CYDY - CytoDyn: On The Cusp Of A New Beginning Existing Shareholders Beware

2023-03-28 10:52:34 ET

Summary

• Former CytoDyn CEO Pourhassan's indictment is now public.
• Company is moving on with an entirely different management team.
• CytoDyn shares and its finances are both in the dumps.
• CytoDyn's future holds little promise for current shareholders.

Just browsing through the titles to my 16 previous CytoDyn (CYDY) articles, from my first - 2019's "CytoDyn: What To Do When It's Too Good To Be True?", to my most recent - 2021's "CytoDyn: Suitable For Trading Not Investing", fills me with nostalgia.

The CytoDyn story with its ever-effervescent and promotional CEO Nadir Pourhassan was one for the ages. Pourhassan is currently under indictment for multiple alleged misdeeds as hereafter discussed.

As I report in this article CytoDyn is trying to close out its bad old days. It wants to excise the stink of the Pourhassan indictment. In doing so it is trying to preserve the reputation along with the commercial and clinical viability of leronlimab (PRO 140, Vyrologix), its sole molecule in clinical development.

Pourhassan, CytoDyn's long-time CEO, is under federal indictment for multiple offenses.

Nader Pourhassan, CytoDyn's long-time CEO until his dismissal in 01/2022, was a character with boundless energy and chutzpah. He could be very convincing as noted by one rueful commentator:

I kinda, sorta fell for the hype. Within weeks of my foray into covering the biopharma space a few years ago, I interviewed Pourhassan. I got swept up in the story about an Iranian immigrant, a teacher, risking it all to raise a flailing biotech company from the ashes on the back of a promising molecular discovery. He was confident and convincing. The story didn't age well.

That is history, a history I chronicle at length in my above referenced articles.

The present and the future are about the indictment , filed 12/15/2022, and about CytoDyn with its lonely clinical molecule leronlimab. As for the indictment, it is essential reading for investors not just in CytoDyn, but in any speculative biotech company. It blares out a clarion call. It warns of potential management malfeasance, as it stokes FOMO in eager investors.

The indictment alleges a pastiche of facts which long time CytoDyn investors will view with horror (or a smug "just as I expected" satisfaction), including:

1. repeated FDA warnings starting in 2018 that Pourhassan's BLA timeline was overly aggressive and that an incomplete BLA would face a CRL;
2. Pourhassan marginalized and ultimately removed directors who attempted oversight on his public statements and releases;
3. Pourhassan's BLA timeline communications were based not on when CytoDyn could meet FDA requirements, but rather on what was likely to inflate and maintain CytoDyn's stock price and attract new investors;
4. despite FDA advice that the BLA was incomplete, CytoDyn issued an 04/27/2020 release telling the public the opposite;
5. Pourhassan had CytoDyn issue a false release that the first of three sections of the BLA had been filed and that CytoDyn was in line for potential revenue in 2020;
6. on 04/09/2020 Pourhassan signed and approved a false 10-Q which was knowingly false in stating that CytoDyn expected to file the last two sections of the BLA by the end of April;
7. in 05/2020 Pourhassan filmed an interview claiming that he exercised a stock option at great tax cost in order to provide stopgap funding for the company when he had actually exercised his options based on material, non-public information.

The foregoing is based on the first 21 pages of the 42 page indictment. It generally relates to leronlimab's HIV indication . The indictment goes on to address misrepresentations relating to its COVID-19 filings, along the same general lines.

CytoDyn has appointed new C-suite officers; its directors are also recent additions.

CytoDyn's board finally woke up to the Damoclean sword swaying crazily above its head. The board removed Pourhassan effective 01/24/2022 as announced in a release dated 01/24/2022. Currently CytoDyn's leadership team on its website includes:

1. President Cyrus Arman, hired in 07/2022;
2. CFO Antonio Migliarese, hired to fill a variety of roles in 01/2020, and drafted as interim President when Pourhassan was ousted;
3. VP, Operations Bernie Cunningham hired as Executive Director of Supply Chain and Project Management in 06/2020;
4. Senior Director of Clinical Operations, Joseph Meidling hired in 03/2021 as Senior Director of Portfolio and Project Management;
5. Directors Tanya D. Urbach and Lishomwa C. Ndhlovu elected to the board on 11/24/2021;
6. Director Karen J. Brunke appointed to the board on 04/01/2022;
7. Director Stephen M. Simes appointed to the board effective 10/13/2022;
8. Director Ryan Dunlap appointed to the board effective 08/25/2022.

CytoDyn's current president and its entire current board of directors took office either subsequent to, or shortly before Pourhassan's departure. CFO Migliarese is the most senior person who provides any institutional memory of Pourhassan and that only for two years. Accordingly CytoDyn has done a significant housecleaning, not just of Pourhassan but also of many of those hired during his tenure.

CytoDyn's finances are in ragged shape as one might expect given allegations in the indictment.

As I write on 03/26/2023, the latest available CytoDyn information comes in the form of its 01/09/2023 10-Q (the "10-Q") for the quarterly period ended 11/30/2022. CytoDyn provides no quarterly earnings conference calls.

Under the 10-Q heading "Liquidity and Capital Resources" (p. 34), CytoDyn advises that at quarter's end it had $2.6 million in cash and restricted cash and ~$122.7 million in short-term liabilities.

Despite this lopsided negative working capital balance it characterized its vendor relations as accommodative. It advised that it did not expect significant delays in scheduling business operations because of liquidity constraints. It has been selling securities and incurring debt when needed to fund current operations.

The chart below shows the share environment in which it is working:

When shares trade for two bits plus change, it takes vast quantities of them to cover the costs of operating a publicly traded company.

A quick look at the statement of operations excerpt from its 10-Q tells the story:

Despite having pared its R&D expense down to de minimis amounts, CytoDyn's annualized expenses are running up above $60 million. Fortunately the biggest chunk of that is its non-cash inventory charge.

CytoDyn's planned rebranding may wash out current shareholders.

CytoDyn's 12/2022 Additional Proxy Soliciting Materials form DEFA14A includes its job jar for 2023. At page 99 under the heading "What we expect in 2023", it lists 7 tasks as follows:

1. lifting its partial hold in HIV;
2. financing;
3. initiating NASH trial;
4. developing a long acting CCR5 molecule;
5. participation in medical meetings and peer reviewed journals;
6. building its team and infrastructure;
7. corporate rebranding.

At page 97 of the proxy it includes the graphic below pointing to the end game it hopes to accomplish with its 7 tasks. I pay particular attention to its plan to seek co-development partners:

CytoDyn scenario planning posits a variety of potential futures.

Bullish scenarios

CytoDyn bulls are confident of one overriding fact. Leronlimab, a humanized monoclonal antibody targeted against the CCR5 receptor found on T lymphocytes of the human immune system, is a hugely versatile and valuable molecule.

Out of the thousands of comments to my previous CytoDyn articles, I would point to comments by sjacobs26 as among the most insightful of the bulls. He supported his conviction as to leronlimab's therapeutic potential with a variety of journal citations including:

1. Tumor and Stem Cell Biology article titled "CCR5 Receptor Antagonists Block Metastasis to Bone of v-Src Oncogene-Transformed Metastatic Prostate Cancer Cell Lines";

2. CANCER RESEARCH article titled " Recent Advances Targeting CCR5 for Cancer and Its Role in Immuno-Oncology"; and

3. Frontiers in Immunology article titled "The Expanding Therapeutic Perspective of CCR5 Blockade"

Given such therapeutic potential, bulls hypothesize that CytoDyn will eventually attract the backing needed to sustain CytoDyn's value as a company. Such backing could come from:

1. debt financing;
2. collaboration with a big pharma to pursue leronlimab in one or more indication(s);
3. one or more grants; or
4. a private funder.

Bullish scenarios 2-4 are the ones that avoid the problems associated with 1. debt financing, which quickly leads to bearish scenarios discussed below.

Bearish scenarios

Those advancing a bearish scenario for CytoDyn can be wholly agnostic as to leronlimab's therapeutic potential. Bears focus not on the molecule but the company. As described in this article, it is in dire shape. Its balance sheet shows its $122+ million in current liabilities; it has total assets of $7.1 million.

The two proven paths companies in such condition often choose are:

1. reverse splits to boost the price per share and reduce the share count;
2. reorganization under the bankruptcy act.

These are vastly different approaches. The reverse split has no impact on shareholders' proportional ownership in a company. It simply reduces one's share count. Imagine a company starts with 1,000 shares of which you own half or 500 shares.

Suppose the company wants to reduce its share count by a factor of 10. It decides on a 1 for 10 (1:10) reverse split. After the reverse split the company's share count will reduce by a factor of 10, from 1,000 to 100 shares. your share count will also be divided by 10. Your count will reduce from 500 to 50. You will still own half the company's shares.

If CytoDyn did such a 1:10 reverse split when you owned 10,000 CytoDyn shares trading at $0.35. Your 10,000 shares would be reduced to 1,000 shares trading at $3.50. CytoDyn's overall share count would also go down by a factor of 10. Although a reverse split has no direct impact on the value of a shareholder's stake, such splits are often received poorly by the market.

In a reorganization shareholders typically lose their entire stake in a company. The company itself gets a fresh start and can usually shed most of its unsecured obligations.

My concern for CytoDyn is that management will elect the bankruptcy route. Bankruptcy offers it a chance to address solvency concerns and to build strong defense to litigation arising out of Pourhassan's tenure at the company.

Conclusion

CytoDyn's pathetic share price coupled with its meager liquidity are heavily overmatched by its bumper crop of >$100 million in current liabilities. Its one bright spot is its leronlimab, which still has believers, despite its years of mismanagement.

As part of its planned rebranding, CytoDyn will need one or more partner(s) What kind of moneyed partner is going to want to jump into a situation which is so swamped in debt? Likely, the price for new money will be a prepackaged bankruptcy, in which current shareholders lose their existing stakes.

There are real and substantial risks to my bear thesis as outlined above. The law, rules, practices and tax implications associated with corporate reorganizations are highly complex and sophisticated. I am not an expert, nor do I have experience in any such transactions. I may be wrong in my assumption that there are no moneyed parties willing to invest in CytoDyn outside of bankruptcy.

Howsoever it turns out for CytoDyn over the long haul, investors need to be aware that CytoDyn shares can turn on a dime. They are very responsive to news flow.

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