Note 6 – Stock Options and Warrants

The Company has one active stock-based equity plan at May 31, 2018, the CytoDyn Inc. 2012 Equity Incentive Plan (the “2012 Plan”) and one stock-based equity plan that is no longer active, but under which certain prior awards remain outstanding, the CytoDyn Inc. 2004 Stock Incentive Plan (the “2004 Plan” and, together with the 2012 Plan, the “Incentive Plans”). The 2012 Plan was approved by stockholders at the Company’s 2012 annual meeting to replace the 2004 Plan. The 2012 Plan was amended by stockholder approval in February 2015 to increase the number of shares available for issuance from 3,000,000 to 5,000,000 shares of common stock and in March 2016 to increase the number of shares available for issuance from 5,000,000 to 7,000,000 shares of common stock. At the annual meeting of stockholders held on August 24, 2017, the stockholders approved an amendment to the 2012 Plan to increase the number of shares available for issuance from 7,000,000 to 15,000,000 shares of common stock. As of May 31, 2018, the Company had 4,858,870 shares available for future stock-based grants under the 2012 Plan, as amended.

Stock Options

During the year ended May 31, 2018, 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 year ended May 31, 2018, the Company granted stock option awards to directors to purchase a total of 836,055 shares of common stock with an exercise price of $0.56 per share. The option awards were issued in lieu of accrued and unpaid cash board compensation for the previous quarters ended May 31, 2017, August 31, 2017, November 30, 2017 and February 28, 2018. The options awards fully vest upon grant, have a ten-year term and a grant date fair value of $0.31 per share.

During the year ended May 31, 2018, the Company granted to its Chief Science Officer a stock option award covering 600,000 shares of common stock with an exercise price of $0.57 per share. This option award vests annually over three years, has a ten-year term and a grant date fair value of $0.35 per share.

During the year ended May 31, 2018, the Company granted, to executive management and employees, stock options covering an aggregate of 800,000 shares of common stock, with exercise prices of $0.57 per share. The option awards vest annually over three years, have a ten-year term and grant date fair values of $0.35 per share.

During the year ended May 31, 2018, the Company issued replacement stock options, to executive management and directors, covering an aggregate of 1,050,000 shares of common stock. The replacement options retained the original exercise price of $0.80 per share and have a five-year term, to reflect the corrected term of approximately ten years from the original grant date. These options have a grant date fair value of $0.42 per share. In connection with the modification, the Company recognized non-cash stock based compensation of approximately $321,000.

During the year ended May 31, 2017, the Company’s Compensation Committee of the Board of Directors granted a time-based option covering 550,000 shares of common stock and a milestone-based option covering 450,000 shares of common stock to the Executive Chairman. The time-based option has an exercise price of $0.76 and a ten-year term. The option vests in equal monthly installments over the next two years and has a grant date fair value of $0.64 per share. The grant of the milestone-based option is conditioned on stockholder approval of the increase in the number of shares authorized for issuance under the 2012 Plan, as discussed above. The milestone-based option will not be exercisable unless and until approval of the share increase, for the 2012 Plan, as discussed above, is obtained from the stockholders. At that time the vesting will be contingent upon the achievement of certain strategic milestones specified in the option agreement.

 

During the year ended May 31, 2017, the Company granted annual stock option awards to directors to purchase a total of 300,000 shares of common stock with an exercise price of $1.09 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 $0.78 per share. An additional stock option covering 100,000 shares of common stock was granted to a director. The option has an exercise price of $0.68 and vests 25% immediately with the remainder ratably over one year, has a ten-year term and grant date fair value of $0.53 per share. In April 2017, an option award was granted to the Company’s newly appointed director, subject to stockholder approval of the increase in the number of shares authorized for issuance under the 2012 Plan, in a pro-rata amount covering 7,123 shares of common stock with an exercise price of $0.61 per share. The option vested May 31, 2017 and has a ten-year term and grant date fair value of $0.36 per share.

During the year ended May 31, 2017, the Company granted options covering an aggregate of 1,050,000 shares of common stock to executive management and certain employees with exercise prices of $1.09 and $1.10 per share. The options vest annually over three years, have a ten-year term and grant date fair values of $0.75 and $0.76 per share, respectively.

Warrants

During the year ended May 31, 2018, the Company granted, to a consultant, a warrant covering an aggregate of 200,000 shares of common stock, with an exercise price of $0.64 per share. 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 $0.26 per share.

During the year ended May 31, 2018, the Company granted to a consultant a warrant covering an aggregate of 100,000 shares of common stock, with an exercise price of $0.75 per share. The warrant vests immediately, has a five-year term and a grant date fair value of $0.29 per share.

During the year ended May 31, 2018, the Company granted to a consultant a warrant covering an aggregate of 50,000 shares of common stock, with an exercise price of $0.76 per share. The warrant vests immediately, has a five-year term and a grant date fair value of $0.26 per share.

During the year ended May 31, 2018, in connection with a private equity offering, as fully described in Note 10, the Company issued common stock warrants covering a total of 35,286,904 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued common stock warrants covering 2,813,491 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.55, and include a cashless exercise provision.

During the year ended May 31, 2018, the Company determined to extend the expiration dates of certain warrants from May 31, 2017 to June 30, 2017 covering 3,295,000 shares of common stock. The warrants were originally issued in connection with 2013 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.

 

		2017
Expected dividend yield		0%
Stock price volatility		61.48%
Expected term		1 month
Risk-free interest rate		0.84%
Grant-date fair value		$0.25

On January 23, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering 3,071,014 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued warrants covering 245,681 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.55 per share, and include a cashless exercise provision.

 

On January 31, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering 7,718,010 shares of common stock to investors. The warrants have a five-year term and an exercise price of $0.75 per share.

On May 22, 2018, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued warrants covering 4,640,000 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued warrants covering 315,200 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.55 per share, and include a cashless exercise provision.

On May 31, 2017, in connection with the sale of the 2017 Notes, as fully described in Note 4, the Company issued common stock warrants covering 383,333 shares of common stock to note holders. The warrants have a five-year term and an exercise price of $1.35 per share.

On June 14, 2017, the Company’s Board of Directors approved a modification in the warrant terms issued in connection with the 2017 Notes, as fully described in Note 4. The warrant coverage ratio was increased from 25% to 50% and the per share exercise price of the warrant was reduced to $1.00 from $1.35. On June 19, 2017, in connection with new terms, the Company issued incremental warrants covering 383,333 shares to certain 2017 Note holders whose investment was completed on May 31, 2017.

During the year ended May 31, 2018, in connection with the issuance of the 2017 Notes, as fully described in Note 4, and more fully described in Note 11 below, the Company issued common stock warrants, covering 3,258,990 shares of common stock to additional 2017 Note holders. The warrants have a five-year term and an exercise price of $1.00 per share. In connection with the 2017 Notes, the Company issued warrants covering 350,766 to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.825, and include a cashless exercise provision.

In connection with the January 31, 2018, registered direct offering, as fully described below in Note 11, the exercise price of all detachable warrants issued with the 2017 Notes described in Note 4, was reduced further to $0.75 per share. As a result of this modification, the Company recognized non-cash inducement interest expense of approximately $2.4 million.

On September 8, 2017, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued common stock warrants covering 1,668,163 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $1.00 per share. In connection with this offering, the Company also issued common stock warrants covering 213,573 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.825 per share, and include a cashless provision. In connection with the Make-Whole Offering, fully described in Note 10, the exercise price of the investor and placement agent warrants were reduced to $0.75 and $0.715 per share, respectively.

On October 11, 2017, in connection with a registered direct equity offering, as fully described in Note 11, the Company issued common stock warrants covering 940,380 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $0.75 per share. In connection with this offering, the Company also issued common stock warrants covering 150,461 shares of common stock to the placement agent. The placement agent warrants have a five-year term and an exercise price of $0.715 per share, and include a cashless exercise provision.

On November 24, 2017, the Company filed an “Offer to Amend and Exercise” (the “Offer”) certain warrants covering an aggregate of 51,090,113 shares of common stock, at a potentially reduced exercise price of $0.50 per share. The original exercise price on these certain warrants ranged from $0.50 to $1.35 per share and have expiration dates beginning October 2018 continuing through October 2022. The Offer was originally scheduled to expire December 22, 2017, but was subsequently extended three times to March 23, 2018. The Offer was subject to the completion of an election to participate and exercise by the holder, certain representations and warranties by the holder and remittance of exercise proceeds to the Company. Upon expiration of the Offer, warrants to purchase up to 3,027,263 shares of common stock were accepted for gross cash proceeds to the Company of approximately $1.5 million. Solicitation fees of approximately $73,000 were paid to the solicitating agent in the Offer. Pursuant to U.S. GAAP, the Company recognized non-cash inducement expense of approximately $0.4 million, due to the reduction in warrant exercise price, related to this Offering.

On November 30, 2017, in connection with a registered direct equity offering dated September 8, 2017, as fully described in Note 11, the Company issued incremental common stock warrants covering 251,504 shares of common stock to investors. The investor warrants have a five-year term from initial investment date, September 8, 2017, and an exercise price of $0.75 per share. In connection with this offering, the Company also issued common stock warrants covering 26,702 shares of common stock to the placement agent. The placement agent warrants have a five-year term from September 8, 2017, and an exercise price of $0.715 per share, and include a cashless exercise provision.

In connection with a private equity offering completed in June 2016, as fully described in Note 10, the Company issued common stock warrants covering 182,375 shares of common stock to investors. The warrants have a five-year term and an exercise price of $1.35 per share.

During the year ended May 31, 2017, in connection with the December, January and February registered direct equity offerings, as fully described in Note 11, the Company issued common stock warrants covering 5,602,821 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $1.00 per share. In connection with these offerings, the Company also issued common stock warrants covering 576,451 shares of common stock to the placement agent. The placement agent warrants have a five-year term, an exercise price of $0.825 per share, and include a cashless exercise provision.

In January 2017, the Company determined to extend the expiration dates of certain warrants (“2013 Warrants”) to May 31, 2017, covering an aggregate of 6,310,667 shares of common stock. The 2013 Warrants were originally issued in connection with the sale of 2013 convertible promissory notes. The 2013 Warrants currently have an exercise price of $1.00 per share, and all but two warrants were exercisable through October 2016. One 2013 Warrant, for the purchase of 186,667 shares of common stock, was exercisable through December 2016 and one 2013 Warrant, for the purchase of 160,000 shares of common stock, was exercisable until January 15, 2017. The extension to May 31, 2017 was contingent upon the execution of a release of claims by each of the warrantholders, the delivery of the “form of exercise,” and the receipt of the exercise proceeds to the Company. Pursuant to U.S. GAAP the Company recognized non-cash interest expense of approximately $72,000, which represented the incremental increase in fair value of the extended warrants.

During the fiscal year ended May 31, 2016, the board of directors approved a one-year extension of expiration dates of the 2013 Warrants, further extended, as mentioned above. The 2013 Warrants, which had an original term of two years, covering approximately 6.3 million shares of common stock, with an exercise price of $1.00 per share. The first extension of expiration dates ranged from October 2015 through January 2016 and the second extension deferred the expiration dates to October 2016 through January 2017. The extensions were effective upon the receipt of certain executed documentation from the warrantholders. Pursuant to U.S. GAAP, the Company recognized non-cash interest expense in fiscal year ended May 31, 2016 of approximately $867,000, in connection with these extensions, which represented the incremental increase in the fair value of the modified warrants

During the year ended May 31, 2017, holders of warrants covering 774,097 shares of common stock exercised the right to purchase such shares at either $0.50 or $0.75 per share and the Company received proceeds of approximately $398,000. Additionally, warrants covering 138,864 shares with an exercise price of $0.75 per share were exercised pursuant to a cashless exercise provision.

In connection with a registered direct equity offering completed in September 2016, as fully described in Note 11, the Company issued common stock warrants covering 6,666,667 shares of common stock to investors. The investor warrants have a five-year term and an exercise price of $1.00 per share. In connection with this offering, the Company also issued common stock warrants covering 1,066,667 shares of common stock to the placement agent. The placement agent warrants have a five-year term, an exercise price of $0.825 per share, and include a cashless exercise provision.

Compensation expense related to stock options and warrants for the fiscal years ended May 31, 2018, May 31, 2017 and May 31, 2016 was approximately $1.3 million, $1.2 million and $2.4 million, respectively. The grant date fair value of options and warrants vested during the fiscal years ended May 31, 2018, May 31, 2017 and May 31, 2016, was approximately $1.4 million, $0.9 million and $1.7 million, respectively. As of May 31, 2018, there was approximately $0.6 million of unrecognized compensation expense related to share-based payments for unvested options, with is expected to be recognized over a weighted-average period of approximately 1.13 years.

 

The following table represents stock option and warrant activity for the years ended May 31, 2018, May 31, 2017 and May 31, 2016:    

 

										Weighted
										Average
						Weighted				Remaining
		Number of				Average				Contractual Life				Aggregate
		Shares				Exercise Price				in Years				Intrinsic Value
Options and warrants outstanding—May 31, 2015			31,008,915			$	0.88				2.94			$	5,538,335
Granted			33,838,536				0.80				—				—
Exercised			(1,050,301	)			0.70				—				—
Forfeited/expired/cancelled			(490,000	)			2.01				—				—
Options and warrants outstanding—May 31, 2016			63,307,150			$	0.83				3.20			$	9,863,492
Granted			16,935,437				0.99				—				—
Exercised			(912,961	)			0.55				—				—
Forfeited/expired/cancelled			(1,470,000	)			1.56				—				—
Options and warrants outstanding—May 31, 2017			77,859,626			$	0.86				3.40			$	40,250
Granted			65,420,227				0.75				—				—
Exercised			(6,322,263	)			0.50				—				—
Forfeited/expired/cancelled			(4,572,321	)			0.94				—				—
Options and warrants outstanding—May 31, 2018			132,385,269				0.80				3.78				3,673
Outstanding exercisable—May 31, 2018			128,872,852			$	0.80				3.66			$	3,673