Note 10. Commitments and Contingencies

Commitments with Samsung BioLogics Co., Ltd. (“Samsung”)

In April 2019, the Company entered into an agreement with Samsung, pursuant to which Samsung will perform technology transfer, process validation, manufacturing and supply services for the commercial supply of leronlimab effective through calendar year 2027. In 2020, the Company entered into an additional agreement, pursuant to which Samsung will perform technology transfer, process validation, vial filling and storage services for clinical, pre-approval inspection, and commercial supply of leronlimab. Samsung is obligated to procure necessary raw materials for the Company and manufacture a specified minimum number of batches, and the Company is required to provide a rolling three-year forecast of future estimated manufacturing requirements to Samsung which are binding. The future commitments pursuant to these agreements are estimated as follows (in thousands):

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Commitments with Contract Research Organization (“CRO”)

The Company has entered into project work orders, as amended, for each of our clinical trials with our CRO and related laboratory vendors. Under the terms of these agreements, the Company incurs execution fees for direct services costs, which are recorded as a current asset. In the event the Company were to terminate any trial, it may incur certain financial penalties which would become payable to the CRO. Conditioned upon the form of termination of any one trial, the financial penalties may range up to approximately $3.4 million. In the remote circumstance that the Company would terminate all clinical trials, the collective financial penalties may range from an approximate low of $2.0 million to an approximate high of $3.7 million.

Legal Proceedings

From time to time the Company is a party to various legal proceedings. As of the quarter ended February 28, 2021, we were not party to any material pending legal proceedings, except those described below and as described in Part I, Item 3 of our 10-K for the fiscal year ended May 31, 2020 (as updated in Part II. Item 1 of our quarterly reports on Form 10-Q for the fiscal quarters ended August 31, 2020 and November 30, 2020). The Company recognizes 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 and the loss or range of loss can be estimated, the possible loss is disclosed. It is not possible to determine 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, 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, or if an accrual had not been made, could be material to the Company’s consolidated financial statements.

The Company did not record any material accruals for the matters described below in our Consolidated Balance Sheets as of February 28, 2021 and May 31, 2020.

Delaware Shareholder Derivative Lawsuit

As previously disclosed, on April 24, 2020, certain stockholders of the Company (the “Plaintiffs”) filed a derivative action, alleging claims for breach of fiduciary duty and unjust enrichment against the Company’s CEO, current and former CFO, CMO, and current and former members of the Company’s board of directors in connection with certain equity grant awards to these individuals in December 2019 and January 2020 (the “Defendants”). The Company was named a nominal defendant. The Plaintiffs demanded the rescission of the awards, a finding that the named directors breached their fiduciary duty to the Company, and an unnamed amount of damages. The Company appointed a Special Litigation Committee (“SLC”), consisting solely of independent directors not named in the complaint, to investigate the allegations in the complaint.

On December 15, 2020, the Defendants reached an agreement in principle with the SLC (collectively “Parties”) to resolve the lawsuit. On December 18, 2020, the Parties executed a memorandum of understanding outlining the key terms of their agreement. On January 27, 2021, the Parties entered into a proposed Stipulation and Agreement of Compromise, Settlement, and Release (the “Stipulation”) to settle the derivative action. A hearing has been scheduled for April 19, 2021 to consider the fairness of the Stipulation.

Pursuant to the Stipulation, the current directors agreed to implement a series of corporate governance reforms related to director and executive officer compensation and certain Defendants agreed to forfeit a substantial portion of the December 2019 Awards following approval of the settlement by the Delaware Court, in exchange for a release of claims and the dismissal of the Derivative Action with prejudice. Specifically, the December 2019 Awards to Michael A. Klump, Jordan G. Naydenov, and David F. Welch, Ph.D. will be forfeited in their entirety; sixty percent of the December 2019 Awards to Scott A. Kelly, M.D. will be forfeited; and the warrant to acquire 2,000,000 shares of common stock of the Company awarded to Nader Z. Pourhassan, Ph.D. in the December 2019 Awards will be forfeited in its entirety. In addition, Dr. Pourhassan will forfeit vested options to purchase 373,000 shares of common stock of the Company that he currently owns (issued separate and apart from the December 2019 Awards). Executive officers Michael D. Mulholland and Nitya Ray, Ph.D., and former officer Brendan Rae, will retain their December 2019 Awards.

On March 19, 2021, the Plaintiffs filed a brief agreeing to the proposed settlement and seeking an award of approximately $4.1 million for bringing the lawsuit. Plaintiff’s demand is based on the claimed value or benefit to the Company and its stockholders from the value of the rescinded equity awards, in addition to the time incurred by the Plaintiffs’ attorney with regard to this action.

On April 8, 2021, the SLC filed an opposition to the Plaintiff’s motion contending that the amount of the award being demanded is not legally supported as the actions resulting from the derivative action taken by the Company and the Defendants were the result of actions of the SLC, not those of the Plaintiffs’ attorney. The SLC contends the Plaintiffs’ attorney is only entitled to a quantum meruit award equal to a proportional amount of the legal fees incurred, equating to approximately $0.4 million. This amount was calculated by the SLC obtaining the amounts of hours and the various rates of the Plaintiffs’ attorney and then applying the same proportion applied to the award being demanded by the Plaintiff. If the court were to rule in favor of the SLC’s Opposition that the Plaintiff is only entitled to a Quantum Meruit award, the loss is expected to be approximately $0.4 million, alternatively if the court were to rule in favor of the Plaintiff’s full claim for award the loss is expected to be approximately $4.1 million.

In assessing whether the Company should accrue a liability for this litigation in the Consolidated Financial Statements, the Company considered various factors, including the legal and factual circumstances of the case, relevant case law, judge’s history of rulings in similar cases, similar derivative stockholder matters brought against the Company, the current status of the proceedings, the views of the SLC, its legal counsel, and the Company’s legal counsel, and the likelihood an award as requested will be upheld. As a result of this analysis, the Company recorded an immaterial accrual in accordance with applicable accounting standards and determined it is not probable a material loss will be incurred by the Company resulting from this legal proceeding. However, we cannot at this time predict the ultimate outcome of the decision in the current derivative action.

Washington Shareholder Derivative Lawsuit

On September 10, 2020, the Plaintiffs from the April 24, 2020 derivative action filed another derivative action against CEO Nader Z. Pourhassan claiming he had violated Section 16(b) of the Securities Exchange Act of 1934 with respect to certain personal stock transactions in the Company’s stock. The parties filed cross-motions to dismiss. On March 12, 2021, the U.S. District Court for the Western District of Washington granted Dr. Pourhassan’s motion to dismiss with prejudice. On April 9, 2021, the Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals appealing the decision of the District Court.

Placement Agent Arbitration Claim

As previously disclosed, on April 29, 2020, Torreya Capital LLC (“Torreya”) filed an arbitration claim against the Company demanding payment of a transaction fee in the amount of $0.6 million plus attorney fees, for the Company’s alleged failure to pay a transaction fee to Torreya under the terms of the engagement letter with the Company, and amended its claim on September 17, 2020 to add an additional transaction fee claim, increasing its demand to approximately $1.8 million. The Company has denied Torreya’s contractual right to any fee under the terms of the engagement letter with the Company. The parties filed dispositive motions in August 2020 and September 2020, which the arbitrator denied on October 5, 2020. On February 18, 2021, a one-day arbitration hearing was held to determine Torreya’s right to approximately $1.8 million in transaction fees plus attorney fees. Closing briefs were filed on April 1, 2021, and a decision is expected by May 3, 2021. Although the Company cannot predict the ultimate outcome of this arbitration claim, the Company believes there is no legal basis for the fees and that the final award, if any, will not be a material amount.

Securities Class Action Lawsuit

On March 17, 2021, a stockholder filed a class-action lawsuit in the U.S. District Court for the Western District of Washington against the Company and certain officers, alleging the defendants made false and misleading statements regarding the viability of leronlimab as a potential treatment for COVID-19 (“First CA Suit”). Plaintiff seeks a ruling that this case may proceed as a class action, and seeks unspecified damages, and attorneys’ fees and costs. On April 9, 2021, a second stockholder filed a similar class-action lawsuit suit (“Second CA Suit”, together with the First CA Suit “CA Suits”) alleging the same facts as the First CA Suit and seeking similar relief. The Company and the individual defendants deny any allegations of wrongdoing in the complaints and intend to vigorously defend the matters. In light of the fact that these cases are in their early stages, the number of plaintiffs are not known, and the claims do not specify an amount of damages, the Company cannot predict the ultimate outcome of the CA Suits and cannot reasonably estimate the potential loss or range of loss that the Company may incur.

Pestell Employment Dispute

As previously disclosed, in July 25, 2019, the Company’s Board terminated the employment of Dr. Pestell, the Company’s former Chief Medical Officer, for cause pursuant to the terms of his employment agreement. On August 22, 2019, the Company received notice that a lawsuit naming the Company and its Chief Executive Officer, and the Chairman of the Board was filed by Dr. Pestell in the U.S. District Court for the District of Delaware, alleging breach of Dr. Pestell’s employment agreement, among other claims, and seeking damages in the amount of certain severance entitlements thereunder pertaining to non-cause termination, among other relief. The treatment of those entitlements and of certain previously granted unvested stock options and shares of restricted common stock, which were subject to a repurchase option, are expected to be determined by the outcome of this litigation. On September 17, 2019, the Company and the other defendants moved to dismiss the complaint in part. On September 27, 2019, Dr. Pestell amended his complaint. On October 10, 2019, the Company again moved to dismiss certain wage and hour and defamation claims, and on June 12, 2020, the Court dismissed the wage and hour claims. On July 10, 2020, Dr. Pestell moved again to amend the dismissed wage claims, which the Company again moved to dismiss on July 24, 2020. On November 2, 2020, the Court dismissed Dr. Pestell’s wage claims with prejudice and the individual defendants were dropped from the proceeding. The Company filed its answer and counterclaims thereafter. A bench trial is currently set for mid-2022. The Company disputes all of Dr. Pestell’s claims and intends to vigorously defend the action. The Company cannot predict the ultimate outcome and cannot reasonably estimate the potential loss or range of loss that the Company may incur.

ProstaGene Arbitration

On March 19, 2021, the Company concluded a five-day arbitration hearing concerning a claim by ProstaGene and counterclaims by the Company for approximately 3.1 million shares of the Company’s common stock held in escrow as holdback stock pursuant to the transaction agreement for the acquisition of certain intangible assets from ProstaGene in November 2018. Based upon facts revealed during the hearing from the testimony and report from an expert, as of February 28, 2021 the Company recognized a full impairment charge against the net carrying value of a certain acquired intangible asset. See Note 8 of the Notes to Consolidated Financial Statements included herein above. Notwithstanding the foregoing, ProstaGene also seeks monetary damages, in an amount to be determined by the arbitration panel, based on the difference between then-current stock price per share and the stock price on June 29, 2020 of $7.93 per share for any shares awarded to ProstaGene and the Company seeks their respective attorney fees and costs. Post-hearing briefing will be concluded by mid-May 2021, and a decision and award is expected thereafter. The Company disputes ProstaGene’s claim and has vigorously defended against that claim, and the Company believes its counterclaims are meritorious and has vigorously prosecuted its counterclaims. The Company cannot, however, predict the ultimate outcome and cannot reasonably estimate the potential loss or range of loss that the Company may incur.