UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1933
For Quarter Ended: February 29, 2008 Commission File Number 000-49908
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CYTODYN, INC.
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(Exact name of registrant as specified in its charter)
75-3056237 COLORADO
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(I.R.S. Employer Identification No.) State or other jurisdiction
of incorporation organization
1511 Third Street, Santa Fe, 87505
---------------------------------------- -----
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (505) 988-5520
(Former address, changed sine last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No X
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, and
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See Definition of "accelerated filer, large accelerated filer, and smaller
reporting company" in 12(b)2 of the Exchange Act (check one)
Large Accelerated Filer ___ Accelerated Filer ___
Non-accelerated Filer ___ Smaller Reporting Company _X_
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes No X
--- ---
On October 21, 2009, there were 19,154,216 shares outstanding of the
registrant's no par common stock.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
---------------------
Item 1 Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of
February 29, 2008 (unaudited) and May 31, 2007 (audited) 3
Condensed Consolidated Statement of Operations for the Three
and Nine Months Ended February 29, 2008, for the Three and
Nine Months Ended February 28, 2007 and for the Period from
October 28, 2003 to February 29, 2008 (unaudited) 4
Condensed Consolidated Statement of Changes in
Stockholders' Deficit for the Period from October 28, 2003
to February 29, 2008 (unaudited) 5 - 8
Condensed Consolidated Statement of Cash Flows for
the Nine Months Ended February 29, 2008 and
February 28, 2007 and for the Period from
October 28, 2003 to February 29, 2008 (unaudited) 9 - 10
Notes to Condensed Consolidated Financial Statements
(unaudited) 11 - 24
Item 2 Management's discussion and analysis of financial condition
-----------------------------------------------------------
and results of operations. 25
--------------------------
Item 3 Quantitative and Qualitative Disclosures About Market Risk 29
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Item 4T Controls and Procedures 29
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PART II OTHER INFORMATION
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Item 1 Legal Proceedings 29
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 30
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Item 3 Defaults Upon Senior Securities 30
-------------------------------
Item 4 Submission of Matters to a Vote of Security Holders 30
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Item 5 Other Information 30
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Item 6 Exhibits 30
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2
CytoDyn, Inc.
(A Development Stage Company)
Condensed Balance Sheet
February 29, May 31,
2008 2007
(unaudited) (audited)
------------ ------------
Assets
Current Assets:
Cash $ -- $ 16,604
Prepaid insurance 11,176 43,254
Prepaid license fees 7,500 50,000
------------ ------------
Total current assets 18,676 109,858
Furniture and equipment, net 1,718 2,611
Intangible assets, net 768 1,294
Other Assets 39,375 495
------------ ------------
$ 60,537 $ 114,258
============ ============
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 281,228 $ 239,572
Accrued liabilities 247,051 193,600
Short Term Portion of Commitment and Contingencies 50,000 --
Convertible notes payable, net -- 14,385
Accrued interest payable 33,420 10,216
Indebtedness to related parties -- 455,701
Short-term portion of notes payable -- 125,000
------------ ------------
Total current liabilities 611,699 1,038,474
Notes payable 295,000 --
Convertible notes payable, net 20,695 --
Indebtedness to related parties 437,401 --
Accrued legal costs 25,000 --
Commitments and contingencies -- 150,000
------------ ------------
Total liabilities 1,389,795 1,188,474
------------ ------------
Shareholders' deficit:
Preferred stock, no par value; 5,000,000 shares
authorized, 100,000 shares issued and outstanding 167,500 167,500
Common stock, no par value; 25,000,000 shares authorized,
11,904,407 and 11,297,264 shares issued and outstanding 4,147,865 4,172,865
at February 29, 2008 and May 31, 2007 respectively
Stock for services (16,521) (106,521)
Additional paid-in capital 2,482,785 2,072,993
Less: subscription receivable (25,000) --
Accumulated deficit on unrelated dormant operations (1,601,912) (1,601,912)
Deficit accumulated during development stage (6,483,975) (5,779,141)
------------ ------------
Total shareholders' deficit (1,329,258) (1,074,216)
------------ ------------
$ 60,537 $ 114,258
============ ============
See accompanying notes to condensed consolidated unaudited financial statements
3
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Operations
Unaudited
October 28,
Three Months Ended Nine Months Ended 2003
February 29, February 28, February 29, February 28, through
---------------------------- ---------------------------- February 29,
2008 2007 2008 2007 2008
------------ ------------ ------------ ------------ ------------
Operating expenses:
General and administrative $ 142,037 $ 418,469 $ 583,064 $ 1,304,592 $ 4,307,483
Amortization / depreciation 416 816 1,418 124,281 173,578
Research and development -- 52,909 -- 374,650 797,340
Legal fees 11,708 79,540 191,565 132,081 511,060
Commitments and contingencies -- -- (150,000) -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses 154,161 551,734 626,047 1,935,604 5,789,461
------------ ------------ ------------ ------------ ------------
Operating loss (154,161) (551,734) (626,047) (1,935,604) (5,789,461)
Interest income -- 26 -- 946 1,627
Interest expense:
Interest on convertible debt (41,774) (7,622) (52,809) (140,258) (670,163)
Other (24,172) -- (25,978) -- (25,978)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (220,107) (559,330) (704,834) (2,074,916) (6,483,975)
Income tax provision -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (220,107) $ (559,330) $ (704,834) $ (2,074,916) $ (6,483,975)
============ ============ ============ ============ ============
Basic and diluted loss per share $ (0.02) $ (0.05) $ (0.06) $ (0.19) $ (0.70)
============ ============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 11,011,550 11,281,597 11,178,390 10,895,897 9,238,703
============ ============ ============ ============ ============
See accompanying notes to condensed consolidated unaudited financial statements
4
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Changes in Shareholders' Deficit
October 28, 2003 through February 29, 2008
Deficit
Accumulated
Preferred Stock Common Stock Stock for Additional Stock During
---------------- ---------------------- Prepaid Paid-in Subscription Accumulated Development
Shares Amount Shares Amount Services Capital Receivable Deficit Stage Total
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Balance at
October 28,
2003, following
recapitalization -- $ -- 6,252,640 $1,425,334 $ -- $ 23,502 $ -- $(1,594,042) $ -- $ (145,206)
February through
April 2004, sale
of common stock
less offering
costs of $54,000
($.30/share) -- -- 1,800,000 486,000 -- -- -- -- -- 486,000
February 2004,
shares issued to
former officer
as payment for
working capital
advance
($.30/share) -- -- 16,667 5,000 -- -- -- -- -- 5,000
Net loss at
year ended
May 31, 2004 -- -- -- -- -- -- -- (7,870) (338,044) (345,914)
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Balance at
May 31, 2004 -- -- 8,069,307 1,916,334 -- 23,502 -- (1,601,912) (338,044) (120)
July 2004,
capital
contribution
by an officer -- -- -- -- -- 512 -- -- -- 512
November 2004,
common stock
warrants
granted -- -- -- -- -- 11,928 -- -- -- 11,928
February 2005,
capital
contribution
by an officer -- -- -- -- -- 5,000 -- -- -- 5,000
Net loss at
year ended
May 31, 2005 -- -- -- -- -- -- -- -- (777,083) (777,083)
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Balance at
May 31, 2005 -- -- 8,069,307 1,916,334 -- 40,942 -- (1,601,912) (1,115,127) (759,763)
See accompanying notes to condensed consolidated unaudited financial statements
5
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Changes in Shareholders' Deficit
October 28, 2003 through February 29, 2008
Deficit
Accumulated
Preferred Stock Common Stock Stock for Additional Stock During
---------------- ---------------------- Prepaid Paid-in Subscription Accumulated Development
Shares Amount Shares Amount Services Capital Receivable Deficit Stage Total
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
June through
July 2005, sale
of common stock
less offering
costs of $27,867
($.75/share) -- -- 289,890 189,550 -- -- -- -- -- 189,550
August 2005,
common shares
issued to
extinguish
promissory notes
payable and
related interest
($.75/share) -- -- 160,110 120,082 -- -- -- -- -- 120,082
May 2006, common
shares issued
to extinguish
convertible debt -- -- 350,000 437,500 -- -- -- -- -- 437,500
November 2005,
94,500 warrants
exercised
($.30/share) -- -- 94,500 28,350 -- -- -- -- -- 28,350
January through
April 2006,
common shares
issued for
prepaid services -- -- 183,857 370,750 (370,750) -- -- -- -- --
Amortization of
prepaid stock
services -- -- -- -- 103,690 -- -- -- -- 103,690
January through
June 2006,
warrants issued
with convertible
debt -- -- -- -- -- 274,950 -- -- -- 274,950
January through
May 2006,
beneficial
conversion
feature of
convertible debt -- -- -- -- -- 234,550 -- -- -- 234,550
See accompanying notes to condensed consolidated unaudited financial statements
6
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Changes in Shareholders' Deficit
October 28, 2003 through February 29, 2008
Deficit
Accumulated
Preferred Stock Common Stock Stock for Additional Stock During
---------------- ---------------------- Prepaid Paid-in Subscription Accumulated Development
Shares Amount Shares Amount Services Capital Receivable Deficit Stage Total
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
March through May
2006, stock
options granted
to consultants -- -- -- -- -- 687,726 -- -- -- 687,726
March 2006,
stock options
issued to
extinguish debt -- -- -- -- -- 86,341 -- -- -- 86,341
Net loss at
year ended
May 31, 2006 -- -- -- -- -- -- -- -- (2,053,944) (2,053,944)
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Balance at
May 31, 2006 -- -- 9,147,664 3,062,566 (267,060) 1,324,509 -- (1,601,912) (3,169,071) (650,968)
Common stock
issued to
extinguish
convertible debt -- -- 119,600 149,500 -- -- -- -- -- 149,500
Convertible debt
stock issued for
AITI acquisition -- -- 2,000,000 934,399 -- -- -- -- -- 934,399
Amortization of
prepaid stock
services -- -- -- -- 267,060 -- -- -- -- 267,060
Common stock
payable for
prepaid services -- -- -- -- (106,521) 120,000 -- -- -- 13,479
Stock-based
compensation -- -- -- -- -- 535,984 -- -- -- 535,984
Warrants issued
with convertible
debt -- -- -- -- -- 92,500 -- -- -- 92,500
Common stock
issued for
services -- -- 30,000 26,400 -- -- -- -- -- 26,400
Preferred shares
issued AGTI 100,000 167,500 -- -- -- -- -- -- -- 167,500
See accompanying notes to condensed consolidated unaudited financial statements
7
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Changes in Shareholders' Deficit
October 28, 2003 through February 29, 2008
Deficit
Accumulated
Preferred Stock Common Stock Stock for Additional Stock During
---------------- ---------------------- Prepaid Paid-in Subscription Accumulated Development
Shares Amount Shares Amount Services Capital Receivable Deficit Stage Total
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Net loss,
May 31, 2007 -- -- -- -- -- -- -- -- (2,610,070) (2,610,070)
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Balance at
May 31, 2007 100,000 167,500 11,297,264 4,172,865 (106,521) 2,072,993 -- (1,601,912) (5,779,141) (1,074,216)
Amortization of
prepaid stock
for services
(unaudited) -- -- -- -- 90,000 -- -- -- -- 90,000
Stock based
compensation
(unaudited) -- -- -- -- -- 356,130 -- -- -- 356,130
Common stock
issued to
extinguish
convertible
debt (unaudited) -- -- 750,000 75,000 -- -- (25,000) -- -- 50,000
Rescission of
common stock
issued for
services -- -- (142,857) (100,000) -- -- -- -- -- (100,000)
Original issue
discount
convertible debt
with warrants
(unaudited) -- -- -- -- -- 3,662 -- -- -- 3,662
Original issue
discount
convertible debt
with beneficial
conversion
feature
(unaudited) -- -- -- -- -- 50,000 -- -- -- 50,000
Net loss
(unaudited) -- -- -- -- -- -- -- -- (704,834) (704,834)
------- -------- ---------- ---------- --------- ---------- ------------ ----------- ----------- -----------
Balance at
February 29,
2008
(unaudited) 100,000 $167,500 11,904,407 $4,147,865 $ (16,521) $2,482,785 $ (25,000) $(1,601,912) $(6,483,975) $(1,329,258)
======= ======== ========== ========== ========= ========== ============ =========== =========== ===========
See accompanying notes to condensed consolidated unaudited financial statements
8
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Cash Flows
Unaudited
October 28,
Nine Months Ended 2003
Feruary 29, Feruary 28, through
-------------------------- February 29,
2008 2007 2008
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (704,834) $(2,074,916) $(6,483,975)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization / depreciation 1,419 124,281 173,578
Amortization of original issue discount 50,972 136,241 652,356
Reversal of contingent liability (150,000) -- --
Purchased in process research and development -- 274,399 274,399
Stock-based compensation 346,130 694,089 1,993,683
Changes in current assets and liabilities:
Decrease in prepaid expenses 74,578 30,019 (8,051)
Decrease in deposits (38,880) -- --
Increase in accounts payable, accrued
interest and accrued liabilities 193,311 27,368 636,699
----------- ----------- -----------
Net cash used in operating activities (227,304) (788,519) (2,761,311)
----------- ----------- -----------
Cashflows from investing activities:
Furniture and equipment purchases -- (3,345) (10,764)
----------- ----------- -----------
Net cash used in investing activities -- (3,345) (10,764)
----------- ----------- -----------
Cash flows from financing activities:
Capital contributions by president -- -- 5,512
Proceeds from notes payable to related parties 2,000 62,341 549,849
Payments on notes payable to related parties (20,300) -- (58,624)
Proceeds from notes payable issued to individuals 170,000 -- 295,000
Proceeds from notes payable from convertible notes 59,000 92,500 661,000
Proceeds from the sale of common stock -- -- 757,417
Payments for offering costs -- -- (81,867)
Proceeds from issuance of stock for AITI acquisition -- 512,200 512,200
Proceeds from issuance of stock for AGTI acquisition -- 100,000 100,000
Proceeds from exercise of warrants -- -- 28,350
----------- ----------- -----------
Net cash provided by financing activities 210,700 767,041 2,768,837
----------- ----------- -----------
Net change in cash (16,604) (24,823) (3,238)
Cash, beginning of period 16,604 125,320 3,238
----------- ----------- -----------
Cash, end of period $ -- $ 100,497 $ --
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ -- $ -- $ --
=========== =========== ===========
Interest $ -- $ -- $ 1,126
=========== =========== ===========
See accompanying notes to condensed consolidated unaudited financial statements
9
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Cash Flows
Unaudited
October 28,
Nine Months Ended 2003
Feruary 29, Feruary 28, through
-------------------------- February 29,
2008 2007 2008
----------- ----------- -----------
Non-cash investing and financing transactions:
Net assets acquired in exchange for common stock
in CytoDyn/Rexray business combination $ -- $ -- $ 7,542
=========== =========== ===========
Common stock issued to former officer to repay
working capital advance $ -- $ -- $ 5,000
=========== =========== ===========
Common stock issued for convertible debt $ 75,000 $ 149,500 $ 662,000
=========== =========== ===========
Common stock issued for debt $ -- $ -- $ 120,082
=========== =========== ===========
Options to purchase common stock issued for debt $ -- $ -- $ 62,341
=========== =========== ===========
Original issue discount and intrinsic value of
beneficial conversion feature related to debt
issued with warrants $ 53,662 $ 92,500 $ 655,662
=========== =========== ===========
On July 18, 2006 the company issued 2,000,000 shares of unregistered
restricted common stock for 1,000 shares of AITI common stock. The
acquistion was accounted for as an asset purchase (See Note 4). The company
acquired a prepaid sponsored research project for $162,800, a license
agreement for $150,000, and acquired $109,399 in expenses associated with
the license agreement and cash of $512,200. The license agreement and
associated expenses have been recorded as in process research and
development expenses on the accompanying financial statements.
On July 16, 2007, the Company cancelled the issuance of 142,857 shares of
restricted common stock previously issued to a consultation firm. In
conjunction with the cancellation, the Company reduced stock compensation
expense and common stock by $100,000, which was the value of the shares on
the date of cancellation.
On January 30, 2007, the company issued 100,000 preferred shares of
unregsitered stock for 1,000 shares of AGTI common stock. The company
acquired a prepaid license fee for seven years for $52,500 and $15,000 in
expense associated with the license agreement
See accompanying notes to condensed consolidated unaudited financial statements
10
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
1 - Organization:
CytoDyn, Inc, (the "Company") was incorporated under the laws of Colorado on May
2, 2002 under the name Rexray Corporation ("Rexray"). The Company entered the
development stage effective October 28, 2003 upon a reverse merger and a
recapitalization of the company and follows Statements of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises"
(SFAS No. 7). On October 27, 2003, Rexray changed its name to CytoDyn, Inc.
Advanced Influenza Technologies, Inc. ("AITI") was incorporated under the laws
of Florida on June 9, 2006. Advanced Genetic Technologies, Inc. ("AGTI") was
incorporated under the laws of Florida on December 18, 2006.
CytoDyn, Inc. discovered and is developing a class of therapeutic monoclonal
antibodies to address significant unmet medical needs in the areas of HIV and
AIDS.
2 - Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and reflect all adjustments, consisting solely of
normal recurring adjustments, needed to fairly present the financial results for
these periods. The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q. Accordingly, certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. The accompanying consolidated financial statements should be
read in conjunction with the financial statements for the years ended May 31,
2007 and 2006 and notes thereto in the Company's annual report on Form 10-KSB
for the year ended May 31, 2007, filed with the Securities and Exchange
Commission on August 30, 2007. Operating results for the three and nine months
ended February 29, 2008 are not necessarily indicative of the results that may
be expected for the entire year. In the opinion of management, all adjustments
consisting only of normal recurring adjustments necessary for a fair statement
of (a) the results of operations for the three and nine month periods ended
February 29, 2008 and the period October 28, 2003 through February 29, 2008, (b)
the financial position at February 29, 2008, and (c) cash flows for the nine
month periods ended February 29, 2008 and February 28, 2007 and the period
October 28, 2003 through February 29, 2008, have been made.
11
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
Principles of Consolidation
The consolidated financials statements include the accounts of CytoDyn, Inc. and
its wholly owned subsidiaries; AITI and AIGI All intercompany transactions and
balances are eliminated in consolidation.
Going Concern
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company is currently in the development
stage with losses for all periods presented. As of October 21, 2009, these
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional operating capital, complete development of its medical
treatment, obtain FDA approval, outsource manufacturing of the treatment, and
ultimately to attain profitability. The Company intends to seek additional
funding through equity offerings to fund its business plan. There is no
assurance that the Company will be successful in these endeavors.
Use of Estimates
The preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less when acquired to be cash equivalents. The
Company had no cash equivalents as of February 29, 2008 or May 31, 2007. The
Company maintains its cash in bank deposit accounts, which at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
12
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
Furniture, Equipment and Depreciation -
Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally three to seven years. Maintenance and repairs are charged to expense
as incurred and major improvements or betterments are capitalized. Gains or
losses on sales or retirements are included in the consolidated statements of
operations in the year of disposition.
Impairment of Long-Lived Assets - The Company evaluates the carrying value of
any long-lived assets under the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell. There were no impairment charges for the three and
nine months ended February 29, 2008 and February 28, 2007, and for the period
October 28, 2003 through February 29, 2008.
Research and Development
Research and development costs are expensed as incurred.
Financial Instruments
At February 29, 2008 and May 31, 2007, the carrying value of the Company's
financial instruments approximate fair value due to the short-term maturity of
the instruments.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004), "Share-Based Payments" ("SFAS No. 123R"). SFAS No. 123R
requires companies to measure the cost of employee services received in exchange
for the award of equity instruments based on the fair value of the award at the
date of grant. The expense is to be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS No.
123R is effective as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005 and, accordingly, the Company adopted
this standard on June 1, 2006.
SFAS No. 123R provides for two transition methods. The "modified prospective"
method requires that share-based compensation expense be recorded for any
employee options granted after the adoption date and for the unvested portion of
any employee options outstanding as of the adoption date. The "modified
retrospective" method requires that, beginning June 1, 2006, all prior periods
presented be restated to reflect the impact of share-based compensation expense
consistent with the pro forma disclosures previously required under SFAS No.
123.
13
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
The Company adopted the modified prospective application of SFAS No. 123R
effective June 1, 2006 and, as a result, was not required to restate its
financial results for prior periods. Prior to June 1, 2006, the Company had
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As provided for
by SFAS No. 123, the Company had elected to continue to account for its
stock-based compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). Accordingly, compensation expense had been recognized to the extent of
employee or director services rendered based on the intrinsic value of stock
options granted under the plan. The Company accounted for common stock, stock
options, and warrants granted to non-employees based on the fair market value of
the instrument using the Black-Scholes option pricing model based on assumptions
for expected stock price volatility, term of the option, risk-free interest
rate, and expected dividend yield at the grant date. For all awards granted
prior to June 1, 2006, the unearned deferred fair value of stock-based
compensation was recognized as an expense on a straight-line basis over the
remaining requisite service period, ranging from three months to four years.
Effective June 1, 2006, the estimated fair value of options and warrants granted
is determined in accordance with SFAS No. 123R on the date of grant using the
Black-Scholes option valuation model with the following weighted-average
assumptions. Risk free interest rate of 3.0%; dividend yield 0%; volatility 70%;
and expected life of 5.5 years. The risk-free interest rate assumption is based
upon observed interest rates appropriate for the expected term of the stock
options. The expected volatility is based on the historical volatility of the
Company's common stock. The Company has not paid any dividends on its common
stock since its inception and does not anticipate paying dividends on its common
stock in the foreseeable future. The computation of the expected option term is
based on the "simplified method" as the Company's stock options are "plain
vanilla" options and the Company has a limited history of exercise data. For
common stock options and warrants with graded vesting, the Company recognizes
the related compensation costs associated with these options and warrants on a
straight-line basis over the requisite service period.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Based on limited historical experience of forfeitures, the
Company estimated future unvested option forfeitures at 0% as of February 29,
2008 and February 28, 2007. Net cash proceeds from the exercise of stock options
and warrants were $0 for the three and nine months ended February 29, 2008 and
February 28, 2007. Compensation expense related to stock options was
approximately $105,000, $356,000, $124,000, $411,000 and $891,000 for the three
and nine month periods ended February 29, 2008, and 2007 and for the period
October 28, 2003 through February 29, 2008, respectively. As of February 29,
2008, there was approximately $688,340 of unrecognized compensation costs
related to share -based payments for unvested options, which is expected to be
recognized over a weighted average period of 2.01 years.
14
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
The following table represents stock option and warrants activity as of and for
the nine months ended February 29, 2008:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
shares Price Life Value
--------- -------- ----------- ---------
Options and warrants
outstanding - May 31, 2007 2,047,022 $ 1.61 $ 6.69 $ 204,200
Granted 859,000 $ 0.69
Exercised -- -- -- --
Forfeited/expired/cancelled -- -- -- --
Options and warrants
outstanding 2,906,222 $ 1.34 $ 6.95 --
========= ====== ====== =========
Outstanding exercisable -
February 29, 2008 1,997,170 $ 1.50 $ 5.92 --
========= ====== ====== =========
The total average grant date fair value of options and warrants during the nine
months ended February 29, 2008 and February 28, 2007 was $0.69 and $1.03,
respectively. The fair value of options vested during the nine months period
ended February 29, 2008 and February 28, 2007 was approximately $225,000 and
$403,000, respectively.
Stock Issued for Services
-------------------------
During the year ended May 31, 2006, the Company issued common stock for certain
services to a public relations company and a technology company. The Company
recorded into additional paid-in capital the fair value of the common stock
issued based on the quoted market price of the Company's common stock at the
date of the respective agreements with the above parties. A contra-equity was
recorded for the above services, which is being amortized into compensation
expense and additional paid-in capital over the requisite service period of the
agreements. During the three months ended February 29, 2008 and February 28,
2007 and nine months ended February 29, 2008 and February 28, 2007 and for the
period October 28, 2003 through February 29, 2008, approximately $30,000,
$67,000, $90,000, $257,000, and $374,000 was recognized as compensation expense
related to these agreements, respectively. As of February 29, 2008, the
unamortized portion of the stock for services was $16,521.
15
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
On July 16, 2007, the Company cancelled 142,857 shares of restricted common
stock, which had previously been issued for services to be rendered by a
consultation company. The expense associated with the original issuance had
previously been amortized as compensation expense over the requisite life of the
agreement. In conjunction with the cancellation, the Company has reduced
compensation expense by $100,000 for the period for non-performance under the
contract, which represented the fair market value of the common stock on the
date of cancellation.
Earnings (Loss) per Common Share
--------------------------------
Basic earnings (loss) per share is computed by dividing the net income or loss
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the weighted average common shares and potentially dilutive common share
equivalents. The effects of potential common stock equivalents are not included
in computations when their effect is antidilutive. Because of the net loss for
the three and nine month periods ended February 29, 2008 and February 28, 2007,
the basic and diluted weighted average shares outstanding are the same since
including the additional shares would have an antidilutive effect on the loss
per share calculation. Common stock option and warrants to purchase 2,906,222
and 2,047,222 shares of common stock were not included in the computation of
basic and diluted weighted average common shares outstanding for the three and
nine months ended February 29, 2008 respectively. Additionally, convertible
preferred stock that could convert into 4,333,333 shares of common stock were
not included in the computation of basic and diluted weighted average common
shares for the above periods as the effect would be antidilutive.
Reclassification - Certain prior period amounts have been reclassified to comply
with current period presentation.
3 - Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS
No. 157, "Fair Value Measurements," which defines fair value, establishes
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of
the information. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and all interim periods within those fiscal years. In
February 2008, the FASB released FASB Staff Position (FSP FAS 157-2 - "Effective
Date of FASB Statement No. 157"), which delays the effective date of SFAS No.
157 for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the consolidated financial
statements on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2007 and interim periods within those financial years. The
implementation of SFAS No. 157 for financial assets and liabilities, effective
January 1, 2008, did not have an impact on the Company's financial position and
results of operations.
16
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits entities to
choose to measure on an item by item basis, specified financial instruments and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are required to be reported in
earnings at each reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007, the provisions of which are required to be
applied prospectively. The Company adopted this statement as of January 1, 2008
and has elected not to apply the fair value option to any of its financial
instruments.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations," which replaces SFAS No. 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way the assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets acquired and
liabilities assuming arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition related costs as incurred. SFAS No. 141R is effective for business
combinations on or after December 15, 2008. The adoption of SFAS No. 141R is not
expected to have a material effect on the Company's financial position, results
of operations, or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements and Amendment of ARB No. 51." SFAS No. 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the controlling interest, changes in a
parent's ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The adoption of SFAS No. 160 is not currently expected to
have a material effect on the Company's financial position, results of
operations, or cash flows.
17
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
required enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company is currently evaluating the impact of adoption of SFAS
No. 161 on its consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which provides
guidance to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No. 165 also requires entities to
disclose the date through which subsequent events were evaluated, as well as the
rationale for why that date was selected. SFAS Mo. 165 is effective for interim
and annual periods ending after June 15, 2009. SFAS No. 165 is effective for the
Company during its interim period ending August 31, 2009. The Company does not
believe the adoption of SFAS No. 165 will have a material effect on its
financial condition, results of operations, and disclosures.
In June 2009, the FASB issued SFAS No. 166 "Accounting for Transfers of
Financial Assets--an amendment of FASB Statement No. 140" ("SFAS 166"). SFAS 166
improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. SFAS 166 is effective as
of the beginning of each reporting entity's first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter. The
Company is evaluating the impact the adoption of SFAS 166 will have on its
financial statements.
In June 2009, the FASB issued SFAS No. 167 "Amendments to FASB Interpretation
No. 46(R)" ("SFAS 167"). SFAS 167 improves financial reporting by enterprises
involved with variable interest entities and to address (1) the effects on
certain provisions of FASB Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities", as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166 and (2) constituent
concerns about the application of certain key provisions of Interpretation
46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about an
enterprise's involvement in a variable interest entity. SFAS 167 is effective as
of the beginning of each reporting entity's first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. The
Company is evaluating the impact the adoption of SFAS 167 will have on its
financial statements.
18
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
In June 2009, the FASB issued SFAS No. 168 "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles--a
replacement of FASB Statement No. 162". The FASB Accounting Standards
Codification ("Codification") will be the single source of authoritative
nongovernmental U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective
for interim and annual periods ending after September 15, 2009. All existing
accounting standards are superseded as described in SFAS 168. All other
accounting literature not included in the Codification is nonauthoritative. The
Codification is not expected to have a significant impact on the Company's
financial statements.
Other recent accounting pronouncements issued by FASB (including EITF), the
AICPA, and the SEC did not or are not believed by management to have a material
impact on the Company's present or future financial statements.
4 - Acquisitions - On July 18, 2006, CytoDyn, Inc. entered into an acquisition
agreement with UTEK Corporation to purchase all 1,000 issued and outstanding
shares of Advanced Influenza Technologies, Inc. (AITI), a Florida Corporation,
in exchange for 2,000,000 unregistered restricted common shares of CytoDyn, Inc.
stock.
The transaction was accounted for as an asset purchase and not an acquisition of
a business as AITI had no employees, operations, or customers, and was
essentially a shell corporation that was incorporated to consummate the
purchase. Pursuant to the agreement, the Company acquired $512,200 in cash and a
prepaid sponsored research project of $162,800 from the University of
Massachusetts to further the technology associated with certain acquired
licenses. The $162,800 is being amortized into research and development expense
as the services are provided. The Company valued the assets acquired based on
the consideration received rather than the fair market value of the shares
issued as the Company believes this was more indicative of the value of the
assets acquired. In addition to the cash and the prepaid sponsored research
project, the Company acquired the worldwide nonexclusive and exclusive license
agreements from the University of Massachusetts for certain technologies. The
license agreements were recorded as research and development expense as the
patent rights or license agreements are being used in a particular research
project and have no alternative future use outside of this project. Including
the license agreements, a total of $259,399 of in-process research and
development was acquired related to the acquisition, which is included as a
component of research and development expense for the period ended May 31, 2007.
The license agreement grants the Company the exclusive right to develop and
commercialize the licensed products associated with certain existing patents.
19
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 4.0% royalties on net sales of the licensed
products.
AITI agreed to fund a two-year ($325,600) unrestricted project ($162,800 per
year) under the Sponsored Research Agreement, with the primary objective during
the first year to conduct lab work to provide well documented research studies.
If after one year the desired outcome is not achieved, the agreement can be
cancelled and the second year's payment is not required. Included in the
consolidated statements of operations is $162,800 of amortization expense for
the period ended May 31, 2007 as all services related to the initial project
were completed. The Company did not make the second payment and, consequently,
as of February 29, 2008, the Company has no right to the above license
agreement. Additionally, the milestone fee payable and royalties discussed above
are no longer in force as of February 29, 2008. Corporate charter revoked in
Florida.
On January 30, 2007, CytoDyn, Inc. entered into an acquisition agreement with
UTEK Corporation, to acquire 100% of the outstanding stock of Advanced Genetic
Technologies, Inc. (AGTI), a Florida Corporation, in exchange for 100,000
preferred no par value stock convertible into $1,300,000 worth of common
unregistered restricted shares of CytoDyn, Inc. stock. The option to convert is
any time after twelve (12) months and before thirty six (36) months from the
date of closing of the agreement. The conversion option has a floor price of
$.30 per share, which limits the maximum number of shares that the Company may
issue upon conversion to 4,333,333 shares of common stock. There was no
derivative liability or beneficial conversion feature associated with the
conversion option.
AGTI holds the worldwide exclusive and nonexclusive license agreements from the
CBR Institute for Biomedical Research affiliated with Harvard Medical School for
certain biological materials.
The term of the licensing agreement is until the later of 20 years or the date
the last patent expires that is owned or controlled by the Licensee.
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 2.0% royalties of net sales of the licensed
products up to $200 million and 3.0% royalties of net sales in excess of $200
million. In the case of a sublicense, the University would get 25% of
non-royalty sublicense income.
The transaction was accounted for as an asset purchase and not an acquisition of
a business as AGTI had no employees, operations, or customers, and was
essentially a shell corporation that was incorporated to consummate the
purchase. Pursuant to the agreement, the Company acquired $100,000 in cash and
seven years of prepaid license fees to the Center for Biological Research at
20
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
Harvard Medical School. $52,500 was recorded as prepaid license fees and $15,000
was expensed as research and development. The Company valued the assets acquired
based on the consideration received rather than the fair market value of the
shares issued as the Company believes this was more indicative of the value of
the assets acquired. In addition to the cash and the prepaid license fees, the
Company acquired the worldwide nonexclusive and exclusive license agreements
from the Center for Biological Research at Harvard Medical School for certain
biological materials. The license agreement grants the Company the exclusive
right to develop and commercialize the licensed products associated with certain
biological materials.
5 - Convertible Notes - During the year ended May 31, 2006, the Company issued
convertible promissory notes with 407,600 detachable warrants to purchase common
stock to individuals in exchange for proceeds totaling $509,500. As of February
29, 2008, all of the convertible notes were converted into common stock. The
original issue discount and beneficial conversion option were recorded as a
discount to the convertible notes, and an increase in additional paid-in
capital, respectively. For the three and nine month periods February 29, 2008
and February 28, 2007, the Company amortized approximately $0, $0, $0, and
$48,000 of the discounts, which was included as a component of interest expense
for the periods ended February 29, 2008 and February 28, 2007, respectively.
From October 28, 2003 to February 29, 2008, the Company amortized approximately
$509,000 of the discount.
During the year ended May 31, 2007, the Company issued convertible notes with
74,000 detachable common stock warrants to purchase common stock in exchange for
proceeds of $92,500. The notes bear interest at 5.0% per annum. Principal and
accrued interest are payable in any combination of cash and common stock at the
option of the Company. The Company can repay principal and accrued interest with
common stock at the conversion price of $1.25. As of February 29, 2008, $77,500
of the $92,500 in convertible notes were converted into common stock. The
warrants to purchase common stock which accompanied the convertible promissory
notes are exercisable at $2.50 per share, vest immediately, and expire in
October 2010. Additionally, the Company recorded an original issue discount
based on the fair value of the warrants. To recognize the original issue
discount, the Company discounted the notes and increased additional paid-in
capital by $92,500. The Company did not record the intrinsic value for
conversion into the Company's common stock, as the discount was limited to the
debt proceeds of $92,500, which was fully discounted by the fair value of the
warrants. The discount was amortized over the life of the debt. During the three
and nine month periods ended February 29, 2008 and February 28, 2007, the
Company amortized approximately $0, $0, $4,000, and $88,000 of this discount,
respectively, which is included as a component of interest expense. From October
28, 2003 to February 29, 2008, the Company amortized approximately $92,000 of
discounts related to convertible notes payable.
21
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
During the nine months ended February 29, 2008, the Company issued two
convertible notes each in the amount of $37,500. As of February 29, 2008,
$50,000 of the proceeds were received and $25,000 was recorded as a subscription
receivable. As of February 29, 2008, $75,000 of the convertible notes were
converted into common stock. The notes are due in 12 months and bear interest at
14.0%. At the commitment date, the Company recorded a beneficial conversion
feature of $50,000, which represented the intrinsic value of the conversion
option, and was limited to the proceeds received. The conversion price is fixed
at $.10. The beneficial conversion feature that will be recorded as a discount
to the convertible notes and an increase in additional paid in capital. For the
three and nine months ended February 29, 2008 the Company amortized into
interest expense approximately $50,000 of the discount.
During the nine months ended February 29, 2008, the Company also issued a
convertible promissory note with 9,000 detachable warrants to purchase common
stock at an exercise price of $.30 in exchange for proceeds totaling $9,000. The
note bears interest at 14.0%. The warrants to purchase common stock vest
immediately and expire in 2011. The Company valued the warrants utilizing the
Black-Scholes option valuation model, and the resulting fair value was recorded
as a debt discount of $3,662, which will be amortized of the term of the debt.
As of February 29, 2008, the face amount related to convertible notes was
$24,000.
6 - Promissory Notes - During the year ended May 31, 2007, the Company issued
$125,000 in unsecured promissory notes to third parties. The principal and
interest on the notes are due in six months and pay interest at 14.0% per annum.
During the nine months ended February 29, 2008 the Company issued an additional
$170,000 in promissory notes to third parties. The notes are all due in six
months and pay interest of 14.0% per annum. The parties have agreed to extend
the due date another six months while continuing to accrue interest. As of
February 29, 2008, approximately $29,000 of interest has been accrued (See Note
9 for subsequent events).
7 - Commitments and Contingencies - In 2001, the Company sued its previous
licensee, Amerimmune Pharmaceuticals, Inc. ("API"), and its directors. The
Company was ordered by the court to pay $150,000 in attorney fees to the
insurance company of API. and recorded a contingent liability for the amount.
Prior to issuance of the financial statements, the Company appealed the Court's
decision and, in December 2007, the Court's decision was reversed based on the
appeal. Based on these facts and circumstances, the Company has reversed the
recording of the contingent liability as of August 31, 2007.
Related to certain litigation whereby the Company was both a defendant and a
plaintiff, the Company entered into a settlement agreement in December 2008. As
part of the settlement agreement, the Company agreed to pay $50,000 in January
2009 and $25,000 on or before December 31, 2009 to the plaintiff. The Company
paid the $50,000 in January 2009. The remaining $25,000 is unsecured and accrues
interest at 10.0% per annum. The Company accrued $75,000 related to this
settlement agreement as of February 29, 2008 for the past litigation. The
associated expense for the nine month period ended February 29, 2008 is included
in legal fees in the condensed statement of operations.
22
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
8 - Related Party Transactions - As of February 29, 2008, the Company owed two
officers promissory notes totaling of $72,574. The notes are due on demand and
carry no interest rate. Management plans to repay the notes through cash
payments, issuance of the Company's common stock, or a combination thereof. The
balance due of $56,075 remained unpaid at February 29, 2008 and is included in
the accompanying consolidated financial statements as "indebtedness to related
parties."
A director provided legal services to the Company over the past several years.
As of February 29, 2008, the Company owed the director $43,985 and it is
included in the accompanying consolidated financial statements as "indebtedness
to related parties" as of November 30, 2007. As of February 29, 2008, no
arrangements had been made for the Company to repay the balance of this
obligation. The Company anticipates that the director will continue to provide
legal services in the future.
A former director of the Company is owed $337,341 related to certain clinical
research data that was obtained by the former director and later purchased by
the Company. As of February 29, 2008, the liability has no payment terms and no
stated interest rate, and is included in the accompanying consolidated financial
statements as "indebtedness to related parties."
Patents
The Company has a License Agreement with Allen D. Allen, the Company's president
that gives the exclusive right to develop his technology worldwide. This
includes issued U.S. patents 5,424,066; 5,651,970 and 6,534,057, foreign
counterparts, as well as European Patents No. 94 912826.8 and 04101437.4. Hong
Kong, Australian and Canadian patents have been obtained as well. The Company
estimates the costs associated with these issued patents to be approximately
$65,000 per year. The Company may file additional patents during the current
fiscal year if the research and development efforts warrant them, but the
Company does not have any such potential patents identified at this time. The
license acquired gives the Company the right to develop Mr. Allen's patents
worldwide.
9 - Subsequent Events - In April 2008, the Company's Board of Directors approved
a Private Placement Memorandum to sell up to 6 million shares of common stock,
no par value, a company offering. This offering was only available to accredited
investors as defined under the 1933 Securities Act ("The Act"). The offering
commenced on or about May 1, 2008 and ended June 15, 2009, the Company has sold
3,876,508 restricted common shares and 1,938,254 warrants for proceeds totaling
$1,938,254. These securities were sold pursuant to an exemption from
registration under Regulation D under The Act and will not be registered with
the Securities and Exchange Commission. The warrants have an exercise price of
$1.00 per share, immediate vesting rights, and expire in April 2013.
Subsequent to February 29, 2008, the Company granted common stock options to
employees, directors, and consultants at exercise prices ranging from $.34 to
$.72. The options vest between one and three years and expire in 2015.
Subsequent to February 29, 2008, the Company paid approximately $600,000 in cash
for the manufacturing of our product, Cytolin(R), to be used in human clinical
trials.
23
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2008
(UNAUDITED)
Subsequent to February 29, 2008, the Company amended the promissory note
agreements relating to $295,000 in unsecured promissory notes. The original
terms had no conversion feature, a stated interest rat e of 14% per annum, and
had an original maturity of six months. Related to this amendment, the holders
of the promissory notes were given the right to convert the face amount of the
notes and accrued interest into shares of common stock at a fixed conversion
price of $0.45 per share. At the commitment date, the date the notes were
amended, the Company incurred a beneficial conversion feature of $50,000. The
amendment to the unsecured promissory notes, limited the amount of promissory
notes and accrued interest that could be converted to $225,000, effectively
capping the number of common shares that could be converted to 500,000. As of
the date of this filing, $146,456 of promissory notes converted into 325,459
shares of common stock.
Subsequent to February 29, 2008, the Company entered into an agreement with
University of Massachusetts General Hospital to provide financial support for
the purpose of conducting an ex-vivo study of the Company's lead drug, Cytolin.
This study is intended as a prelude to an in-vivo stuffy. Costs are estimated at
approximately $316,000 of which 50%, or $158,000, was paid to Massachusetts
General Hospital by CytoDyn.
Subsequent to February 29, 2008 the Company received a request from a
shareholder to convert 100,000 preferred shares into 2,356,142 restricted common
shares pursuant to an Agreement dated January 2007. The common shares were to be
converted at the average price per share over the last 10 days of trading prior
to the conversion date which calculated to $.62 per share. The Agreement
contained a floor price of $.30 per share, which effectively limited the maximum
number of the common shares issued to an amount that was less than the Company's
authorized shares. These shares have not been registered with the SEC and are
subject to the restrictions under Rule 144 of the Securities Act.
On October 26, 2009 the Company offered subscription agreements to sell
1,000,000 shares of unregistered common stock pursuant to Rule 144 of the U.S.
Securities and Exchange Commission Act of 1933 at $.50 per share. Related to the
subscription agreements, the Company sold 500,000 common shares to a consulting
company at $.50 per share for $250,000 in cash. On November 3, 2009 the company
entered into a twelve month agreement with the above consulting company for the
purpose of widening their common stock distribution. This agreement calls for a
cash payment of $30,000 as well as the issuance of common stock with a value of
$90,000. This stock is to be restricted under Rule 144 of the US Securities and
Exchange Commission's 1933 Act.
Subsequent to February 28,2009, the company amended its Articles of
Incorporation for the purpose of authorizing the issuance of 400,000 shares of
Preferred Stock designated as Series B Convertible Preferred Stock (Series B).
Dividends accrue at the rate of $.25 per share per annum from the date of
issuance and can be paid with cash or issuance of restricted common stock, at
the corporation's discretion. One share of Series B can be converted into ten
shares of restricted common stock, adjusted for reverse mergers or stock splits.
The Series B has a fixed conversion price of $.50 per share. Any beneficial
conversion feature at the commitment date would be treated as a constructive
dividend to the Series B investors. In the event of liquidation, holders of
preferred shares are to receive an amount per share equal to $5.00 plus any
accrued and unpaid dividends. As of November 10, 2009 the company has issued
103,000 shares of Series B stock.
In November 2009, the Company purchased 1,200,000 common shares at $.28 per
share from an unrelated third-party. The Company paid $336,000 in cash for the
shares.
24
Part I - Item 2. Management's discussion and analysis of financial condition
----------------------------------------------------------------------------
and results of operations.
--------------------------
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the related notes thereto
included in this Quarterly Report on Form 10-Q. The discussion and analysis
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (Exchange Act). These forward-looking statements are
based on our current expectations and entail various risks and uncertainties.
Our actual results could differ materially from those projected in the
forward-looking statements as a result of various factors, including those set
forth in, "Risk Factors" of the Company's May 31, 2007 Form 10-K.
Plan of Operations
CytoDyn, Inc. discovered and is developing a class of therapeutic monoclonal
antibodies to address significant unmet medical needs in the area of HIV/AIDS.
CytoDyn, Inc. has sponsored a research grant to Massachusetts General Hospital
in Boston, Massachusetts, to design and sponsor clinical trials in addition to
conducting those trials on our lead product Cytolin(R), an immune therapy
intended to treat early HIV infection. Although CytoDyn, Inc. will retain all of
its intellectual property rights and will have access to the study data, the
data will be owned by Massachusetts General Hospital (MGH). A chief benefit for
CytoDyn, Inc. is that the Company will not have to deal directly with the FDA..
Moreover, the high costs and long delays associated with the FDA's oversight of
clinical trials may be significantly reduced in the case of clinical trials
designed and sponsored by a leading teaching hospital.
The FDA licenses medicinal products for sale in interstate commerce under a
particular label. Only if they receive data supporting that label and only if
some company asks them to do so. CytoDyn may or may not be the company that
requests a license to market Cytolin(R) under a label. Under our current
thinking we hope to enter into a strategic alliance after the next two studies
under which a larger pharmaceutical marketing company will seek a license from
the FDA to market Cytolin(R) and under a license from us to use our intellectual
property in that manner. However there is no guarantee that we will wind up
pursuing this strategy.
25
Projected costs to complete our research and development as a pre-requisite for
co-development and/or out-licensing.
We negotiated with a contract manufacturer Vista Biologicals Corporation to
manufacture GMP product for the next clinical trial of Cytolin(R) at a cost of
$565,000, all of which was paid by September 2008. The initial clinical trial to
be conducted by Massachusetts General Hospital will cost the Company
approximately $340,000 of which $158,000 was paid in September 2009.
Timing and anticipated completion dates for research and development.
We estimate that the initial clinical trial to be conducted by Massachusetts
General Hospital will take one year to complete. The study enrollment will begin
once the Institutional Review Board approvals Dr. Rosenberg's protocol. We
cannot estimate when enrollment will begin as of November 2009. Subsequently,
the CytoDyn, Inc. may fund a follow- up clinical trial at Massachusetts General
Hospital using venture capital or, at that time, may enter into a strategic
alliance for completion of research and the subsequent marketing of Cytolin(R)
if approved. In the former case, CytoDyn, Inc. will need to provide a new batch
of humanized product, which we estimate will cost on the order of another half
million dollars. The company is conducting a private placement of preferred
shares to secure the capital needed for the follow-up study. We cannot estimate
what the hospital's research grant will be at this time until the hospital has
provided those estimates.
There are many factors that can delay clinical trial benchmarks. However, the
Company hopes to receive the results and analysis of the upcoming clinical trial
during 2010.
================================================================================
Benchmark Some Factors That Can Cause Delays+
================================================================================
Manufacturing Delays
Documentation Delays
Patient Outreach IRB Delays
Delays in Regulatory Review or Approval
Force Majeure
================================================================================
Fill and Finish Delays
Dose First Patient Slower Than Expected Patient Enrollment
Force Majeure
================================================================================
Slower Than Expected Patient Enrollment
Lock Database - Begin Clinical Hold
Statistical Analysis Laboratory Error
Protocol Deviation
Force Majeure
================================================================================
Additional Stratification Required
Release Final Report Computer Hardware or Software Malfunction
Force Majeure
================================================================================
+There are other factors, known and unknown, such as unexpected financial
hardships, that can cause delays.
================================================================================
Clinical Trials Process - Described below is the traditional drug development
track. Under the Company's current business plan, much of this initial work will
be sponsored and conducted by the MGH, eliminating the need for CytoDyn to deal
directly with the FDA. Traditionally, the Company would enter into a strategic
alliance with a larger pharmaceutical company after development has progressed
to a certain point. While there can be no guarantee that this will occur in our
case, if it does, then our larger partner would usually be responsible for
dealing with the FDA.
26
Phase I
Phase I includes the initial introduction of an investigational new drug or
biologic into humans. These studies are closely monitored and may be conducted
in patients, but are usually conducted in a small number of healthy volunteer
subjects. These studies are designed to determine the metabolic and
pharmacologic actions of the investigational product in humans, the side effects
associated with increasing doses, and, if possible, to gain early evidence on
effectiveness. During Phase I, sufficient information about the investigational
product's pharmacokinetics and pharmacological effects are obtained to permit
the design of well-controlled, scientifically valid, Phase II studies.
Phase II
Phase II includes the early controlled clinical studies conducted to obtain some
preliminary data on the effectiveness of the drug for a particular indication or
indications in patients with the disease or condition. This phase of testing
also helps determine the common short-term side effects and risks associated
with the drug. Phase II studies are typically well-controlled, closely
monitored, and conducted in a relatively small number of patients, usually
involving several hundred people. Depending upon need, a new drug may be
licensed for interstate marketing after Phase II if it is a "pivotal" study.
Phase III
Phase III studies are expanded controlled clinical studies. They are performed
after preliminary evidence suggesting effectiveness of the drug has been
obtained in Phase II, and are intended to gather the additional information
about effectiveness and safety that is needed to evaluate the overall
benefit/risk relationship of the drug. Phase III studies also provide an
adequate basis for extrapolating the results to the general population and
transmitting that information in the physician labeling. Phase III studies
usually include several hundred to several thousand people.
Patents
We have a License Agreement with Allen D. Allen, our president that gives us the
exclusive right to develop his technology worldwide. This includes issued U.S.
patents 5,424,066; 5,651,970 and 6,534,057, foreign counterparts, as well as
European Patents No. 94 912826.8 and 04101437.4. Hong Kong, Australian and
Canadian patents have been obtained as well. We estimate the costs associated
with these issued patents to be approximately $65,000 per year. We may file
additional patents during the current fiscal year if our research and
development efforts warrant them, but we do not have any such potential patents
identified at this time. The license acquired gives us the right to develop Mr.
Allen's patents worldwide.
Going Concern
We will require additional funding in order to continue with research and
development efforts.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company is currently in the development stage with
losses for all periods presented. As of October 21, 2009 these factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to obtain additional operating
capital, complete development of its medical treatments, obtain FDA approval,
outsource manufacturing of the treatments, and ultimately to attain
profitability. The Company intends to seek additional funding through equity
offerings or licensing agreements to fund its business plan. There is no
assurance that the Company will be successful in these endeavors.
27
Results of Operations
---------------------
Results of Operations for the three months ended February 29, 2008 and February
28, 2007 are as follows:
For the three months ended February 29, 2008 and 2007 the Company had no
activities that produced revenues from operations.
For the three months ended February 29, 2008, the Company had a net loss of
($220,107) compared to a net loss of $(559,330) for the corresponding period in
2007. For the three months ended February 29, 2008, the Company incurred
operating expenses of $154,161 consisting primarily of stock-based compensation,
legal fees, salaries, and accounting fees.
For the three months ended February 28, 2007, the Company had a net loss of
$(559,330). In the same period, the Company incurred operating expenses of
$551,734 consisting primarily of research and development expense, stock-based
compensation, legal fees and salaries.
The decrease in operating expenses of $397,573 from the three month period
February 29, 2008 compared to the corresponding period related primarily to a
decrease in stock based compensation, legal fees and depreciation and
amortization expenses.
Results of Operations for the nine months ended February 29, 2008 and February
28, 2007 are as follows:
For the nine months ended February 29, 2008 and February 28, 2007, the Company
had no activities that produced revenues from its operations.
For the nine months ended February 29, 2008, the Company had a net loss of
$(704,834) compared to a net loss of $(2,074,916) for the corresponding period
in 2007. For the nine months ended February 29, 2008 the Company incurred
operating expenses of $626,047 consisting primarily of stock based compensation,
legal fees, salaries, and accounting fees. For the nine months ended February
28, 2007, the Company incurred operating expenses of $1,935,604 consisting
primarily of research and development expenses, stock based compensation, legal
fees and salaries. The decrease in operating expenses of $1,309,557 from the
nine months ended February 29, 2008, compared to the corresponding period
related primarily to a decrease in research and development expenses,
amortization expense, stock based compensation, and the cancellation of stock
previously issued for services.
Liquidity and Capital Resources
As shown in the accompanying Financial Statements, for the nine months ended
February 29, 2008 and February 28, 2007, and since October 28, 2003 through
February 29, 2008 the Company has had net losses of $704,834 and $2,074,916 and
$6,483,975, respectively. As of February 29, 2008, the Company has not emerged
from the development stage. In view of these matters, the Company's ability to
continue as a going concern is dependent upon the Company's ability to begin
operations and to achieve a level of profitability. Since inception, the Company
has financed its activities principally from the sale of public equity
securities and proceeds from notes payable. The Company intends on financing its
future development activities and its working capital needs largely from the
sale of public equity securities with some additional funding from other
traditional financing sources.
28
As previously mentioned, since October 28, 2003, we have financed our operations
largely from the sale of common stock and proceeds from notes payable. From
inception through February 29, 2008 we raised cash of approximately $675,550
(net of offering costs) through private placements of common stock financings
and $1,505,849 through the issuance notes payable.
Since October 28, 2003 through February 29, 2008, we have incurred $797,340 of
research and development costs and $5,789,461 in operating expenses.
We have incurred significant net losses and negative cash flows from operations
since our inception. As of February 29, 2008, we had an accumulated deficit of
$8,085,887 and a working capital deficit of $1,051,119.
We anticipate that cash used in product development and operations, especially
in the marketing, production and sale of our products will increase
significantly in the future.
Part I - Item 3. Quantitative and Qualitative Disclosures about Market Risk
---------------------------------------------------------------------------
Not applicable
Item 4T. Controls and Procedures
--------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d015(e) under the Exchange Act) as of the three
and nine month period ending February 29, 2008 covered by this quarterly report
on Form 10Q. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures were not effective as required
under Rules 13a015(e) and 15d-15(e) under the Exchange Act. This conclusion by
the Company's Chief Executive Officer and Chief Financial Officer does not
relate to reporting periods after February 29, 2008.
Changes in Control Over Financial Reporting
-------------------------------------------
No change in the Company's internal control over financial reporting occurred
during the quarter ended February 29, 2008, that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - Item 1. Legal Proceedings
-----------------------------------
Maya LLC v. CytoDyn, et al Superior Court of Los Angeles Glendale Case #EC041590
--------------------------------------------------------------------------------
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
-------------------------------------------------------------------
Pharmaceuticals, Inc. v. Biovest International, Inc., Commonwealth of
---------------------------------------------------------------------
Massachusetts, Superior Court, Worcester County, Civil Action No. 05-0452-C.
----------------------------------------------------------------------------
The company and some of its officers and directors have entered into a
Settlement Agreement with the all parties involved in the above legal matters
including CytoDyn, Inc. Allen D. Allen, Corinne Allen, Maya LLC, AIDS Research
LLC and Rex Lewis. All of the cases have been settled pursuant to this
agreement. The liability incurred by the company is $50,000 payment to Maya LLC
by January 14, 2009 and an additional $25,000 by January 14, 2010. We have
dismissed all claims to the old FDA IND and the old cell bank as defined in the
agreement and Rex Lewis and his parties agree to dismiss all claims against the
company, any of its predecessors and any of its officers and directors. Related
to the above settlement the Company accrued $75,000 as of February 29, 2008.
29
Part II - Item 2. Unregistered Sales of Equity and Use of Proceeds
------------------------------------------------------------------
In April 2008 our Board of Directors approved a Private Placement Memorandum to
sell up to 6 million shares of common stock, no par value, through a Placement
Agent, a company offering. This offering was only available to accredited
investors as defined under the 1933 Securities Act ("The Act"). The offering
commenced on or about April 4, 2008 and ended June 2009. The company sold
3,876,509 restricted common shares and 1,938,254 warrants. These securities were
sold pursuant to an exemption from registration under Regulation D under "The
Act" and will not be registered with the Securities and Exchange Commission.
The Company used the proceeds to manufacture our primary product Cytolin(R) for
use in clinical trials. The remaining amount of the proceeds will be used for
company operating expenses, patent fees and legal fees.
Item 3. Defaults Upon Senior Securities
---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
None
Item 5. Other Information
-------------------------
None
Item 6. Exhibits and Reports on Form 8-K.
-----------------------------------------
(a) Exhibits:
1. 31.1: Certification by the CEO
2. 31.2: Certification by the CFO
3. 32.1: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO
4. 32.2: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO
SIGNATURES CYTODYN, INC.
Registrant)
DATE: December 1, 2009 BY: /s/ Allen D. Allen
---------------- -----------------------------
Allen D. Allen
President and CEO
30