Note 8. Acquisition of Patents and Intangibles

The Company consummated an asset purchase on October 16, 2012, and paid $3.5 million for certain assets, including intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the leronlimab (PRO 140) drug substance. The Company followed the guidance in ASC 805, Business Combinations, to determine if the Company acquired a business. Based on the prescribed accounting, the Company acquired assets and not a business. As of February 28, 2021 and February 29, 2020, the Company has recorded and is amortizing $3.5 million of intangible assets related to the patent rights acquired. The Company estimates the acquired patent has an estimated life of ten years. Subsequent to the acquisition date, the Company has continued to expand, amend and file new patents central to its current clinical trial strategies, which, in turn, have extended the protection period for certain methods of using leronlimab (PRO 140) and formulations comprising leronlimab (PRO 140) out through at least 2031 and 2038, respectively, in various countries.

On November 16, 2018, the Company completed the acquisition of substantially all the assets of ProstaGene, LLC (“ProstaGene”), a biotechnology start-up company, which included patents related to clinical research, a proprietary CCR5 technology for early cancer diagnosis, and a noncompetition agreement with ProstaGene’s founder and Chief Executive Officer, Richard G. Pestell. The Company accounted for the ProstaGene acquisition as an asset acquisition under ASC 805-10-55, Business Combinations, because the assets acquired from ProstaGene do not include an assembled workforce, and the gross value of the assets acquired meets the screen test in ASC 805-10-55-5A related to substantially all of the fair value being concentrated in a single asset or group of assets (i.e., the proprietary technology and patents) and, thus, is not considered a business. Thus, management concluded that the acquisition did not include both an input and substantive processes that together significantly contribute to the ability to create outputs. The acquisition of ProstaGene’s assets expanded the Company’s clinical development of leronlimab (PRO 140) into cancer indications and potential commercialization of certain cancer diagnostic tests. The aggregate purchase price paid for the ProstaGene acquisition was approximately $11.6 million based on the issuance of approximately 20.3 million shares of the Company’s common stock at $0.57 per share, including approximately 1.6 million shares to an investment bank for advisory services. In connection with the purchase, the Company entered into a Stock Restriction Agreement with Dr. Pestell, (the “Stock Restriction Agreement”), restricting the transfer of approximately 8.3 million shares of common stock (the “Restricted Shares”) payable to Dr. Pestell for a three-year period from the closing date of the ProstaGene transaction. The Stock Restriction Agreement provided that in the event Dr. Pestell’s employment with the Company is terminated by Dr. Pestell other than for Good Reason, or by the Company for Cause, as defined in Dr. Pestell’s employment agreement with the Company, the Company would have an option to repurchase such Restricted Shares from Dr. Pestell at a purchase price of $0.001 per share. The Restricted Shares were to vest and be released from the Stock Restriction Agreement in three equal annual installments commencing one year after the closing date of the acquisition of ProstaGene. On July 25, 2019, the Company’s Board terminated the employment of Dr. Pestell prior to the vesting of any of the Restricted Shares. The vesting and/or release or forfeiture of the Restricted Shares is currently subject to litigation between the Company and Dr. Pestell.

A summary of the net purchase price and allocation to the acquired assets is as follows (in thousands):

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Assets acquired from ProstaGene include (1) patents issued in the United States and Australia related to “Prostate Cancer Cell Lines, Gene Signatures and Uses Thereof” and “Use of Modulators of CCR5 in the Treatment of Cancer and Cancer Metastasis,” (2) an algorithm used to identify a 14-gene signature to predict the likelihood and severity of cancer diagnoses, and (3) a noncompetition agreement in connection with an employment agreement with Dr. Pestell as Chief

Medical Officer of the Company. The fair value of the assets acquired approximates the consideration paid. The Company did not assume any liabilities.

The fair value of the technology acquired was identified using the Income Approach. The fair value of the patents acquired is identified using the Cost to Reproduce Method. The fair value of the noncompetition agreement acquired is identified using the Residual Value Method. Goodwill is not recorded as the transaction represents an asset acquisition in accordance with ASU 2017-01. Acquisition costs for asset acquisitions are capitalized and included in the total cost of the transaction. In addition, pursuant to ASC 805, the net tax effect of the deferred tax liability arising from the book to tax basis differences is recorded as a cost of the acquisition.

The following table presents intangible assets as of February 28, 2021 and May 31, 2020, inclusive of patents (in thousands):

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The Company concluded a five-day arbitration hearing on March 19, 2021 concerning a claim by ProstaGene for approximately 3.1 million shares of common stock that the Company withheld for damages incurred by the Company in connection with the acquisition of an intangible asset from ProstaGene in November 2018. Expert testimony and report during the arbitration hearing revealed the stage of development was low, among other issues, and projected the technology would require a sizable amount of incremental capital and development time to advance towards a possible monetization. Based on this expert testimony and report, it is management’s conclusion the net carrying value of the proprietary algorithm is fully impaired. As such, the Company recorded an intangible asset impairment charge of approximately $10.0 million for the quarter ended February 28, 2021 resulting from the write-off of the allocated purchase price of $12.2 million and $2.2 million of associated accumulated amortization. Closing and reply briefs will be filed by mid-May 2021 and a decision by the arbitration panel will be rendered thereafter. Amortization expense related to all intangible assets was approximately $0.5 million and $1.5 million and $0.5 million and $1.5 million for the three and nine months ended February 28, 2021 and February 29, 2020, respectively. The following table summarizes the estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives as of February 28, 2021 (in thousands):

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