Note 3. Inventories

The Company’s pre-launch inventories consist of raw materials purchased for commercial production and work-in-progress inventory related to the substantially completed commercial production of pre-launch inventories of leronlimab to support the Company’s expected approval of the product as a combination therapy for HIV patients in the United States. Work-in-progress consists of bulk drug substance, which is the manufactured drug stored in bulk storage, and drug product, which is the manufactured drug in unlabeled vials.

Inventories as of May 31, 2021 and May 31, 2020 are presented below (in thousands):

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During the quarter ended February 28, 2021, the Company was notified by a third-party contract manufacturing partner that, due to an operational error committed by the contract manufacturer, one of the batches of a multiple-batch manufacturing campaign failed to meet quality standards, and thus would not be saleable upon regulatory approval. In accordance with the agreement, the contract manufacturer assumed liability for the failure and all costs to manufacture the batch, and committed to remanufacture the batch at a future date. As a result, the Company reduced work-in-progress inventory and the related amounts due to the contract manufacturer by $6.1 million. No other inventory was affected by this failure, and all other inventory has successfully passed quality standards.

The Company believes that material uncertainties related to the ultimate regulatory approval of leronlimab for commercial sale have been significantly reduced based on positive data from its Phase 3 clinical trial for leronlimab as a combination therapy with HAART for highly treatment-experienced HIV patients, as well as information gathered from meetings with the FDA related to its Biologics License Application (“BLA”) for this indication. The Company submitted the last two portions of the BLA (clinical and manufacturing) with the FDA in April 2020 and May 2020. In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA submittal requesting additional information. In August and September 2020, the FDA provided written responses to the Company’s questions and met telephonically with key Company personnel and its clinical research organization concerning its BLA to expedite the resubmission of its BLA.

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The deficiencies cited by the FDA in its July 2020 Refusal to File letter consisted of administrative deficiencies, omissions, corrections to data presentation, and related analyses and clarifications of manufacturing processes. The Company commenced its resubmission of the BLA in July 2021 and expected to be completed in October 2021.

The Company is working with new consultants to cure the BLA deficiencies and resubmit the BLA in order to allow the FDA to perform their substantive review. The Company anticipates that when the FDA completes their review, leronlimab will be approved, and we will achieve market acceptance of leronlimab as a treatment for HIV, realizing the amount of pre-launch inventory on-hand prior to shelf-life expiration. Accordingly, management believes the Company will realize future economic benefit in excess of the carrying value of its pre-launch inventory.

The expiration of remaining shelf-life of the Company’s inventories consists of the following as of May 31, 2021 (in thousands):

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When the remaining shelf-life of drug product inventory is less than 12 months, it is likely that it will not be accepted by potential customers. However, 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; however, at May 31, 2021 and 2020 there was no drug product inventory that may be sold. If the Company determines it is not likely shelf-life will be able to be extended or the inventory cannot be sold prior to expiration, the Company will write-down the inventory to its net realizable value. For the fiscal year ended May 31, 2021 the Company recognized expense related to the write-down of obsolete inventory of $0.7 million and recognized zero expense during the years ended May 31, 2020, and May 31, 2019.