Note 6 – Stock Options and Warrants

The Company has one active stock-based equity plan at August 31, 2017, the CytoDyn Inc. 2012 Equity Incentive Plan (the “2012 Plan”) and one stock-based equity plan that is no longer active, but under which certain prior awards remain outstanding, the CytoDyn Inc. 2004 Stock Incentive Plan (the “2004 Plan” and, together with the 2012 Plan, the “Incentive Plans”). The 2012 Plan was approved by stockholders at the Company’s 2012 annual meeting to replace the 2004 Plan. The 2012 Plan was amended by stockholder approval in February 2015 to increase the number of shares available for issuance from 3,000,000 to 5,000,000 shares of common stock, in March 2016 to increase the number of shares available for issuance from 5,000,000 to 7,000,000 shares of common stock and a recent approval to increase the total number of shares by 8,000,000 to 15,000,000, among other amendments, on August 24, 2017. As of August 31, 2017, the Company had 5,693,807 shares available for future stock-based grants under the 2012 Plan, as amended.

Stock Options

During the three months ended August 31, 2017, the Company granted annual stock option awards to directors to purchase a total of 450,000 shares of common stock with an exercise price of $0.57 per share. These option awards vest quarterly over one year and have a ten-year term. The grant date fair value related to these options was $0.36 per share.

During the three months ended August 31, 2017, the Company granted an option award covering 600,000 shares of common stock with an exercise price of $0.57 per share, to the Chief Science Officer. This option vests annually over three years, has a ten-year term and a grant date fair value of $0.35 per share.

During the three months ended August 31, 2017, the Company granted options, covering an aggregate of 800,000 shares of common stock, to executive management and employees with exercise prices of $0.57 per share. The options vest annually over three years, have a ten-year term and grant date fair values of $0.35 per share.

Warrants

During the three months ended August 31, 2017, the Company granted a warrant covering an aggregate of 200,000 shares of common stock, with an exercise price of $0.64 per share, to a consultant. The warrant vests 25% upon grant date, 25% on December 31, 2017 and 50% upon achieving certain future milestones. The warrant has a five-year term and a grant date fair value of $.26 per share.

During the three months ended August 31, 2017, in connection with unsecured convertible promissory Notes, as fully described in Note 4, the Company issued common stock warrants, covering 3,258,990 shares of common stock to note holders. The warrants have a five-year term and an exercise price of $1.00 per share. In connection with the promissory notes, the Company issued warrants covering 350,766 to the placement agent. The warrants have a five year term and an exercise price of $0.825.

On June 14, 2017, the Company’s Board of Directors approved a modification in the warrant terms issued in connection with the Notes, as fully described in Note 4. The warrant coverage was increased from 25% to 50% and the exercise price of the warrant was reduced to $1.00 per share from $1.35 per share. On June 19, 2017, in connection with new terms, the Company issued an incremental 383,333 warrant shares to the investors during the year ended May 31, 2017.

During the three months ended August 31, 2017, the Company determined to extend the expiration dates of certain warrants to June 30, 2017 covering 3,295,000 shares of common stock. The warrants were originally issued in connection with 2012 convertible promissory notes and had an exercise price of $1.00 per share. The extension to June 30, 2017 was contingent upon immediate exercise of the warrants at a reduced exercise price of $0.50 per share. The Company received proceeds of approximately $1.6 million and pursuant to U.S. GAAP, the Company recognized non-cash inducement interest expense of approximately $0.8 million, which represented the incremental increase in the fair value of the extended warrants.

The Company determined the fair value of the warrant extension using the Black-Scholes option pricing model utilizing certain weighted-average assumptions, such as expected stock price volatility, term of the warrants, risk-free rate and expected dividend yield at date of exercise.

Compensation expense related to stock options and warrants was approximately $255,000 and $335,000 for the three months ended August 31, 2017 and August 31, 2016, respectively. The grant date fair value of options and warrants vested during the three month periods ended August 31, 2017 and August 31, 2016 was approximately $447,000 and $252,000, respectively. As of August 31, 2017, there was approximately $1,357,000 of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 1.66 years.

The following table represents stock option and warrant activity as of and for the three-months ended August 31, 2017: