CCR5 receptor. The first longer-acting potential therapeutic is a modified monoclonal antibody designed to have a longer half-life, which could lead to the development of an HIV prophylactic for humans at high risk of contracting HIV. The second longer-acting potential therapeutic is a gene therapy that could lead to the development of a functional cure for humans living with HIV. While both longer-acting therapeutics are still in the early stages of development, early data from the macaque monkey studies suggest that increased dosing intervals from once weekly to over three months are possible. Data from both potential therapeutics were also presented during the Company's R&D Investor Update onDecember 7, 2022 , which is available on the Company's website. By making this and other references to the Company's website, we do not intend to incorporate by reference into this report any information posted on our website. The website should not be considered part of this report.
NASH Clinical Developments
InNovember 2022 , the Company presented two posters at theAmerican Association for the Study of Liver Diseases (AASLD) meeting inWashington, DC . The data presented expanded on the efficacy data from the CDI-NASH-01 trial (NCT04521114), which was previously presented at the EASLD meeting inJune 2022 , and is discussed in more detail below. This data presented included the functional biomarker and supportive mechanism of action data for leronlimab
in NASH. 28 Table of Contents During November andDecember 2022 , the Company presented the same data presented at the EASLD and AASLD meetings, at the NASH and Obesity Drug Development Summit held inBoston and further raised the clinical development needs for addressing NASH in people living with HIV. Similar data was also presented during the Company's R&D Investor Update onDecember 7, 2022 , which is available on the Company's website. NASH is a chronic liver disease characterized by the presence of hepatic inflammation and fibrosis. 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 for leronlimab in the treatment of NASH was demonstrated in a pre-clinical model of fatty liver disease. Immunodeficient, NOD-SCID Gamma (NSG) mice were fed a high fat, NASH-inducing 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. 29
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All analyses performed are being treated as 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 continues to identify the next steps in clinical development and is exploring potential business opportunities to continue the investigation of leronlimab for solid tumors in oncology based on 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 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 (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 was 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). 30 Table of Contents Corporate Developments OnOctober 13, 2022 ,Scott A. Kelly , M.D. resigned as a director of the Company.Dr. Kelly resigned as the Company's Chief Medical Officer and Head of Business Development onDecember 19, 2022 . OnOctober 13, 2022 ,Stephen M. Simes was appointed to the Company's Board of Directors to fill the vacancy created by the resignation ofDr. Kelly .Mr. Simes brings extensive experience to our Board through his service as CEO or a director of a number of pharmaceutical companies, both public and private. His career in the pharmaceutical industry started over 40 years ago withG.D. Searle & Co. (now a part of Pfizer Inc.). He currently is Entrepreneur in Residence at Helix 51 and the Innovation andResearch Park ofRosalind Franklin University of Medicine and Science inNorth Chicago, Illinois .Mr. Simes also serves as a director ofBioLife4D Corporation , a private company developing a patient-specific, fully functioning human heart using 3D bioprinting and the patient's own cells and currently preparing for an IPO.Mr. Simes is also chairman of the board ofBio-XL Limited , an Israeli company developing products in oncology. He serves as an advisor for SmartHealth Catalyzer and advises several emerging companies in varied therapeutic areas, including oncology and cardiology.Mr. Simes was the CEO ofRestorGenex Corporation from 2014 to 2016, when it was acquired by Diffusion Pharmaceuticals (NASDAQ: DFFN). From 1998 to 2013,Mr. Simes was the President and CEO ofBioSante Pharmaceuticals , which was acquired by ANI Pharmaceuticals Inc. (NASDAQ: ANIP) inJune 2013 . He previously served on the boards of directors of Therapix Biosciences (2016-2020),RestorGenex Corporation (2014-2016),Ceregene, Inc. (2009-2013),BioSante Pharmaceuticals (1998-2013),Unimed Pharmaceuticals, Inc. (1994-1997), Bio-Technology General (1993-1995), andGynex Pharmaceuticals, Inc. (1989-1993). Stephen has a BSc in Chemistry fromBrooklyn College of theCity University of New York and an MBA fromNew York University .
During the quarter endedNovember 30, 2022 , as well as inDecember 2022 , the Company concluded private warrant exchanges resulting in aggregate net proceeds of approximately$2.8 million . InJanuary 2023 , the Company commenced an offering of up to$15.0 million , with each unit consisting of one share of common stock and one warrant to purchase one share of common stock. Results of Operations
Fluctuations in Operating Results
The Company's operating results may fluctuate significantly depending on the outcomes, number and timing of pre-clinical and clinical studies, patient enrollment and/or completion rates in the studies, and their related effect on research and development expenses, regulatory and compliance activities, activities related to seeking removal of the partial clinical hold and FDA approval of our drug product, general and administrative expenses, professional fees, and legal proceedings and related consequences. We require a significant amount of capital to continue to operate; therefore, we regularly conduct financing offerings to raise capital, which may result in various forms of non-cash interest expense or other expenses. Additionally, we periodically seek to negotiate settlement of debt payment obligations in exchange for equity securities of the Company and enter into warrant exchanges or modifications that may result in non-cash charges. Our ability to continue to fund operations will depend on our ability to raise additional funds. Refer to Risk Factors, Liquidity and Capital Resources, and Going Concern sections included in this quarterly report. 31 Table of Contents
The results of operations were as follows for the periods presented:
Three months ended November 30, Change Six months ended November 30, Change (in thousands, except for per share data) 2022 2021 $ % 2022 2021 $ % (Restated) (1) (Restated) (1) Revenue $ - $ 225$ (225) (100) % $ - $ 266$ (266) (100) % Cost of goods sold - 52 (52) (100) - 53 (53) (100) Gross profit - 173 (173) (100) - 213 (213) (100) Operating expenses: General and administrative 5,043 16,203 (11,160) (69) 11,376 23,820 (12,444) (52) Research and development 137 7,447 (7,310) (98) 713 19,467 (18,754) (96) Amortization and depreciation 54 252 (198) (79) 153 528 (375) (71) Inventory charge 17,929 1,593 16,336 1,025 20,633 3,357 17,276 515 Total operating expenses 23,163 25,495 (2,332) (9) 32,875 47,172 (14,297) (30) Operating loss (23,163) (25,322) 2,159 9 (32,875) (46,959) 14,084 30 Interest and other expenses: Interest on convertible notes (1,159) (1,426) 267 19 (2,305) (3,112) 807 26 Amortization of discount on convertible notes (580) (793) 213 27 (1,156) (1,745) 589 34 Amortization of debt issuance costs (18) (23) 5 22 (34) (51) 17 33 Loss on induced conversion (638) (6,785) 6,147 91 (638) (25,315) 24,677 97 Finance charges (937) (1,024) 87 8 (1,877) (1,059) (818) (77) Inducement interest expense - (4,704) 4,704 100 - (5,232) 5,232 100 Legal settlement - - - - - (1,941) 1,941 100 Loss on derivatives - - - - (8,601) - (8,601) (100) Total interest and other expenses (3,332) (14,755) 11,423 77 (14,611) (38,455) 23,844 62 Loss before income taxes (26,495) (40,077) 13,582 34 (47,486) (85,414) 37,928 44 Income tax benefit - - - - - - - - Net loss$ (26,495) $ (40,077) $ 13,582 34 %$ (47,486) $ (85,414) $ 37,928 44 % Basic and diluted: Weighted average common shares outstanding 813,373 662,600 150,773 23 800,545 647,517 153,028 24 Loss per share $ (0.03) $ (0.06)$ 0.03 50$ (0.07) $ (0.13) $ 0.06 46
(1) See Note 2, Summary of Significant Accounting Policies-Revision and Restatement of Financial Statements.
Product revenue, Cost of goods sold ("COGS") and Gross margin
We had no revenue in the three- and six-months endedNovember 30, 2022 as compared to approximately$225.0 and$266.0 thousand in the three and six months endedNovember 30, 2021 . Revenue was related to the fulfillment of orders under a Compassionate Special Permit ("CSP") inthe Philippines for the treatment of COVID-19 patients. Sales were made under theApril 2021 exclusive supply and distribution agreement granting Chiral the right to distribute and sell up to 200,000 vials of leronlimab throughApril 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. 32
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General and administrative ("G&A") expenses
G&A expenses consisted of the following:
Three months ended November 30, Change Six months ended November 30, Change (in thousands) 2022 2021 $ % 2022 2021 $ % Salaries, benefits, and other compensation $ 979 $ 1,850$ (871) (47) %$ 2,257 $ 2,235 $ 22 1 % Stock-based compensation 1,777 2,060 (283) (14) 3,118 4,657 (1,539) (33) Legal fees 1,044 9,206 (8,162) (89) 2,497 11,557 (9,060) (78) Other 1,243 3,087 (1,844) (60) 3,504 5,371 (1,867) (35) Total general and administrative$ 5,043 $ 16,203 $ (11,160) (69) %$ 11,376 $ 23,820 $ (12,444) (52) % The decreases in G&A expenses for the three- and six-month periods endedNovember 30, 2022 , compared to the same periods in the prior year, were primarily due to a reduction in legal fees, other, and salaries, benefits, and other compensation. The decreases in legal fees were due to lowered legal fees related to theSEC andDOJ investigations, Pestell employment dispute, Amarex dispute, and the absence of legal fees related to the prior year proxy contest and related lawsuits, as well as, in the six-month period, the payment of certain legal fees by the Company's insurance carriers. The decreases in other were the result of a reduction in expenses related to the prior year proxy contest, insurance premiums, and recruiting and contract services. The decreases in salaries, benefits, and other compensation were the result of decreased headcount and cash compensation, as well as a decrease in stock-based compensation expense due to fewer equity grants being outstanding during the six months endedNovember 30, 2022 .
Research and development ("R&D") expenses
R&D expenses consisted of the following:
Three months ended November 30, Change Six months ended November 30, Change (in thousands) 2022 2021 $ % 2022 2021 $ % Clinical$ (865) $ 5,783 $ (6,648) (115) %$ (845) $ 14,846 $ (15,691) (106) % Non-clinical 26 326 (300) (92) 26 490 (464) (95) CMC 811 1,103 (292) (26) 1,134 3,662 (2,528) (69)
License and patent fees 165 235 (70) (30) 398 469 (71)
(15)
Total research and development $ 137
The decreases in R&D expenses in the three- and six-month periods endedNovember 30, 2022 , compared to the same periods in the prior year, were primarily the result of clinical trials related to COVID-19, oncology, NASH, and HIV extension studies being completed, paused, or closed that had been active in the same periods of the prior year and decreased activity related to the BLA resubmission, offset by increased costs related to activities focused on the potential lifting of the clinical hold. The credit balance in clinical expenses is related to credits received related to the Brazilian COVID-19 trials. The decreases in chemistry, manufacturing, and controls ("CMC") related expenses from the same period last year were the result of decreased activity related to CMC manufacturing. The future trend of our R&D expenses is dependent on the timing of FDA clearance of the clinical hold, our decision-making on which indications on which to focus our future efforts toward the clinical development and study of leronlimab, which may include the treatment of NASH, NASH-HIV, oncology, and additional HIV indications and the timing and outcomes of such efforts.
Amortization and depreciation expenses
The decreases in amortization and depreciation expenses for the three- and six-month periods endedNovember 30, 2022 , compared to the same periods last year were attributable to the intangible write-off of a proprietary algorithm intangible asset during the fiscal year endedMay 31, 2021 and the ProstaGene noncompete intangible asset becoming fully amortized as ofNovember 30, 2021 . 33 Table of Contents Inventory charge The increase in the inventory charge for the three- and six-month periods endedNovember 30, 2022 , compared to the same periods in the prior year was primary attributable to pre-launch inventories no longer qualifying for inventory capitalization due to the withdrawal of the BLA submission, in addition to expected expiration based on estimated shelf lives for the six-month period. See Note 3., Inventories, net, for additional information.
Interest and other expense
Interest and other expense consisted of the following:
Three months ended November 30, Change Six months ended November 30, Change 2022 2021 $ % 2022 2021 $ % (in thousands) (Restated) (1) (Restated) (1) Interest on convertible notes payable$ 1,159 $ 1,426$ (267) (19) %$ 2,305 $ 3,112 $ (807) (26) % Amortization of discount on convertible notes 580 793 (213) (27) 1,156 1,745 (589) (34) Amortization of debt issuance costs 18 23 (5) (22) 34 51 (17) (33) Loss on induced conversion 638 6,785 (6,147) (91) 638 25,315 (24,677) (97) Finance charges 937 1,024 (87) (8) 1,877 1,059 818 77 Inducement interest expense - 4,704 (4,704) (100) - 5,232 (5,232) (100) Legal settlement - - - - - 1,941 (1,941) (100) Loss on derivatives - - - - 8,601 - 8,601 100 Total interest and other expenses$ 3,332 $ 14,755 $ (11,423) (77) %$ 14,611 $ 38,455 $ (23,844) (62) %
(1) See Note 2, Summary of Significant Accounting Policies-Revision and Restatement of Financial Statements.
The decreases in interest and other expenses for the three-month period endedNovember 30, 2022 , compared to the same period in the prior year was primarily due to a decrease in non-cash loss on induced conversion and inducement interest expense. The decreased non-cash loss on induced conversions resulted from the Company settling less outstanding convertible debt with common stock 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 inducement interest expense is the result of this now being recorded in stockholders' equity as a result of the adoption of ASU No. 2021-04 (refer to Note 2, Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements). For the six-month period endedNovember 30, 2022 , the decrease was primarily due to decreases in loss on induced conversion and inducement interest expense as discussed above, as well as a decrease in legal settlement expenses, offset by an increase in loss on derivatives. The decrease in legal settlement expense resulted from there being no legal settlements during the six months endedNovember 30, 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 for which the related warrants subsequently became equity classified upon the stockholders' approval of an increase in authorized shares onAugust 31, 2022 .
Liquidity and Capital Resources
As ofNovember 30, 2022 , we had a total of approximately$2.6 million in cash and restricted cash and approximately$122.7 million in 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 arrangements are deemed acceptable to both parties under then current circumstances and as necessary to fund our current and projected cash needs. 34
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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 the fiscal year 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. In exchange for warrants, the Company entered into a Backstop Agreement 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.
Cash
The Company's cash and restricted cash position of approximately$2.6 million as ofNovember 30, 2022 , decreased by approximately$1.6 million , when compared to the balance of$4.2 million as ofMay 31, 2022 . This decrease was primarily the result of approximately$15.5 million in cash used in our operating activities offset by approximately$13.9 million in cash provided by financing activities during the six months endedNovember 30, 2022 . Refer to Item 1, Note 2, Summary of Significant Accounting Policies - Going Concern, and the Going Concern discussion below for information regarding concerns about the Company's ability to continue to fund its operations and satisfy its payment obligations and commitments. A summary of cash flows and changes between the periods presented is as follows: Six months ended November 30, Change (in thousands) 2022 2021 $ Net cash (used in) provided by: Net cash used in operating activities$ (15,480) $ (60,632) $ 45,152 Net cash used in investing activities $ - $ (13) $ 13 Net cash provided by financing activities$ 13,852 $ 35,577
Cash used in operating activities
Net cash used in operating activities totaled approximately$15.5 million during the six months endedNovember 30, 2022 , representing an improvement of approximately$45.2 million compared to the six months endedNovember 30, 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, R&D, 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 further discussion.
Cash used in investing activities
Net cash used in investing activities for the six months ended
Cash provided by financing activities
Net cash provided by financing activities totaled approximately$13.9 million , a decrease of approximately$21.7 million compared to the six months endedNovember 30, 2021 . The decrease in net amount of cash provided was primarily the result of a decrease of approximately$17.5 million of cash through the private placement of common stock and warrants, with the balance due to decreased cash received for warrant and option exercises. 35 Table of Contents Pre-launch inventories
The Company previously capitalized pre-launch inventories and subsequently in October of 2022 charged-off for GAAP accounting purposes due to no longer qualifying for inventory capitalization as pre-launch inventories due to the withdrawal of the BLA submission. Work-in-progress and finished drug product inventories continue to be physically maintained, can be used for clinical trials, and can be commercially sold upon regulatory approval if the shelf-lives can be extended as a result of the performance of on-going stability tests. Raw material continued to be maintained so that they can be used in the future if needed. During the first quarter of fiscal year 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 million in the third quarter of fiscal year 2022, which were recorded as prepaid expenses in the consolidated financial statements as ofMay 31, 2022 . As discussed in Note 9, Commitments and Contingencies - Commitments with Samsung BioLogics Co., Ltd. ("Samsung"), the Company and Samsung remain in ongoing discussions about, among other things, deferring the unfulfilled commitments. These additional specialized raw materials are estimated to have shelf-lives ranging from 2023 to 2026. The entire amount was charged-off as ofAugust 31, 2022 . InOctober 2022 , the Company voluntarily withdrew its rolling BLA submission after concluding that a significant risk existed that the BLA would not receive FDA approval due to the inadequate process and performance by its former CRO around the monitoring and oversight of the clinical data from its trials. Following this decision, none of the Company's inventories now qualify for capitalization as pre-launch inventories. For the three months endedNovember 30, 2022 , the Company charged-off the remaining raw material resin and work-in-progress bulk product inventories of approximately$16.3 million and$1.7 million , respectively. For additional information, refer to Note 2, Summary of Significant Accounting Policies - Pre-launch Inventories in this Form 10-Q, and to Note 3, Inventories, net, in the 2022 Form 10-K. Convertible debt
OnApril 2, 2021 , we issued a convertible note with a principal amount of$28.5 million resulting in net cash proceeds of$25.0 million , after$3.4 million of debt discount and$0.1 million of offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of$10.00 per share, and matures inApril 2023 . TheApril 2, 2021 Note required monthly debt reduction payments of$7.5 million for the six months beginning inMay 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 ofNovember 30, 2022 , the outstanding balance of theApril 2, 2021 Note, including accrued interest, was approximately$12.4 million .
OnApril 23, 2021 , we issued a convertible note with a principal amount of$28.5 million resulting in net cash proceeds of$25.0 million , after$3.4 million of debt discount and$0.1 million of offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of$10.00 per share, and matures inApril 2023 . Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to$7.0 million . As ofNovember 30, 2022 , the outstanding balance of theApril 23, 2021 Note, including accrued interest, was approximately$32.8 million . 36 Table of Contents Common stock
We have 1,350.0 million authorized shares of common stock. The table below summarizes intended uses of common stock.
As of (in millions)November 30, 2022 Issuable upon: Warrants exercise 175.0
Convertible preferred stock and undeclared dividends conversion 32.6 Outstanding stock options exercise or vesting of outstanding RSUs 29.2
Reserved for issuance pursuant to future stock-based awards under equity incentive plan
14.2 Reserved and issuable upon conversion of outstanding convertible notes 12.0 Total shares reserved for future uses
263.0 Common stock outstanding 824.8 As ofNovember 30, 2022 , we had approximately 262.2 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
As of
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 Notes 6 and 10 in Part II, Item 8 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 ofNovember 30, 2022 , the Company did not record any legal accruals related to the outcomes of the matters discussed
in this Form 10-Q. Regulatory Matters
Voluntary Withdrawal of HIV BLA Submission
InJuly 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. InNovember 2021 , the Company resubmitted the non-clinical and CMC sections of the BLA. InOctober 2022 , the Company voluntarily withdrew its BLA submission due to management's conclusion that a severe risk of the BLA not receiving approval by the FDA existed due to the Company's former CRO's inadequate process and performance around the monitoring and 37 Table of Contents
oversight of the clinical data. For additional information see Note 9, Commitments and Contingencies - Legal Proceedings.
FDA Warning Letter re COVID-19 Misbranding of Investigational Drug
InJanuary 2022 , the Company received a Warning Letter from the FDA 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 have 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 said Act and in violation of section 301(a) of the Food Drug and Cosmetic 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.CytoDyn has completed all the corrective steps requested by the FDA. OnSeptember 26, 2022 ,CytoDyn sent a letter to the FDA informing the FDA that it had completed all corrective steps and requested that FDA issue a close-out letter.
FDA HIV Partial Clinical Hold and COVID-19 Full Clinical Hold Letters
InMarch 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 inthe United States . The Company was not enrolling any new patients in the trials placed on hold inthe 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. The Company has made a business decision not to pursue the use of leronlimab in COVID-19 patients, has no plans for further trials under the COVID-19 indication and has withdrawn the IND for COVID-19. Should the opportunity arise, the Company may explore potential non-dilutive clinical development options.CytoDyn is working diligently with the FDA to resolve the partial clinical hold for HIV as soon as possible.
As of the date of this filing, the Company has submitted the updated Investigator Brochure, the Development Safety Update Report (DSUR), and the Safety Management and Pharmacovigilance Plan to the FDA in connection with resolving the clinical hold. The Company is in the process of completing additionally requested materials and will submit them as soon as possible.
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$47.5 million in the six months endedNovember 30, 2022 and has an accumulated deficit of approximately$809.4 million as ofNovember 30, 2022 . These factors, among several others, including the various legal matters discussed in Note 9, Commitments and Contingencies - Legal Proceedings, 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's continuance as a going concern is dependent upon its ability to obtain additional operating capital, complete the development of its product candidate, leronlimab, obtain approval to commercialize leronlimab from regulatory agencies, continue to outsource manufacturing of leronlimab, and ultimately achieve revenues and attain profitability. The Company plans to continue to engage in research and development activities related to leronlimab for multiple indications and expects to incur significant research and development expenses in the future, primarily related to its regulatory compliance, including seeking the lifting of theFDA's partial clinical hold with regard to the Company's HIV program, performing additional clinical trials, and seeking regulatory approval of its product candidate for commercialization. These research and development activities are subject to significant risks and uncertainties. The Company intends to finance its future development activities and its working capital needs primarily from the sale of equity and debt securities, combined with additional funding from other sources. However, there can be no assurance that the Company will be successful in these endeavors.
38 Table of Contents New Accounting Pronouncements
Refer to Part I, Note 2, Summary of Significant Accounting Policies - Recent Accounting Pronouncements of this Form 10-Q.
Critical Accounting Policies and Estimates
Pre-launch inventories
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. 39
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InOctober 2022 , the Company voluntarily withdrew its BLA submission after concluding that a significant risk existed that the BLA would not receive FDA approval due to the inadequate process and performance by its former CRO around the monitoring and oversight of the clinical data from its trials. Following this decision, none of the Company's inventories now qualify for capitalization as pre-launch inventories. See Note 3., Inventories, net.
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.
Contingent liabilities
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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