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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended May 31, 2012
or
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-49908
CYTODYN INC.
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of
incorporation or organization)
110 Crenshaw Lake Road, Lutz, Florida
(Address of principal executive offices)
75-3056237
(I.R.S. Employer
Identification No.)
33548
(Zip Code)
Registrant’s Telephone Number, including area code: (813) 527-6969
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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. x Yes ¨ No
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange
Act.
Large accelerated filer ¨
Non-accelerated filer
¨
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 Act). ¨ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter: $29,890,680 (as of November 30, 2011).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of
July 31, 2012, the registrant had 29,211,509 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of Proxy Statement for the 2012 Annual Meeting of Shareholders (“Proxy Statement”)
Parts Into Which
Incorporated
Part III
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CYTODYN INC
FORM 10-K FOR THE YEAR ENDED MAY 31, 2012
Table of Contents
PART I
ITEM 1.
BUSINESS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY , RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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THROUGHOUT THIS FILING, WE MAKE FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATE,”
“BELIEVE,” “EXPECT,” “INTEND,” “PREDICT,” “PLAN,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “CONTINUE,” “COULD,”
“MAY,” AND SIMILAR TERMS AND EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE
CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOWS. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT
VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES
IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE MARKET PENETRATION AND ATTRACT
CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED,
ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN
THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE
ACTUAL RESULTS OR DEVELOPMENTS.
Item 1.
Business.
Overview / Corporate History
PART I
CytoDyn Inc. (the “Company”), is a Colorado corporation, with its principal business office at 110 Crenshaw Lake Road, Lutz, Florida
33548; telephone: (813) 527-6969, facsimile: (813) 527-6970, and website address: www.cytodyn.com. We are a development stage
biotechnology company (concept company) focused on discovering and developing a class of therapeutic monoclonal antibodies to treat
Human Immunodeficiency Virus (“HIV”) infection. In addition, we formed a wholly owned subsidiary, CytoDyn Veterinary Medicine LLC
(“CVM”), which will explore the possible application of our existing proprietary monoclonal antibody technology to the treatment of Feline
Immunodeficiency Virus, a retroviral infection in cats (“FIV”).
In October 2003, the Company (under its previous name RexRay Corporation) entered into an Acquisition Agreement with CytoDyn of
New Mexico, Inc. Pursuant to the acquisition agreement, we acquired assets related to our leading drug candidate, Cytolin , including the
assignment of the patent license agreement dated July 1, 1994 between CytoDyn of New Mexico, Inc. and Allen D. Allen covering three
United States patents along with foreign counterpart patents which describe a method for treating HIV disease with the use of monoclonal
antibodies. This includes issued U.S. Patent Nos. 5,424,066; 5,651,970 and 6,534,057, as well as European Patent Nos. 0690725 and
1438970. In addition, Hong Kong Patent No. 1067958,
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Australian Patent Nos. 684074 and 2003203742, Canadian Patent No. 2156495, Austrian Patent Nos. 408418, 267019, and 1438970,
Belgian Patent No. 1438970, Swiss Patent Nos. 1438970 and 0690725, German Patent Nos. 69433789 and 69435142.3, Danish Patent
No. 1438970, Spanish Patent Nos. 2219647, 2314341, 04101437.4, and 94912826.8, French Patent Nos. 1438970 and 0690725, Great
Britain Patent Nos. 1438970 and 069725, Greece Patent No. 3067384, Iceland Patent No. 1438970, Italian Patent Nos. 1438970 and
0690725, Luxenbourg Patent No. 1438970, Monaco Patent No. 1438970, Netherlands Patent Nos. 1438970 and 0690725, Portuguese Patent
Nos. 690725 and 1438970, and Swedish Patent Nos. 0410437.4 and 94912826.8 have been obtained as well. We also acquired the federally
registered trademarks, CYTODYN (U.S. Registration No. 2095498) and CYTOLIN (U.S. Registration No. 2095497), and a related design
mark (U.S. Registration No. 2662777. The license acquired gives the Company the worldwide, exclusive right to develop, market and sell
compounds disclosed by the patent claims, practice methods taught by the patent claims, and exploit specified technology related to the patents.
The term of the license agreement is for the life of the patents of which the first will expire in 2013. The original expiration dates on the issued
U.S. Patent Nos. 5,424,066; 5,651,970 and 6,534,057 are 2013, 2014 and 2013, respectively. The original expiration dates for the foreign
patents listed above are in 2013 or 2014, if the required annuity fee payments are paid by September 21, 2012. The Company’s Cytolin-related
patents referenced above are for a murine (mouse) version of the drug. The Company’s research on Cytolin to date has utilized the current
murine version of the drug. However, on September 23, 2011, the Company filed a provisional patent application (Serial No. 61/534,942) in
the United States for its humanized version of Cytolin , a monoclonal antibody for the treatment of HIV Infection.
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The Company is also exploring other antibodies as potential therapeutics for FIV. On June 17, 2011, the Company filed a provisional
patent application in the United States (Serial No. 61/498,029) for the use of these antibodies as well as selected small molecule antagonists
and agonists for the treatment of FIV. On June 15, 2012, the Company filed an international patent application (Serial No.
PCT/US2012/042693) claiming priority to this provisional patent application. On August 10, 2011, the Company filed an application for
registration of the trademark CYTOFELINE, intended for use in conjunction with veterinary preparations for the treatment of FIV (U.S. App.
Ser. No. 85393956). In February 2012, the Company filed foreign trademark applications claiming priority to the US application for
CYTOFELINE, including Australian App. No. 1473043, Canadian App. No. 1563313, European CTM App. No. 010625192, Indian App.
No. 2279431, Japan App. No. 2012-008009, Mexican App. No. 1247597, and a Chinese App. No. 10475960. Thus far, the Company has
received a Certificate of Trademark Registration from Japan No. 5488875, with an effective registration date of April 20, 2012, and a
Certificate of Trademark Registration from the European Union No. 010625192 with an effective registration date of June 11, 2012.
Additionally, the Company’s Australian App. No. 1473043 was registered on May 31, 2012.
Research History of Cytolin Compound
Cytolin is part of a class of drugs called monoclonal antibodies. It targets a normal cell molecule called CD11a, part of the
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heterodimer that makes up the cell adhesion molecule lymphocyte function cell associated antigen (“LFA-1”). Published reports have
suggested that blocking or engaging CD11a might somehow limit or prevent HIV infection of CD4 cells and monocytes. In 1993, six HIV-
infected patients were treated with murine Cytolin . Blood and skin tests of these patients suggested that the antibody might be producing
improvements in the
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immune function of each patient. Based on the results of this pilot study, a compassionate use trial was initiated. In this study a relatively small
number of physicians in the United States administered Cytolin to their HIV-infected patients over two years. As results from this initial use
became available, other physicians obtained and administered Cytolin to their patients as well. Four of the doctors using Cytolin allowed the
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Company’s predecessor to send in an independent Institutional Review Board to inspect the medical records of approximately 200 patients
treated with Cytolin once or twice a month over 18 months. Data were recorded and summarized and formed part of the material presented to
the U.S. Food & Drug Administration (the “FDA”) as an early indication of the safety and potential efficacy of Cytolin .
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In 1996, the FDA approved a drug master file, designated BB-DMF#6836, for the manufacture of murine Cytolin at Vista
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Biologicals Corporation. CytoDyn of New Mexico, Inc. (a predecessor to the Company) and Vista Biologicals Corporation worked
cooperatively to develop the drug master file. In accordance with the practice of the FDA, the drug master file was issued to and became the
property of the entity with the capacity to manufacture the drug, in this case Vista Biologicals Corporation. By contract with Vista Biologicals
Corporation, CytoDyn of New Mexico, Inc. had the exclusive right to reference the drug master file, that is, to authorize Vista Biologicals
Corporation to manufacture Cytolin in accordance with the terms of the drug master file.
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In 1996, the FDA also designated our investigational new drug application for murine Cytolin as BB-IND #6845, and
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subsequently approved a clinical trial. In 2002, Symbion Research International, a contract research organization, completed a Phase I a/b
clinical trial of Cytolin (a Phase I trial includes the initial introduction of an investigational new drug or biologic into humans). The trial was
sponsored by Amerimmune, Inc., the previous licensee of CytoDyn of New Mexico, Inc. but Symbion was never paid for its work. As a
result, its work product became Symbion’s. We entered into a buy-sell agreement with Symbion to purchase the Phase Ia study data in 2004.
The Phase Ia study, conducted in 13 subjects suffering from HIV/Acquired Immune Deficiency Syndrome (“AIDS”), found Cytolin to be
safe and well tolerated. The initial safety study supported the safety and tolerability of the drug in these dose groups. Some of the data was
presented as an abstract and poster session, entitled “Phase I Study of Anti-LFA-1 Monoclonal Antibody (Cytolin in Adults with HIV
Infection)” at the 9th Conference on Retroviruses and Opportunistic Infections held in Seattle, Washington on February 24-28 2002 as well as
the 16th International AIDS Conference held August 2006 in Toronto, Canada. The Company then went through a period of years where legal
issues delayed the progress of this treatment.
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To date, only the murine version of Cytolin has been tested in clinical, research and development studies. The Company
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understands that registrational studies will require similar testing and confirmation of activity with its proprietary humanized version of
Cytolin .
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Cytolin - Current Research
Under a Clinical Trial Agreement dated September 28, 2009 and as amended to date (the “Clinical Trial Agreement”), in exchange
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for a research grant by the Company, Massachusetts General Hospital (“MGH”) in Boston, Massachusetts agreed to conduct an ex-vivo study
of murine Cytolin in accordance with a study protocol entitled “An observational study to determine the in-vitro immunologic and virology
activity of Cytolin” (the “Study”). In addition to providing financial support for the Study, the Company agreed to provide MGH with
supplies of Cytolin needed for the Study. Under the Clinical Trial Agreement, Eric S. Rosenberg, M.D. is designated as the Principal
Investigator for the Study.
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Human subjects were recruited for the Study from Dr. Rosenberg’s clinic. The Study enrolled 10 adults with early HIV infection and 10
healthy adults as the control arm, all of whom were required to participate for six months. None of the patients enrolled in the study received
injections of murine Cytolin ; rather they donated blood to allow one to examine the effects of Cytolin when it was added in the test tube to
their peripheral blood mononuclear cells. The Study design and objectives are available to view at the government’s website at
www.clinicaltrials.gov, ID NCT01048372. The public has online access to this federal database, which describes elements of clinical trials and
their status. To review public records for the Study on the government’s website, enter “Cytolin” as the search term (case sensitive).
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The second amendment to the Clinical Trial Agreement provided that our research grant commitment for the Study would total $316,755.
In March 2010, we agreed in a third amendment to the Clinical Trial Agreement to provide an additional $233,815 for the Study to enable the
Principal Investigator to engage additional personnel. In December 2010, we further agreed in a fourth amendment to the Clinical Trial
Agreement to provide an additional $25,000 for the Study. On May 20, 2011, we entered into a fifth amendment of the Clinical Trial
Agreement with The General Hospital Corporation, d/b/a/ MGH to extend the Study enabling MGH Principal Investigator Eric Rosenberg,
M.D., to further explore his initial findings regarding the potential mechanism of action of murine Cytolin to treat HIV-positive adults. Under
the fifth amendment, we agreed to pay MGH the remaining unpaid balance of $291,590 of the total research grant of $865,375 over the six
month period beginning on May 20, 2011 and ending on November 20, 2011. As of May 31, 2012, the final payment in the amount of
approximately $72,898 due to MGH in connection with the Clinical Trial Agreement was past due. The Study was completed subsequent to
May 31, 2012. The Company anticipates that if there is sufficient data to warrant publication Dr. Rosenberg will draft and submit a manuscript
detailing his results. The release of this or any data from the Study is entirely dependent on Dr. Rosenberg.
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The Study was a science-intensive research study and was not intended to function as a registrational study (see “Registrational Clinical
Trials Process” below). The Company contemplates that the Study may be followed by a clinical trial that may or may not be conducted at
MGH or with Dr. Rosenberg as the Principal Investigator. The Company will determine if clinical trials with the humanized version of
Cytolin are warranted based on these and other results from studies with the murine molecule and subsequent confirmation of activity with
the humanized version of Cytolin . There is no assurance that the results of the Study will warrant further clinical trials, or that a strategic
alliance for humanized Cytolin will be available.
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The Clinical Trial Agreement governs the parties’ rights in Study data and the results of the Study (“Study Data and Results”). MGH
retains ownership of all Study Data and Results, and is obligated to provide the Company with a copy of such Study Data and Results. The
Clinical Trial Agreement places limits on the Company’s ability to use Study Data and Results. Specifically, the Company is permitted to use
Study Data and Results that disclose individually identifiable health information only for purposes of the Study or related studies that concern
murine Cytolin or medical conditions / disease area that are the subject of the Study, however, the Company is permitted to use information
that is not identifiable for any research and development purposes. These uses are further limited by the requirements that any such use comply
with applicable law (including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)); and that the use is permitted by
the informed consent form used with subjects in connection with the Study.
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Why Cytolin May Be a Unique Treatment for Early HIV Infection
The particular epitope recognized by murine Cytolin is highly expressed on killer cells called cytotoxic T cells or CTLs. However,
subsequent studies and analysis of the activity of Cytolin has shown that while Cytolin is highly expressed on CTLs, this antibody does not
block CTLs. In addition to being expressed on CTLs, the CD11a protein has also been reported to be present on the surface of the HIV virion,
presumably to assist in the infectious cycle of the virus. This opens the possibility that Cytolin may bind and neutralize HIV, providing a
direct action against the virus in the bloodstream.
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In addition to CTLs, murine Cytolin also recognizes and binds to dendritic cells (DCs). These two types of immune cells are critical to
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the control of viral burden in HIV infected individuals. By binding to these cells, it is also possible that Cytolin may induce an antiviral
activity that may impede infection of new cells and presumably lead to a reduction in viral burden.
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Acquisition of Advanced Genetic Technologies, Inc.
On January 30, 2007, we acquired, from Utek Corp., our subsidiary Advanced Genetic Technologies, Inc., which holds the exclusive
right to develop alternative antibodies that bind to the same cellular target as murine Cytolin . These two monoclonal antibodies were invented
at Harvard University Medical School’s CBR Institute for Biomedical Research. The Company has not used these two antibodies in our
research and development efforts to date but we may use these in future research and development efforts.
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Formation of CytoDyn Veterinary Medicine LLC and Current Research
On May 16, 2011, we formed a wholly owned subsidiary, CVM, which will explore the possible application of feline reactive
monoclonal antibodies for the treatment of the feline immunodeficiency virus (“FIV”). We view the formation of CVM and the exploration of
CD11a-specific monoclonal antibodies to treat FIV as an effort to strategically diversify the use of monoclonal antibody expertise.
On June 17, 2011, the Company filed a provisional patent application in the United States (Serial No. 61/498,029) for the use of certain
antibodies as well as selected small molecule antagonists and agonists for the treatment of FIV. On June 15, 2012, the Company filed an
international patent application (Serial No. PCT/US2012/042693) claiming priority to this provisional patent application. On August 10, 2011,
the Company filed an application for registration of the trademark CYTOFELINE, intended for use in conjunction with veterinary preparations
for the treatment of FIV (U.S. App. Ser. No. 85393956). In February 2012, the Company filed foreign trademark applications claiming
priority to the US application for CYTOFELINE, including Australian App. No. 1473043, Canadian App. No. 1563313, European CTM
App. No. 010625192, Indian App. No. 2279431, Japan App. No. 2012-008009, Mexican App. No. 1247597, and a Chinese App.
No. 10475960. Thus far, the Company has received a
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Certificate of Trademark Registration from Japan No. 5488875, with an effective registration date of April 20, 2012, and a Certificate of
Trademark Registration from the European Union No. 010625192 with an effective registration date of June 11, 2012. Additionally, the
Company’s Australian App. No. 1473043 was registered on May 31, 2012.
On November 16, 2011, the Company and The Scripps Research Institute, a nonprofit institution (“Scripps Research”) entered into a
six-month Research Funding and Option Agreement (the “Scripps Agreement”) that enabled Dr. John H. Elder, Professor in the Department
of Immunology and Microbial Science at Scripps Research, to explore the potential application of the Company’s recently provisionally
patented technology as an effective therapy in the treatment of FIV. The Company has assigned the Scripps Agreement to CVM. This study
has now been completed. Through the course of this work Dr. Elder was able to identify a panel of anti-human monoclonal antibodies to
CD11a that cross react with feline CD11a. These antibodies limited FIV infection in cell culture. The Company anticipates that if the data
warrants publication Dr. Elder will draft and submit a manuscript detailing his results. The release of this or any data from this study is entirely
dependent on Dr. Elder. While the original six-month period contemplated under the Scripps Agreement has expired, the Company will
continue to engage Dr. Elder and Thomas Fitting, Esq., Ph.D., Chief Patent Counsel at Scripps Research, as consultants on an as needed basis
through July 12, 2013.
On February 15, 2012, the Company and Colorado State University (“CSU”) entered into a Research Funding and Option Agreement
(the “CSU Agreement”) that will enable Dr. Susan VandeWoude Associate Dean for Research and Graduate Education, CVMBS; Professor,
DMIP, to explore the potential application of the Company’s recently provisionally patented technology as an effective therapy in the treatment
of FIV in infected cats. The Company has assigned the CSU Agreement to CVM. This study is designed to determine the effect of a single
dose of murine CytoFeline on FIV RNA and DNA as well as a panel of other virologic and safety markers. The Company anticipates that if
the data warrants publication Dr. VandeWoude will draft and submit a manuscript detailing her results. The release of this or any data from
this study is entirely dependent on Dr. VandeWoude.
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On June 19, 2012, Dr. VandeWoude and Dr. Richard Trauger, the Company’s Managing Director of Science, were awarded a grant of
$27,000 by CSU to study the pharmacokinetics of a chimeric version of CytoFeline in uninfected cats. The Company expects to generate and
provide the chimeric version of the antibody for Dr. VandeWoude in the next six months. The Company anticipates that if the data from the
study warrants publication Dr. VandeWoude and Dr. Trauger will draft and submit a manuscript detailing these results.
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Manufacturing and Source for Raw Materials
We negotiated with a contract manufacturer, Vista Biologicals Corporation (“Vista”), to manufacture murine Cytolin suitable for use in
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our current ex vivo clinical trial of Cytolin at a cost of $565,000, all of which was paid by September 2008. In February 2010, we entered
into a statement of work for the development of a humanized form of Cytolin at a cost of $229,500. Vista entered into an assignment
agreement with us to transfer all rights and title to certain inventions and applications to us in consideration for our forgiveness of certain
disputed amounts under the contractual arrangements between the parties. There are ongoing negotiations related to the ultimate obligations of
the Company and Vista under both the 2008 and 2010
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contractual arrangements. Although a murine version of Cytolin was used for previous human experience that included approximately 200
patients treated for up to two years, as well as an encouraging uncontrolled Phase I(b)/II(a) study, and our current ex-vivo clinical trial, the
Company understands that a fully-humanized version is necessary for the controlled clinical trials that are expected to follow the previous
ones. On September 23, 2011, the Company filed a provisional patent application (Serial No. 61/534,942) in the United States for its
humanized version of Cytolin , a monoclonal antibody for the treatment of HIV infection. The Company is currently in discussions with
potential manufacturing sites to obtain clinical grade antibody for future clinical development of Cytolin .
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Patents and Trademarks
We have a License Agreement with Allen D. Allen, our former Chief Executive Officer and former Chairman of the Company’s board
of directors (the “Board”) that gives us the exclusive right to develop, market, and profit from his technology worldwide. This includes issued
U.S. Patent Nos. 5,424,066; 5,651,970 and 6,534,057, as well as European Patent Nos. 0690725 and 1438970. In addition, Hong Kong
Patent No. 1067958, Australian Patent Nos. 684074 and 2003203742, Canadian Patent No. 2156495, Austrian Patent Nos. 408418, 267019,
and 1438970, Belgian Patent No. 1438970, Swiss Patent Nos. 1438970 and 0690725, German Patent Nos. 69433789 and 69435142.3,
Danish Patent No. 1438970, Spanish Patent Nos. 2219647, 2314341, 04101437.4, and 94912826.8, French Patent Nos. 1438970 and
0690725, Great Britain Patent Nos. 1438970 and 069725, Greece Patent No. 3067384, Iceland Patent No. 1438970, Italian Patent Nos.
1438970 and 0690725, Luxenbourg Patent No. 1438970, Monaco Patent No. 1438970, Netherlands Patent Nos. 1438970 and 0690725,
Portuguese Patent Nos. 690725 and 1438970, and Swedish Patent Nos. 0410437.4 and 94912826.8 have been obtained as well. We also
acquired the federally registered trademarks, CYTODYN (U.S. Registration No. 2095498) and CYTOLIN (U.S. Registration No. 2095497),
and a related design mark (U.S. Registration No. 2662777. The license acquired gives the Company the worldwide, exclusive right to develop,
market and sell compounds disclosed by the patent claims, practice methods taught by the patent claims, and exploit specified technology
related to the patents. The term of the license agreement is for the life of the patents of which the first will expire in 2013. The original
expiration dates on the issued U.S. Patent Nos. 5,424,066; 5,651,970 and 6,534,057 are 2013, 2014 and 2013, respectively. The original
expiration dates for the foreign patents listed above are in 2013 or 2014, if the required annuity fee payments are paid by September 21, 2012.
The Company’s Cytolin-related patents referenced above are for a murine (mouse) version of the drug. The Company’s research on Cytolin
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to date has utilized the current murine version of the drug. However, on September 23, 2011, the Company filed a provisional patent
application (Serial No. 61/534,942) in the United States for its humanized version of Cytolin , a monoclonal antibody for the treatment of HIV
Infection.
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The Company is also exploring other antibodies as potential therapeutics for FIV. On June 17, 2011, the Company filed a provisional
patent application in the United States (Serial No. 61/498,029) for the use of these antibodies as well as selected small molecule antagonists
and agonists for the treatment of FIV. On June 15, 2012, the Company filed an international patent application (Serial No.
PCT/US2012/042693) claiming priority to this provisional patent application. On August 10, 2011, the Company filed an application for
registration of the trademark CYTOFELINE, intended for use in conjunction with veterinary preparations for the treatment of FIV (U.S. App.
Ser. No. 85393956). In February 2012, the Company filed foreign
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trademark applications claiming priority to the US application for CYTOFELINE, including Australian App. No. 1473043, Canadian App.
No. 1563313, European CTM App. No. 010625192, Indian App. No. 2279431, Japan App. No. 2012-008009, Mexican App. No. 1247597,
and a Chinese App. No. 10475960. Thus far, the Company has received a Certificate of Trademark Registration from Japan No. 5488875,
with an effective registration date of April 20, 2012, and a Certificate of Trademark Registration from the European Union No. 010625192
with an effective registration date of June 11, 2012. Additionally, the Company’s Australian App. No. 1473043 was registered on May 31,
2012.
Government Regulation
Regulation of Health Care Industry
The health care industry is highly regulated, and state and federal health care laws and regulations are applicable to certain aspects of our
business. For example, there are federal and state health care laws and regulations that apply to the operation of clinical laboratories, the
business relationships between health care providers and suppliers, the privacy and security of health information and the conduct of clinical
research.
Regulation of Products
The design, testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our
products is regulated by numerous third parties, including the FDA, foreign governments, independent standards auditors and our customers.
In the United States, biological products have long been subject to regulation by various federal and state agencies, primarily as to
product safety, efficacy, manufacturing, advertising, labeling, import, export and safety reporting. The exercise of broad regulatory powers by
the FDA through its Center for Devices and Radiological Health and its Center for Biological Evaluation and Research continues to result in
increases in the amounts of testing and documentation for FDA clearance of current and new biologic products. The FDA can ban certain
biological products; detain or seize adulterated or misbranded biological products; order repair, replacement or refund of these products; and
require notification of health professionals and others with regard to biological products that present unreasonable risks of substantial harm to
the public health. The FDA may also enjoin and restrain certain violations of the Federal Food, Drug and Cosmetic Act, as amended, or the
Public Health Service Act pertaining to certain biological products or initiate action for criminal prosecution of such violations.
The lengthy process of seeking drug approvals, and the subsequent compliance with applicable statutes and regulations, require the
expenditure of substantial resources. Failure to comply with applicable regulations can result in refusal by the FDA to approve product license
applications. The FDA also has the authority to revoke previously granted product approvals.
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Regulation of Laboratory Operations
Clinical laboratories that perform laboratory testing (except for research purposes only) on human subjects are subject to regulation
under Clinical Laboratory Improvement Amendments (“CLIA”). CLIA regulates clinical laboratories by requiring that the laboratory be
certified by the federal government, licensed by the state and comply with various operational, personnel and quality requirements intended to
ensure that clinical laboratory test results are accurate, reliable and timely. State law and regulations also apply to the operation of clinical
laboratories.
State Governments
Most states in which we operate have regulations that parallel federal regulations. Most states conduct periodic unannounced inspections
and require licensing under such state’s procedures. Our research and development activities and the manufacture and marketing of our
products are and will be subject to rigorous regulations relating to product safety and efficacy by numerous governmental authorities in the
United States and other countries.
Other Laws and Regulations
We are subject to various laws and regulations relating to safe working conditions, clinical, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and
infectious disease agents, used in connection with our research. The extent of government regulation applying to our business that might result
from any legislative or administrative action cannot be accurately predicted.
Environmental
We are subject to a variety of federal, state and local environmental protection measures. We believe that our operations comply in all
material respects with applicable environmental laws and regulations. Our compliance with these regulations did not have during the past year
and is not expected to have a material effect upon our capital expenditures, cash flows, earnings or competitive position.
Registrational Clinical Trials Process
Described below is the traditional registrational drug development track. Under the Company’s current business plan, much of this initial
work may be sponsored and conducted by MGH, or a different clinical trial research facility, as determined by us at some point in the future
and different studies may also be explored. After these trials have been initiated, the Company could enter into a strategic alliance with a larger
pharmaceutical company after development has progressed to a certain point. The Company is exploring all options available to determine the
most cost effective implementation of the clinical trial process.
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.
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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. In some cases, depending upon the need for a new drug, it may be
licensed for sale in interstate commerce after a “pivotal” Phase II trial.
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.
The Company may fund clinical trials using venture capital or through the sale of our common stock or other equity securities, or, at that
time, may enter into a strategic alliance for completion of research and the subsequent marketing of humanized Cytolin if approved. In the
former case, and while the cost will be to some extent determined by the trial size, we currently estimate that we will need to provide additional
humanized product, which we estimate will cost approximately $500,000. The Company intends to conduct one or more private placement
offerings of common shares to secure the needed capital. We cannot estimate the cost of any potential follow up study or whether any of the
planned private placement offerings will be successful.
®
Benchmark
Patient Outreach
Dose First Patient
Lock Database - Begin Statistical
Analysis
Release Final Report
Some Factors That Can Cause Delays+
Manufacturing Delays
Documentation Delays
IRB Delays
Delays in Regulatory Review or Approval
Force Majeure
Fill and Finish Delays
Slower Than Expected Patient Enrollment
Force Majeure
Slower Than Expected Patient Enrollment
Clinical Hold
Laboratory Error
Protocol Deviation
Force Majeure
Additional Stratification Required
Computer Hardware or Software Malfunction
Force Majeure
+ There are other factors, known and unknown, such as unexpected financial hardships, that can cause delays.
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Competition
The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. We will
compete with other more established biotechnology companies which have greater financial resources than we have.
Our potential competitors include entities that develop and produce therapeutic agents for treatment of human and animal disease. These
include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing
production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs.
Almost all of these potential competitors have substantially greater capital resources, research and development capabilities, manufacturing and
marketing resources and experience than we have. Our competitors may succeed in developing potential drugs or processes that are more
effective or less costly than any that may be developed by us, or that gain regulatory approval prior to our potential drugs. Worldwide, there
are many antiviral drugs for treating HIV and AIDS. In seeking to manufacture, distribute and market the various potential drugs we intend to
develop, we face competition from established pharmaceutical companies. All of our potential competitors in this field have considerably
greater financial and personnel resources than we possess. We also expect that the number of our competitors and potential competitors will
increase as more potential drugs receive commercial marketing approvals from the FDA or analogous foreign regulatory agencies. Any of
these competitors may be more successful than us in manufacturing, marketing and distributing our potential drugs.
Research and Development Costs
Our sponsored research and development expenses were $530,027, $480,765 and $2,759,495 in fiscal 2012, 2011 and for the period
October 28, 2003 through May 31, 2012, respectively. We expect that research and development expenses will increase as we seek to expand
development of our current and future product pipeline.
Employees
We have four full time employees, one part time employee, and a varying number of consultants engaged in management and product
development. We are severely understaffed and will expand our employee force if we complete further financings. There can be no assurance
we will be able to locate or secure suitable employees upon acceptable terms in the future.
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Item 1A. Risk Factors.
This item is not required for smaller reporting companies.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Our principal offices were located at 1511 Third Street, Santa Fe, New Mexico 87505 for a portion of fiscal year 2011. We leased
approximately 1,200 square feet under a lease from September 1, 2010 until August 31, 2011 at $1,650 per month.
On June 7, 2011, the Board approved the relocation of the Company’s principal office to Lutz, Florida. Effective as of June 15, 2011,
the principal office of the Company is now located at 110 Crenshaw Lake Road, Lutz, Florida 33548. We use approximately 1,600 square feet
on an at-will tenancy basis at a cost of $1,650 per month in rent plus sales tax and reimbursement for utilities. The building related to this lease
is owned by an affiliate of Kenneth Van Ness, our President and Chief Executive Officer (“CEO”).
Item 3.
Legal Proceedings.
On or about December 22, 2011, William Carmichael and Mojdeh Javadi (the “Plaintiffs”) filed a complaint against the Company in the
Circuit Court of the State of Oregon for the County of Clackamas, alleging breach of contract. The Plaintiffs alleged that the Company entered
into a contract with the Plaintiffs in November 2007, then breached the terms of the contract by failing to issue warrants to the Plaintiffs
entitling them to purchase shares of the Company’s stock (the “Breach of Contract” claims). The Plaintiffs filed an Amended Complaint
against the Company on May 11, 2012 in which they asserted three additional claims each and amended the relief requested. In addition to the
Breach of Contract claims, the Plaintiffs alleged in their Amended Complaint that: (i) they were third-party beneficiaries of a promise made by
the Company to Nader Pourhassan in a Personal Services Agreement (the “Personal Services Agreement”), dated August 4, 2008 (the “Third
Party Beneficiary” claims), (ii) they provided services to the Company and were entitled to the reasonable value for such services (the
“Quantum Meruit” claims), and (iii) in reliance on the promises made in the Personal Services Agreement, the Company induced them to
provide services to the Company and they were entitled to compensation for damages resulting from their reliance on those promises (the
“Promissory Estoppel” claims). The Quantum Meruit and Promissory Estoppel claims were alternative claims to their Third Party Beneficiary
claims. On the Breach of Contract claims, the Plaintiffs sought either compensatory damages in an amount not less than $750,000 each or the
delivery of warrants to each Plaintiff to purchase 375,000 shares of the Company’s common stock for $0.25 per share. With respect to the
Third Party Beneficiary claims, the Plaintiffs sought a judgment requiring the Company to deliver 650,000 shares of its common stock to each
Plaintiff. With respect to the Quantum Meruit claims, Plaintiffs sought compensatory damages in an amount equal to the reasonable value of
their services to the Company. With respect to the Promissory Estoppel claims, the Plaintiffs sought compensation for damages resulting from
their reliance on the Company’s promises. The Plaintiffs also sought prejudgment interest, plus costs and disbursements incurred in the
litigation. The Company filed an answer to the complaint on February 15, 2012. An answer to the Amended Complaint was filed on May 21,
2012.
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On July 27, 2012, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with the above
Plaintiffs. Pursuant to the Settlement Agreement, the Company issued 200,000 shares of the Company’s common stock (“Shares”) to each of
the Plaintiffs, for an aggregate total of 400,000 Shares. In addition, the Company issued warrants (“Warrants”) to purchase up to 375,000
Shares to each of the Plaintiffs, for an aggregate total of 750,000 Warrants. The Warrants are immediately exercisable at $0.25 per Share and
shall expire on August 15, 2012. The Company issued the Shares and the Warrants to the Plaintiffs in exchange for their full and complete
release of any and all claims against the Company as of July 27, 2012. Pursuant to and in accordance with the Settlement Agreement, on
July 30, 2012, the Plaintiffs also dismissed with prejudice and without any award of costs, disbursements or attorney’s fees, their Amended
Complaint against the Company filed in the Circuit Court of the State of Oregon for the County of Clackamas. As of May 31, 2012, the
Company recognized approximately $540,000 and $388,000 of compensation expense related to the Warrant grant, and the issuance of the
Shares, respectively.
In addition, from time to time, we are involved in claims and suits that arise in the ordinary course of our business. Management
currently believes that resolving any such claims against us will not have a material adverse impact on our business, financial position or
results of operations.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the Over-the-Counter Bulletin Board under the ticker symbol CYDY.
The table below provides the high and low sales prices of our common stock for the periods indicated, as reported by the Over-the-
Counter Bulletin Board quotations system:
Price Range of Outstanding Common Stock
Year Ended May 31, 2012
First Quarter Ended August 31, 2011
Second Quarter Ended November 30, 2011
Third Quarter Ended February 29, 2012
Fourth Quarter Ended May 31, 2012
14
High
$ 2.75
Low
$ 1.70
$ 3.00
$ 1.85
$ 4.40
$ 2.52
$ 2.80
$ 1.46
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Year Ended May 31, 2011
First Quarter Ended August 31, 2010
Second Quarter Ended November 30, 2010
Third Quarter Ended February 28, 2011
Fourth Quarter Ended May 31, 2011
High
$ 1.54
Low
$ 0.75
$ 1.40
$ 0.95
$ 2.29
$ 1.15
$ 4.40
$ 1.70
Holders
The number of record holders of our common stock on May 31, 2012 was approximately 1,256. This number includes shareholders that
hold the shares in “street name” with brokers, dealers and other financial institutions. There have been 802,269 shares issued by the Company
after May 31, 2012.
Dividends
Holders of our common stock are entitled to receive dividends as may be declared from time to time by our Board. We have not paid any
cash dividends since inception on our common stock and do not anticipate paying any in the foreseeable future. Management’s current policy
is to retain earnings, if any, for use in our operations.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information regarding outstanding options and rights and shares reserved for future issuance under our
existing equity compensation plans as of May 31, 2012.
Equity Compensation Plan Information
Plan category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders (1)
Total
(a) Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
(b) Weighted-
average exercise
price of
outstanding
options, warrants
and rights
(c) Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
3,658,500
6,669,164
10,327,664
$
$
$
1.48
1.66
1.60
3,941,500
0
3,941,500
(1) Represents warrants issued by the Company (i) in connection with previous issuances of debt and previous private placements of the
Company’s securities, (ii) as consideration for certain consulting services provided to the Company, and (iii) as consideration for the
release of certain claims against the Company, and also includes the issuance of options (i) prior to the adoption of the 2004 Incentive
Plan, (ii) to certain of our employees under their existing employment agreements, and (iii) to compensate Board members for their service
as directors.
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Recent Sales of Unregistered Securities
On May 21, 2012, in connection with and as consideration for their services as members of the Board, the Company issued 3,743 shares
of the Company’s common stock to each of Jordan Naydenov, Ronald Tropp, George Dembow and Gregory Gould. The Company also
issued 1,703 shares of the Company’s common stock to Anthony Caracciolo, prorated for the period of his service as a Board member. The
shares of common stock will vest in equal daily installments and will be fully vested on May 31, 2012.
During the three months ended May 31, 2012, we issued to an investor upon exercise of warrants, 10,000 shares of common stock of
the Company at an exercise price of $1.00 per share, for proceeds of $10,000.
During the three months ended May 31, 2012, 45,900 shares of Series B were converted into 459,000 shares of common stock. The
Series B is convertible into 10 shares of the Company’s common stock including any accrued dividend, with an effective fixed conversion
price of $0.50 per share. During the three months ended May 31, 2012, we issued 42,900 shares of common stock related to these dividends.
We issued and sold the aforementioned warrants, options, and common stock without registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the “Securities Act”), Rule 506, Rule 701 and, as applicable, Regulation S promulgated thereunder.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no repurchases of any of our equity securities during the three months ended May 31, 2012.
Item 6.
Selected Financial Data.
This item is not required for smaller reporting companies.
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the other
sections of this Annual Report, including our consolidated financial statements and related notes appearing elsewhere herein. This discussion
and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions,
operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from
those anticipated and set forth in such forward-looking statements.
Results of Operations
Results of operations for the year ended May 31, 2012 compared to May 31, 2011 are as follows:
For the years ended May 31, 2012 and 2011, we had no activities that produced revenues from operations.
For the year ended May 31, 2012, we had a net loss of approximately $7,474,000 compared to a net loss of approximately $3,720,000
for the corresponding period in 2011. For the year ended May 31, 2012 and 2011, we incurred operating expenses consisting primarily of
stock-based compensation, accounting and consulting, research and development, salary, legal expenses, and various other selling and
administrative expenses.
The operating expenses for the years ended May 31, 2012 and 2011 are as follows:
Accounting and consulting
Stock-based compensation
Legal
Salaries
Research and development
Depreciation and amortization
Other
Total
2012
2011
$ 524,000
2,858,000
1,469,000
1,623,000
530,000
2,000
450,000
$ 274,000
1,186,000
689,000
700,000
481,000
3,000
365,000
$7,456,000
$3,698,000
Accounting and consulting expenses increased approximately $250,000 from $274,000 in fiscal year 2011 to approximately $524,000 at
May 31, 2012. Accounting expenses increased as the Company utilized more temporary accounting staff, as well as increased edgarization
costs related to the Company’s increased filings with the Securities and Exchange Commission (“SEC”). The increase in consulting expenses
relates primarily to the issuance of common stock to consultants for services, as well as the Company entering into a consulting agreement
with the Company’s former CEO in the first quarter of fiscal year 2012.
Stock-based compensation increased approximately $1,672,000 from approximately $1,186,000 at May 31, 2011 to $2,858,000 at
May 31, 2012. The increase relates to options grants made to certain executives of the Company pursuant to employment agreements, as well
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as warrants granted to certain consultants with immediate vesting rights. Additionally, as disclosed in “Item 3. Legal Proceedings” and
footnotes 9 and 11 to the consolidated financial statements, the Company granted warrants and common stock pursuant to the Settlement
Agreement. During fiscal year 2011, there were less option grants, and no grants with immediate vesting rights. The Company expects to
continue to grant stock options in the future, and accordingly, stock-based compensation should continue to be a significant expense in the
future.
Legal expenses increased approximately $780,000 from approximately $689,000 at May 31, 2011 to $1,469,000 at May 31, 2012 due to
a variety of matters, including assistance with: (i) litigation as discussed at footnote 9 of the consolidated financial statements; (ii) preparation
or review and negotiation of contracts such as with third-party providers and employment agreements; (iii) responding to an investigation by
the SEC; (iv) the Company’s SEC filings and corporate compliance; (v) ongoing claims and litigation and other disputes and the negotiation of
associated proposed and/or final settlements with certain third parties; (vi) the Company’s ongoing fundraising efforts and related securities
law research with respect to the Company’s past and current fundraising efforts; (vii) extensive negotiation and drafting of the Asset Purchase
Agreement and related documentation relating to the Company’s proposed acquisition of PRO 140 from Progenics Pharmaceuticals, Inc., as
discussed in footnote 11 to the consolidated financial statements; and (viii) extensive research and review of Company records in order to
facilitate bringing the Company’s SEC filings into compliance. The trend in the Company’s legal expenses will depend on the Company’s
ability to raise proceeds and to hire additional staff who can perform certain functions that can help defray legal expenses.
Salaries increased approximately $923,000 from approximately $700,000 in fiscal year 2011 to $1,623,000 in fiscal year 2012. The
significant increase relates to the execution of executive employment contracts during fiscal year 2012, as well as the payment of certain
discretionary bonuses to executives. The executive salaries in fiscal 2012 were significantly higher for certain executives relative to fiscal year
2011. Bonuses to executives are either based on achievement of targeted annual performance goals recommended by the compensation
committee and approved by the Board, or are discretionary in nature based on Board approval. During fiscal year 2012, the Company granted
discretionary bonuses of approximately $335,000. There were no bonuses granted during fiscal year 2011.
Research and development expenses increased approximately $49,000 from approximately $481,000 in fiscal year 2011 to $530,000 in
fiscal year 2012. The increase relates primarily to the Company entering into a consulting agreement for research related to the development of
FIV therapeutics.
Other expenses are comprised of various selling and administrative expenses which increased approximately $85,000 from
approximately $365,000 in fiscal year 2011 to $450,000 in fiscal year 2012. The increase relates primarily to increases in investor relation
costs, healthcare costs pursuant to employment agreements, and numerous other smaller increases.
The increase or decrease in the above expenses will depend on the Company’s ability to raise additional capital and ultimately fund the
Company’s clinical trials, and fund other operating costs as deemed necessary.
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Rescission Liability
The Company estimates an amount that is a probable indicator of the rescission liability and has recorded rescission liabilities for
May 31, 2012 and May 31, 2011 of approximately $3,749,000 and $4,851,000, respectively. These amounts represent the believed potential
rescission liability as of the dates presented, including any contingent interest payable to investors who accept the rescission right, and forfeit
their shares. For the purpose of calculating and disclosing rescission liability, the Company has assumed that portions of the state claims are
barred by the statutes of limitations of certain states based upon a literal interpretation of the applicable statute. Although the Company has
assumed that affirmative defenses based upon the expiration of the statutes of limitations in these states may be generally available to bar these
state claims, it has not had legal counsel undertake a detailed analysis of case law that might apply to defer or avoid application of a bar to such
claims; thus, if rescission claims are made for those assumed to be barred by a statute of limitations and such claims are contested by the
Company, until such affirmative defenses are ruled upon by judge in a proceeding adjudicating the rights at issue, no assurances can be made
that, if asserted, such defenses would actually bar the rescission claims in these states. See Footnote 3 of our Consolidated Financial
Statements on page 51 for further information regarding these rescission liabilities.
Accrued Incentive Stock Compensation
On August 4, 2008, the Company entered into the Personal Services Agreement with Nader Pourhassan. The Personal Services
Agreement provided for compensation to Dr. Pourhassan at an annual salary of $200,000. Additionally, as incentive compensation,
Dr. Pourhassan’s personal assistant and one additional person were to receive 50,000 common shares each of Company stock for every
$500,000 in capital received by the Company through Dr. Pourhassan’s efforts. As of May 31, 2010, the Company accrued $1,180,000
related to the Personal Services Agreement. Subsequent to the fiscal year ended May 31, 2011, Dr. Pourhassan and the Company entered into
a Mutual Release and Personal Services Termination Agreement (the “MRPSTA”) which relieves the Company of liability for any claims of
compensation under the Personal Services Agreement. Simultaneously, with the signing of the MRPSTA, Dr. Pourhassan and the Company
entered into a new Employment and Non-Compete Agreement whereby Dr. Pourhassan will serve as Managing Director of Business
Development at an annual salary of $200,000. See Footnote 3 of our Consolidated Financial Statements on page 51 for further information.
The Company had been accruing stock compensation and deferred offering costs related to the Personal Services Agreement as
described at Note 3. Upon the signing of the MRPSTA, the Company at May 31, 2011 reversed all accrued stock compensation and deferring
offering costs, as the Company currently has no further obligations under the Personal Services Agreement.
Liquidity and Capital Resources.
On May 31, 2012, we had negative working capital of approximately $4,007,000 as compared to a negative working capital of
approximately $5,022,000 on May 31, 2011.
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Cash Flows
Net cash used in operating activities was approximately $4,391,000 during fiscal year 2012, which reflects an increase of approximately
$2,570,000 from net cash used in operating activities of approximately $1,821,000 in 2011. The increase in the net cash used in operating
activities for the above periods was primarily attributable to the following:
•
•
Net loss increased approximately $3,755,000; and
Accounts payable, accrued salary, accrued interest, and accrued liabilities decreased approximately $679,000.
The above increases were partially offset by stock-based compensation increasing approximately $1,672,000 from 2011 to 2012.
There were no other significant changes in cash used in operating activities from 2011 to 2012.
There were no material changes in cash flows from investing activities from 2011 to 2012.
Cash flows provided by financing activities of approximately $3,638,000 during fiscal year 2012 increased approximately $2,510,000
from approximately $1,128,000 during 2011. The increase in cash provided by financing activities for the above periods was attributable
primarily to the increase in proceeds from the sale of common stock and the exercise of common stock options and warrants.
There were no other significant changes in cash provided by financing activities from 2011 to 2012.
As shown in the accompanying consolidated financial statements, for the year ended May 31, 2012 and 2011, and since October 28,
2003 through May 31, 2012 we incurred net losses of approximately $7,474,000 and $3,720,000 and $22,833,000, respectively. As of
May 31, 2012, we have not emerged from the development stage. In view of these matters, our ability to continue as a going concern is
dependent upon our ability to begin operations and to achieve a level of profitability. Since inception, we have financed our activities
principally from the sale of public and private equity securities and proceeds from notes payable. We intend to finance our future development
activities and our working capital needs largely from the sale of equity securities with some additional funding from other traditional financing
sources.
As previously mentioned, since October 28, 2003, we have financed our operations largely from the sale of common stock and preferred
stock and proceeds from notes payable. From October 28, 2003 through May 31, 2012 we raised cash of approximately $10,504,000 (net of
offering costs) through private placements of common stock, treasury stock and preferred stock financings and $1,537,000 through the
issuance related party notes payable and convertible notes. The Company has raised approximately $612,000 from the issuance of common
stock and preferred stock in conjunction with certain acquisitions in prior years. Additionally, the Company raised approximately $355,000
from the exercise of common stock options and warrants. In April 2010, our shareholders voted to amend our Articles of Incorporation to
increase the number of authorized shares of common stock to 100,000,000 shares; accordingly, we intend to continue to finance our
operations through the sale of our shares.
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Since October 28, 2003 through May 31, 2012, we have incurred approximately $2,759,000 of research and development costs and
approximately $22,295,000 in operating expenses. We have incurred significant net losses and negative cash flows from operations since our
inception. As of May 31, 2012, we had an accumulated deficit of approximately $24,435,000 and negative working capital of approximately
$4,007,000.
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. We currently do not have any significant material commitments related to capital expenditures. As described
above, we do have material commitments related to our current Study (as defined above) of our product with MGH, and have potential
obligations under our contracts with Vista.
Going Concern
We will require additional funding in order to continue with research and development efforts.
The accompanying consolidated 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 May 31, 2012 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 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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity 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 disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
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We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our consolidated
financial statements.
We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant utilizing certain
assumptions that require judgments and estimates. These assumptions include estimates for volatility, expected term, and risk-free interest rates
in determining the fair value of the stock-based awards.
We issue common stock to consultants for various services. Costs for these transactions are measured at the fair value of the
consideration received or the fair value of the equity instruments issued, whichever is more readily measurable. This determination requires
judgment in terms of the consideration being measured.
We estimated an amount that is a probable indicator of our rescission liability and will record rescission liabilities for May 31, 2012 and
May 31, 2011 of $3,749,000 and $4,851,000, respectively. These amounts represent the believed potential rescission liability as of the dates
presented, including any contingent interest payable to investors who accept the rescission right, and forfeit their shares. For the purpose of
calculating and disclosing rescission liability, the Company has assumed that portions of the state claims are barred by the statutes of
limitations of certain states based upon a literal interpretation of the applicable statute. Although the Company has assumed that affirmative
defenses based upon the expiration of the statutes of limitations in these states may be generally available to bar these state claims, it has not
had legal counsel undertake a detailed analysis of case law that might apply to defer or avoid application of a bar to such claims; thus, if
rescission claims are made for those assumed to be barred by a statute of limitations and such claims are contested by the Company, until such
affirmative defenses are ruled upon by judge in a proceeding adjudicating the rights at issue, no assurances can be made that, if asserted, such
defenses would actually bar the rescission claims in these states. See Footnote 3 of our Consolidated Financial Statements on page 51 for
further information.
22
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
This item is not required for smaller reporting companies.
23
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2012 AND MAY 31, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2012 AND 2011, AND FOR
THE PERIOD FROM OCTOBER 28, 2003 TO MAY 31, 2012
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE PERIOD
FROM OCTOBER 28, 2003 TO MAY 31, 2012
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED MAY 31, 2012 AND 2011, AND FOR
THE PERIOD FROM OCTOBER 28, 2003 TO MAY 31, 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
PAGE #
25
26
27
28
44
46
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
CytoDyn Inc. (A Development Stage Company)
Lutz, Florida
We have audited the accompanying consolidated balance sheets of CytoDyn Inc. (a development stage company) as of May 31, 2012 and
2011 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended
and the period from October 28, 2003 through May 31, 2012. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CytoDyn
Inc. as of May 31, 2012 and 2011 and the results of its operations and its cash flows for the years then ended and the period from October 28,
2003 through May 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company incurred a net loss of $7,474,224 for the year ended May 31, 2012,
has a working capital deficit of $4,006,969, and has an accumulated deficit of $24,434,518 from the date of inception through May 31, 2012,
which raises a substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Pender Newkirk & Company LLP
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
August 21, 2012
25
CytoDyn Inc.
(A Development Stage Company)
Consolidated Balance Sheets
Table of Contents
Assets
Current Assets:
Cash
Prepaid expenses
Deferred Offering Costs
Total current assets
Furniture and equipment, net
Other Assets
Liabilities and Shareholders’ (deficit)
Current liabilities:
Accounts payable
Accrued liabilities
Accrued salaries
Indebtedness to related parties - short-term portion
Accrued interest payable
Deposits on stock purchases
Stock rescission liability
Total current liabilities
Long-Term Liabilities
Convertible notes payable, net
Total Liabilities
Shareholders’ (deficit):
May 31,
2012
2011
$
284,991
65,982
677,327
1,028,300
800
41,735
$ 1,070,835
$
831,336
150,573
189,249
74,493
40,618
—
3,749,000
5,035,269
$ 1,037,818
59,275
876,423
1,973,516
5,374
15,748
$ 1,994,638
$
932,996
756
—
148,985
26,696
1,035,000
4,851,000
6,995,433
9,000
5,044,269
6,937
7,002,370
Series B Convertible stock preferred stock, no par value; 400,000 shares authorized, 98,900 and
311,800 shares issued and outstanding at May 31, 2012 and 2011, respectively
451,993
1,566,016
Common stock, no par value; 100,000,000 shares authorized, 28,636,530 and 22,290,982
outstanding at May 31, 2012 and 2011, respectively; 28,836,530 and 22,490,982 issued at
May 31, 2012 and May 31, 2011, respectively
Common stock payable
Additional paid-in capital
Common and Preferred stock subject to rescission
Treasury stock, at cost, 200,000 and 200,000 shares held at May 31, 2012 and 2011,
respectively
Additional paid-in capital - treasury stock
Accumulated deficit on unrelated dormant operations
Deficit accumulated during development stage
Total shareholders’ (deficit)
15,150,261
388,000
8,020,533
(3,749,000)
(100,000)
299,297
(1,601,912)
(22,832,606)
(3,973,434)
$ 1,070,835
9,147,325
—
5,877,141
(4,851,000)
(100,000)
313,080
(1,601,912)
(15,358,382)
(5,007,732)
$ 1,994,638
See accompanying notes to consolidated financial statements.
26
Table of Contents
Operating expenses:
General and administrative
Amortization / depreciation
Research and development
Legal fees
Total operating expenses
Operating loss
Interest income
Extinguishment of debt
Interest expense:
Interest on convertible debt
Interest on notes payable
Loss before income taxes
Income tax provision
Net loss
Constructive preferred stock dividends
Convertible preferred stock dividends
Net loss applicable to common shareholders
Basic and diluted loss per share
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Operations
Year ended May 31,
2012
2011
October 28,
2003 through
May 31, 2012
$ 5,454,477 $ 2,525,661 $ 16,461,892
182,862
2,759,495
2,890,631
2,013
530,027
1,469,129
2,880
480,765
688,933
7,455,646
3,698,239
22,294,880
(7,455,646)
(3,698,239)
(22,294,880)
—
—
—
—
1,627
337,342
(2,063)
(16,515)
—
(21,449)
(736,926)
(139,769)
(7,474,224)
(3,719,688)
(22,832,606)
—
—
—
$ (7,474,224) $ (3,719,688) $(22,832,606)
— $
(88,743) $
— $ (6,000,000)
$
$
(97,293)
$ (7,562,967) $ (3,728,238) $(28,929,899)
(8,550) $
$
(0.31) $
(0.18) $
(2.04)
Basic and diluted weighted average common shares outstanding
24,618,812
21,076,430
14,204,081
See accompanying notes to consolidated financial statements.
27
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Balance at October 28, 2003, following recapitalization
February through April 2004, sale of common stock less offering
Preferred Stock
Shares Amount
—
—
Common Stock
Shares
Amount
6,252,640 $1,425,334
Additional
Subject to
Paid-In Capital Recession
—
23,502
costs of $54,000 ($.30/share)
—
—
1,800,000
486,000
—
—
February 2004, shares issued to former officer as payment for
working capital advance ($.30/share)
—
—
16,667
5,000
—
—
Net loss at year ended May 31, 2004
—
—
—
—
—
—
Balance at May 31, 2004
—
—
8,069,307
1,916,334
23,502
—
July 2004, capital contribution by an officer
November 2004, common stock warrants granted
February 2005, capital contribution by an officer
Net loss at year ended May 31, 2005
Balance at May 31, 2005
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
512
—
11,928
—
5,000
—
—
—
—
—
8,069,307
1,916,334
40,942
—
28
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Balance at October 28, 2003, following recapitalization
February through April 2004, sale of common stock less offering
Treasury
Stock APIC
—
Stock for
Prepaid
Services
— $(1,594,042)
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
—
Total
$(145,206)
costs of $54,000 ($.30/share)
—
—
—
—
486,000
February 2004, shares issued to former officer as payment for
working capital advance ($.30/share)
—
—
—
—
5,000
Net loss at year ended May 31, 2004
—
—
(7,870)
(338,044)
(345,914)
Balance at May 31, 2004
—
—
(1,601,912)
(338,044)
July 2004, capital contribution by an officer
November 2004, common stock warrants granted
February 2005, capital contribution by an officer
Net loss at year ended May 31, 2005
Balance at May 31, 2005
See accompanying notes to consolidated financial statements.
—
—
—
—
—
—
—
—
—
—
—
—
(120)
512
11,928
5,000
—
—
—
(777,083)
(777,083)
—
—
(1,601,912)
(1,115,127)
(759,763)
29
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Shares Amount
Common Stock
Additional
Shares
Amount
Paid-In Capital
June through July 2005, sale of common stock less offering costs of
$27,867($.75/share)
—
—
289,890
189,550
August 2005, common shares issued to extinguish promissory notes payable and
related interest ($.75/share)
—
—
160,110
120,082
May 2006, common shares issued to extinguish convertible debt
—
—
350,000
437,500
November 2005, 94,500 warrants exercised ($.30/share)
—
—
94,500
28,350
January through April 2006, common shares issued for prepaid services
—
—
183,857
370,750
Amortization of prepaid stock services
—
—
—
—
—
—
—
—
—
—
January through May 2006, warrants issued with convertible debt
—
—
—
—
274,950
January through May 2006, beneficial conversion feature of convertible debt
—
—
—
—
234,550
March through May 2006, stock options granted to consultants
—
—
—
—
687,726
30
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Treasury Stock
APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
Total
June through July 2005, sale of common stock less offering
costs of $27,867 ($.75/share)
August 2005, common shares issued to extinguish promissory
notes payable and related interest ($.75/share)
May 2006, common shares issued to extinguish convertible
debt
November 2005, 94,500 warrants exercised ($.30/share)
January through April 2006, common shares issued for prepaid
services
Amortization of prepaid stock services
January through May 2006, warrants issued with convertible
debt
January through May 2006, beneficial conversion feature of
convertible debt
March through May 2006, stock options granted to consultants
See accompanying notes to consolidated financial statements.
31
—
—
—
—
189,550
—
—
—
—
120,082
—
—
—
—
—
(370,750)
—
103,690
—
—
—
—
—
437,500
—
28,350
—
—
—
103,690
—
—
—
—
274,950
—
—
—
—
—
—
—
234,550
—
687,726
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Common Stock
March 2006, stock options issued to extinguish debt
Amount
Shares
—
—
Net loss at year ended May 31, 2006
—
—
Shares
Amount
—
—
—
—
Additional
Paid-In Capital
86,341
Subject to
Rescission
—
—
—
Balance at May 31, 2006
—
—
9,147,664
3,062,566
1,324,509
—
Common stock issued to extinguish convertible debt
—
—
119,600
149,500
—
—
Common stock issued for AITI acquisition
—
—
2,000,000
934,399
—
—
Amortization of prepaid stock services
Common stock payable for prepaid services
Stock-based compensation
Warrants issued with convertible debt
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
120,000
—
535,984
—
92,500
—
Common stock issued for services
—
—
30,000
26,400
—
—
Preferred shares issued AGTI
Net loss, May 31, 2007
Balance at May 31, 2007
100,000
167,500
—
—
—
—
—
—
—
—
—
—
100,000
167,500
11,297,264
4,172,865
2,072,993
—
32
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
March 2006, stock options issued to extinguish debt
Net loss at year ended May 31, 2006
Balance at May 31, 2006
Common stock issued to extinguish convertible debt
Common stock issued for AITI acquisition
Amortization of prepaid stock services
Common stock payable for prepaid services
Stock-based compensation
Warrants issued with convertible debt
Common stock issued for services
Preferred shares issued AGTI
Net loss, May 31, 2007
Balance at May 31, 2007
Treasury Stock
APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
Total
—
—
—
—
—
—
86,341
—
(2,053,944)
(2,053,944)
—
(267,060)
(1,601,912)
(3,169,071)
(650,968)
—
—
—
—
—
267,060
—
(106,521)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
149,500
934,399
267,060
13,479
535,984
92,500
26,400
167,500
—
(2,610,070)
(2,610,070)
—
(106,521)
(1,601,912)
(5,779,141)
(1,074,216)
See accompanying notes to consolidated financial statements.
33
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Common Stock
Additional
Subject to
Amortization of prepaid stock for services
Shares
—
—
Amount
Shares
Amount
Paid-In Capital
—
Rescission
—
—
Stock based compensation
—
—
—
461,602
Common stock issued to extinguish convertible debt
—
—
750,000
75,000
Rescission of common stock issued for services
—
—
(142,857)
(100,000)
—
—
Original issue discount convertible debt with warrants
—
—
—
—
3,662
—
—
—
—
—
—
Original issue discount convertible debt with beneficial
conversion feature
—
—
—
—
75,000
—
Stock issued for cash ($.50/share)
—
—
642,000
321,000
— (321,000)
Net loss
Balance at May 31, 2008
—
—
—
—
—
—
100,000 $167,500 12,546,407 $4,468,865 $ 2,613,257 (321,000)
34
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Amortization of prepaid stock for services
Stock based compensation
Common stock issued to extinguish convertible debt
Rescission of common stock issued for services
Original issue discount convertible debt with warrants
Original issue discount convertible debt with beneficial
conversion feature
Stock issued for cash ($.50/share)
Net loss
Balance at May 31, 2008
See accompanying notes to consolidated financial statements.
Treasury Stock
APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
—
106,521
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
106,521
461,602
75,000
(100,000)
3,662
75,000
—
—
—
—
(1,193,684)
(1,193,684)
—
—
$(1,601,912)
$(6,972,825)
$(1,646,115)
35
Table of Contents
Stock issued for cash ($.50/share)
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Common Stock
Shares
—
Amount
Shares
Amount
Paid-In Capital
— 3,023,308 $1,511,654
Additional
Subject to
Rescission
— (1,494,000)
Stock issued for services ($.50/share)
—
—
388,200
194,100
Stock issued for services ($.37/share)
—
—
150,000
55,500
—
—
Stock based compensation
—
—
—
—
371,996
Stock issued in payment of accounts payable, ($.50/share)
—
—
98,000
49,000
Stock issued for services ($.42/share)
—
—
15,400
6,468
—
—
—
—
—
—
—
—
—
8,900
—
—
—
—
—
—
—
—
—
100,000 $167,500 16,221,315 $6,285,587 $ 2,994,153 $(1,815,000)
—
—
236,400
118,200
—
(118,200)
—
—
632,000
290,500
—
(290,500)
—
—
304,580
137,061
—
(137,061)
Capital contribution
Net loss ended May 31, 2009
Balance at May 31, 2009
Stock issued for cash ($.50/share)
Stock issued for cash ($.50/share)
Stock issued for cash ($.50/share)
Conversion of debt to Common stock ($.45/share)
—
—
325,458
146,456
—
—
36
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Treasury Stock
Treasury
Shares Amount Stock APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Stock issued for cash ($.50/share)
—
—
—
—
Stock issued for services ($.50/share)
—
—
—
—
Stock issued for services ($.37/share)
—
—
—
—
Stock based compensation
—
—
—
—
Stock issued in payment of accounts payable,
($.50/share)
—
—
—
—
Stock issued for services ($.42/share)
—
—
—
—
Capital contribution
—
—
—
—
—
—
—
—
—
—
—
Deficit
Accumulated
During
Development
Stage
Total
— $
17,654
—
—
—
—
—
—
194,100
55,500
371,996
49,000
6,468
8,900
Net loss ended May 31, 2009
—
—
—
—
—
(1,306,004)
(1,306,004)
Balance at May 31, 2009
—
—
—
— $(1,601,912) $(8,278,829) $(2,248,501)
Stock issued for cash ($.50/share)
—
—
—
—
Stock issued for cash ($.50/share)
—
—
—
—
Stock issued for cash ($.50/share)
—
—
—
—
Conversion of debt to Common stock ($.45/share)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
146,456
See accompanying notes to consolidated financial statements.
37
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Common Stock
Conversion of preferred stock to common stock
Shares
(100,000)
Amount
(167,500)
Shares
2,356,142
Amount
167,500
—
Additional
Paid-In Capital
Subject to
Rescission
—
Stock-based compensation
—
—
—
—
1,671,118
—
Original issue discount convertible debt with beneficial
conversion feature
Expiration of rescission liabilities
Repurchase of common stock ($.28/share)
Repurchase of common stock ($.50/share)
Stock issued for cash ($.50/share)
Stock issued for services ($1.45/share)
Stock issued for cash ($.50/share)
—
—
—
—
—
—
—
—
—
38,604
—
—
—
—
903,550
—
—
—
—
—
—
—
—
—
—
—
(277,000)
—
—
—
—
—
—
—
(253,789)
—
—
—
—
—
—
—
38
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Treasury Stock
Shares
Amount
Treasury
Stock APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
Total
Conversion of preferred Stock to common
stock
Stock-based compensation
Original issue discount convertible debt with
beneficial conversion feature
Expiration of rescission liabilities
—
—
—
—
—
—
—
—
Repurchase of common stock ($.28/share)
(1,200,000)
(336,000)
Repurchase of common stock ($.50/share)
(200,000)
(100,000)
—
—
—
—
—
—
Stock issued for cash ($.50/share)
550,000
154,000
123,000
—
—
—
—
—
—
—
Stock issued for services ($1.45/share)
81,580
22,842
95,449 (118,291)
Stock issued for cash ($.50/per share)
568,420
159,158
94,631
—
See accompanying notes to consolidated financial statements.
39
—
—
—
—
—
—
—
—
—
—
—
— 1,671,118
—
38,604
— 903,550
— (336,000)
— (100,000)
—
—
—
—
—
—
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Common Stock
Amortization of prepaid Stock for services
Series B Convertible Preferred stock issued for cash
Shares
—
Amount
Shares
Amount
Additional
Paid-In Capital
Rescission
Amount
—
—
—
—
—
($5.00/share)
Net Loss, ended May 31, 2010
400,000
2,009,000
—
—
—
—
—
—
—
(2,009,000)
—
—
Balance at May 31, 2010
400,000 $2,009,000
20,075,895 $7,145,304 $ 4,703,875 $(3,997,000)
Conversion of Series B Convertible Preferred Stock
to Common Stock
(88,200)
(442,984)
882,000
442,984
Stock issued for services ($1.23/share)
Capital contribution
Stock issued for cash ($1.00/share)
—
—
—
Series B Convertible Preferred Stock dividends
—
Stock based compensation
Rescission expirations and exclusions
Amortization of prepaid Stock for services
Net Loss, ended May 31, 2011
—
—
—
—
—
—
150,000
184,500
—
—
229,500
—
—
—
—
—
—
1,365,987
1,365,987
—
(1,365,987)
—
—
—
—
—
17,100
8,550
(8,550)
—
—
—
—
—
—
—
—
952,316
—
—
—
—
—
511,987
—
—
Balance at May 31, 2011
311,800 $1,566,016
22,490,982 $9,147,325 $ 5,877,141 $(4,851,000)
40
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Treasury Stock
Shares
Amount
Treasury
Stock
APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
Amortization of prepaid Stock for services
—
—
— 69,003
—
—
Total
69,003
Series B Convertible Preferred stock issued For
cash ($5.00/share)
Net Loss, ended May 31, 2010
—
—
—
— —
—
—
—
—
— —
—
(3,359,865) (3,359,865)
Balance at May 31, 2010
(200,000) $(100,000) $313,080 $(49,288) $(1,601,912) $(11,638,694) $(3,215,635)
Conversion of Series B Convertible Preferred
Stock to Common Stock
Stock issued for services ($1.23/share)
Capital contribution
Stock issued for cash ($1.00/share)
Stock-based compensation (unaudited)
Rescission expirations and exclusions
(unaudited)
Amortization of prepaid Stock for services
Net Loss, ended May 31, 2011
—
—
—
—
—
—
—
—
—
— —
—
— —
—
— —
—
— —
—
— —
—
— —
—
— 49,288
—
—
—
—
—
—
—
—
—
—
184,500
—
229,500
—
—
—
952,316
—
511,987
—
49,288
—
— —
—
(3,719,688) (3,719,688)
Balance at May 31, 2011
(200,000) $(100,000) $313,080 — $(1,601,912) $(15,358,382) $(5,007,732)
See accompanying notes to consolidated financial statements.
41
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Common
Stock
Payable
Additional
Paid-In Capital
Rescission
Amount
Rescission expirations and exclusions
—
—
—
—
—
— 1,102,000
Conversion of Series B Convertible
Preferred Stock to Common Stock
(212,900) (1,064,500) 2,129,000 1,064,500
—
—
—
Series B Convertible Preferred Stock
Dividends
Series B Convertible Preferred Stock Cash
—
—
177,485
88,743
—
(88,743)
—
Dividends
—
—
—
—
—
(1,500)
—
Common Stock issued for services to
consultants ($2.55-$2.80/share)
Common Stock issued for services to
Directors ($2.07/share)
Common Stock issued for cash
($1.50/share)
Exercise of Common Stock options ($.30-
—
—
72,500
203,000
—
—
—
—
—
16,675
34,560
—
—
—
—
— 1,997,388 2,996,024
—
—
—
$1.00/share)
—
—
527,500
326,900
—
—
—
Common shares issued from Escrow
liability ($1.00/share)
Common stock to be issued related to legal
—
— 1,425,000 1,425,000
—
—
—
settlement ($0.97/share)
—
—
—
— 388,000
—
—
Amortization of deferred offering costs
related to rescission liability
Capital Contribution
Stock based compensation
Warrants to be issued related to legal
settlement
Net Loss, ended May 31, 2012
—
(49,523)
—
(135,791)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,336
— 1,692,290
—
540,009
—
—
—
—
—
—
—
Balance at May 31, 2012
98,900 $
451,993 28,836,530 $15,150,261 $(388,000) $ 8,020,533 $(3,749,000)
See accompanying notes to consolidated financial statements.
42
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Period October 28, 2003 through May 31, 2012
Treasury Stock
Shares
Amount
Treasury
Stock
APIC
Stock for
Prepaid
Services
Accumulated
Deficit
Deficit
Accumulated
During
Development
Stage
Total
Rescission expirations and exclusions
—
—
—
—
—
—
1,102,000
Conversion of Series B Convertible
Preferred Stock to Common Stock
Series B Convertible Preferred Stock
Dividends
Series B Convertible Preferred Stock Cash
Dividends
Common Stock issued for services to
consultants ($2.80/share)
Common Stock issued for services to
Directors ($2.07/share)
Common Stock issued for cash
($1.50/share)
Exercise of Common Stock options
($.62/share)
Common shares issued from Escrow liability
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,500)
—
—
—
—
—
—
203,000
—
—
—
—
—
—
34,560
—
—
—
—
—
—
2,996,024
—
—
—
—
—
—
326,900
($1.00/share)
—
—
—
—
—
—
1,425,000
Common stock to be issued related to legal
settlement ($0.97/share)
Amortization of deferred offering costs
related to rescission liability
Capital Contribution
Stock based compensation
Warrants to be issued related to legal
settlement
Net Loss, ended May 31, 2012
—
—
—
—
—
—
388,000
—
—
—
—
—
—
(13,783)
—
—
—
—
—
—
—
—
—
—
—
—
(199,097)
1,336
—
1,692,290
—
—
—
—
—
540,009
—
—
—
—
(7,474,224)
(7,474,224)
Balance at May 31, 2012
(200,000) $(100,000)
299,297
— $(1,601,912) $(22,832,606) $(3,973,434)
See accompanying notes to consolidated financial statements.
43
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization / depreciation
Loss on disposal of furniture and equipment
Amortization of original issue discount
Extinguishment of debt
Purchased in process research and development
Stock-based compensation
Changes in current assets and liabilities:
Increase in accrued salaries
Increase in prepaid expenses
(Increase) decrease in other assets
Increase in accounts payable, accrued interest and accrued liabilities
Net cash used in operating activities
Cash flows from investing activities:
Furniture and equipment purchases
Net cash used in investing activities
Cash flows from financing activities:
Capital contributions by executive
Preferred stock dividends
Proceeds from notes payable to related parties
Payments on notes payable to related parties
Proceeds from notes payable issued to individuals
Payments on notes payable issued to individuals
Proceeds from convertible notes payable
Proceeds from the sale of common stock
Proceeds from Series B preferred stock
Purchase of treasury stock
Proceeds from sale of treasury stock
Deferred offering cost
Proceeds from issuance of stock of AITI acquisition
Proceeds from issuance of stock of AGTI acquisition
Proceeds from exercise of warrants and options
Year Ended May 31
2012
2011
October 28, 2003
through May 31, 2012
$(7,474,224)
$(3,719,688)
$
(22,832,606)
2,013
2,560
2,063
—
—
2,857,859
2,880
—
—
—
—
1,186,104
189,249
(6,707)
(25,987)
62,079
—
(39,648)
8,227
740,708
182,862
2,560
719,265
(337,342)
274,399
8,577,984
189,249
(65,982)
(41,735)
1,321,983
(4,391,095)
(1,821,417)
(12,009,363)
—
—
1,336
(1,500)
—
(74,492)
—
—
—
3,386,024
—
—
—
—
—
—
326,900
(4,705)
(4,705)
—
—
(5,000)
—
—
—
2,400,987
—
—
—
(232,544)
—
—
—
(21,083)
(21,083)
15,748
(1,500)
705,649
(239,990)
145,000
(34,500)
686,000
8,966,072
2,009,000
(436,000)
559,210
(1,029,940)
512,200
100,000
355,250
Net cash provided by financing activities
3,638,268
2,163,443
12,312,199
Net change in cash
Cash, beginning of period
Cash, end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes
Interest
(752,827)
337,321
1,037,818
700,497
281,753
3,238
$
284,991
$ 1,037,818
$
284,991
$
$
—
2,593
$
$
—
21,128
$
$
—
26,757
44
Table of Contents
CytoDyn Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Year ended May 31,
2012
2011
October 28, 2003
through May 31, 2012
Non-cash investing and financing transactions:
Net assets acquired in exchange for common stock in CytoDyn/Rexray business
combination
Common stock issued to former officer to repay working capital advance
Common stock issued for convertible debt
Common stock issued for debt
Common stock issued for accrued interest payable
Options to purchase common stock issued for debt
Original issue discount and intrinsic value of beneficial conversion feature related to
debt issued with warrants
Common stock issued for preferred stock
Treasury stock issued for prepaid services
Common Stock issued on payment of accounts payable
$
$
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
Preferred and common stock subject to rescission
$1,102,000
$ 854,000
Accrued stock incentive and deferred offering costs
$
—
$ 537,000
Common stock issued for Series B preferred stock
$1,064,500
$ 442,984
Series B preferred stock dividends
Accrued salaries related party contributed as capital
Reversal of accrued stock incentive and deferred offering costs
Constructive dividend
$
$
$
$
Amortization of deferred offering costs related to rescission liability
Common shares issued from escrow liability
$ 199,097
$1,425,000
See accompanying notes to consolidated financial statements.
45
88,743
$
8,550
—
$ 229,500
—
$1,717,000
—
$
$
$
—
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
7,542
5,000
662,000
245,582
20,956
62,341
719,266
167,500
118,291
49,000
3,749,000
1,717,000
1,507,484
97,293
229,500
1,717,000
6,000,000
199,097
1,425,000
Table of Contents
1 - Organization
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
CytoDyn Inc. (the “Company”) was incorporated under the laws of Colorado on May 2, 2002 under the name Rexray Corporation
(“Rexray”). In October 2003, the Company (under its previous name RexRay Corporation) entered into an Acquisition Agreement with
CytoDyn of New Mexico, Inc. Pursuant to the acquisition agreement, the Company acquired assets related to its leading drug candidate,
Cytolin , including the assignment of the patent license agreement dated July 1, 1994 between CytoDyn of New Mexico, Inc. and Allen D.
Allen covering three United States patents along with foreign counterpart patents which describe a method for treating Human
Immunodeficiency Virus (“HIV”) disease with the use of monoclonal antibodies.
®
The Company entered the development stage effective October 28, 2003 upon the reverse merger and recapitalization of the Company and
follows Financial Standard Accounting Codification No. 915, Development Stage Entities.
Advanced Genetic Technologies, Inc. (“AGTI”) was incorporated under the laws of Florida on December 18, 2006 pursuant to an acquisition
during 2006.
46
Table of Contents
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
On May 16, 2011, the Company formed a wholly owned subsidiary, CVM, which will explore the possible application of feline reactive
monoclonal antibodies for the treatment of Feline Immunodeficiency Virus (“FIV”), a retroviral infection in cats. The Company views the
formation of CVM and the exploration of CD11a-specific monoclonal antibodies to treat FIV as an effort to strategically diversify the use of
monoclonal antibody expertise.
2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; AGTI and CVM. All
intercompany transactions and balances are eliminated in consolidation.
Reclassifications
Certain prior year amounts shown in the accompanying consolidated financial statements have been reclassified to conform to the 2012
presentation. These reclassifications did not have any effect on total current assets, total assets, total current liabilities, total liabilities, total
shareholders’ deficit, or net loss.
Going Concern
The consolidated 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. The Company incurred a net loss of $7,474,224 for the
period ended May 31, 2012, has an accumulated deficit of $24,434,518, and a working capital deficit of $4,006,969 as of May 31, 2012.
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 product candidates, obtain U.S. Food & Drug
Administration (the “FDA”) approval, outsource manufacturing of the product candidates, 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.
47
Table of Contents
Use of Estimates
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) 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
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 May 31, 2012 or May 31, 2011. Cash is maintained at financial institutions, and, at
times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the
Company’s non-interest bearing cash balances were fully insured at May 31, 2012 due to a temporary federal program in effect from
December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts.
Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash
balances may again exceed federally insured limits. Interest-bearing amounts on deposits in excess of federally insured limits at May 31, 2012
were approximately $8,000.
As of May 31, 2012, the Company received a total of $1,425,000 in cash related to deposits received from certain common stock purchases as
compared to $1,035,000 as of May 31, 2011. These deposits were received by the Company from prospective investors (the “Prospective
Investors”) after the Company made an announcement on February 18, 2011 related to its potential rescission (see Note 3) and other liabilities
to investors who had made investments in the Company during the period beginning on April 15, 2008 and ending on February 18, 2011.
During the three months ended February 29, 2012, the Company sent confirmations to the Prospective Investors asking them to either confirm
their investment in the Company or request that their deposit be returned to them. The Company received confirmations for $1,425,000 in cash
deposits from Prospective Investors confirming their original investment. As of May 31, 2012, the $1,425,000 is included as common stock.
Furniture and Equipment
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.
48
Table of Contents
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
Research and Development
Research and development costs are expensed as incurred.
Financial Instruments
At May 31, 2012 and May 31, 2011, the carrying value of the Company’s financial instruments approximate fair value due to the short-term
maturity of the instruments. The Company’s notes payable have market rates of interest, and accordingly, the carrying values of the notes
approximates the fair value.
Stock-Based Compensation
U.S. GAAP 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 (requisite service period).
The Company accounts for common stock options, and common stock warrants granted based on the fair market value of the instrument using
the Black-Scholes option pricing model utilizing certain weighted average assumptions such as expected stock price volatility, term of the
options and warrants, risk-free interest rates, and expected dividend yield at the grant date. 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 at consistent intervals. 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.
U.S. GAAP 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 May 31, 2012 and May 31, 2011.
49
Table of Contents
Deferred Offering Costs
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
In connection with a stock rescission liability as discussed at Note 3, the Company has recorded approximately $677,000 and $876,000 in
deferred offering costs as of May 31, 2012 and May 31, 2011, respectively. These deferred offering costs have been recorded as a current
asset for the respective periods. The asset will be offset against equity, and reduce equity in the period the investors described in Note 3 do not
accept the rescission right and keep their shares. Conversely, if the investors accept the rescission right and forfeit their shares, the deferred
offering costs will be expensed at that time.
Stock for Services
The Company issues common stock, warrants and common stock options to consultants for various services. Costs for these transactions are
measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the
counterparty to earn the equity instruments is reached or (i) the date at which the counterparty’s performance is complete.
(Loss) Per Common Share
Basic (loss) per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Diluted (loss) per share is computed by dividing net (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 anti-dilutive. Because of
the net losses for all periods presented, the basic and diluted weighted average shares outstanding are the same since including the additional
shares would have an anti-dilutive effect on the loss per share calculation. Common stock options and warrants to purchase 10,327,664,
7,473,576 and 10,327,664 shares of common stock were not included in the computation of diluted weighted average common shares
outstanding for the periods ended May 31, 2012, 2011 and for the period October 28, 2003 to May 31, 2012 respectively, as inclusion would
be anti-dilutive for these periods. Additionally, as of May 31, 2012, 98,900 shares of Series B convertible stock can potentially convert into
989,000 shares of common stock.
Income Taxes
Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary
50
Table of Contents
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating
loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). A reconciliation of the beginning
and ending amount of unrecognized tax benefits has not been provided since there are no unrecognized benefits at May 31, 2012 or 2011 and
since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If
there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefit in interest expense
and penalties in operating expenses. The Company is subject to examination by the Internal Revenue Service and state tax authorities for tax
years ending after 2008.
3 - Rescission Liabilities
The Company’s board of directors (the “Board”) was advised by outside legal counsel that compensation the Company previously paid to an
employee and certain other non-employees who were acting as unlicensed, non-exempt broker-dealers soliciting investors on behalf of the
Company from April 15, 2008 to February 18, 2011 was a violation of certain state and possibly federal securities laws. As a result, such
investors and potentially others have rescission or monetary claims (“Claims”) against the Company, and the Company’s liability for these
potential Claims is now being properly reflected in the Company’s financial statements. On March 16, 2011, the Company filed a Current
Report on Form 8-K disclosing the potential rescission liability (the “Liability Disclosure”). On July 21, 2011, the Company filed a Current
Report of Form 8-K disclosing its receipt of an SEC letter of inquiry and request for voluntary assistance in discovering information related to
the Liability Disclosure. By letter dated January 3, 2012, the Division of Enforcement of the Securities and Exchange Commission notified the
Company that the SEC had completed its informal investigation of the Company and is recommending no enforcement action be taken against
the Company, or its officers, directors, or employees.
Rescission rights for individual investors and subscribers vary, based upon the laws of the states in which the investors or subscribers reside.
Investments and subscriptions that are subject to rescission are recorded separately in our financial statements from stockholders’ deficiency in
the Company’s balance sheet. As the statute of limitations expire in the respective states, such amounts for those shares are reclassified to
stockholders’ deficiency. Investors who have sold their shares of capital stock of the Company do not have rescission rights, but instead have
claims for damages, to the extent their shares were sold at a net loss, which is determined by subtracting the purchase price plus statutory
interest and costs (if any) from the sale price.
Based on the Company’s ongoing investigation, assuming there are no affirmative defenses or exemptions available to the Company, investors
may have up to approximately $6.4 million of federal and state Claims against the Company as of the date of filing this Form 10-K. These
51
Table of Contents
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
investor Claims could include approximately $3.75 million of potential state or foreign jurisdiction Claims involving approximately 17 states
and 5 foreign jurisdictions that may not be currently barred by the applicable statute of limitations or state law exemptions from broker-dealer
registration requirements and these investors may also have overlapping federal Claims; the remainder could involve investors who do not
have state law Claims but who may have federal rescission or damages rights if such rights can be proven to exist because of the Company’s
failure to disclose contingent liabilities related to the state and foreign jurisdiction Claims. The Company is continuing with its scientific and
business plans in the ordinary course.
The Company estimates an amount that is a probable indicator of the rescission liability and recorded rescission liabilities for May 31, 2012
and May 31, 2011 of approximately $3,749,000 and $4,851,000, respectively. These amounts represent the believed potential rescission
liability as of the dates presented, including any contingent interest payable to investors who accept the rescission right, and forfeit their shares.
For the purpose of calculating and disclosing rescission liability, the Company has assumed that portions of the state claims are barred by the
statutes of limitations of certain states based upon a literal interpretation of the applicable statute. Although the Company has assumed that
affirmative defenses based upon the expiration of the statutes of limitations in these states may be generally available to bar these state claims,
it has not had legal counsel undertake a detailed analysis of case law that might apply to defer or avoid application of a bar to such claims; thus,
if rescission claims are made for those assumed to be barred by a statute of limitations and such claims are contested by the Company, until
such affirmative defenses are ruled upon by judge in a proceeding adjudicating the rights at issue, no assurances can be made that, if asserted,
such defenses would actually bar the rescission claims in these states.
The Company has considered methods to offer to rescind the previous investment purchase or subscription by persons who acquired or
subscribed for such investments during the period April 15, 2008 to February 18, 2011, but is not actually pursuing any such methods. If
future circumstances warrant, the Company may commence a rescission offer to give each investor the opportunity to rescind or not rescind
their investment (if not already sold) or subscription agreements or by certain shareholders between April 15, 2008 to February 18, 2011. Any
rescission offer could address all or part of the Company’s rescission liability relating to its federal and state securities laws compliance issues
by allowing the investors covered by the rescission offer to rescind the underlying securities transactions and sell those back to the Company
or recover funding provided with subscription agreements, as the case may be.
The Company entered into a seven year Personal Services Agreement on August 4, 2008 (the “Personal Services Agreement “), with Nader
Pourhassan pursuant to which compensation was paid or accrued in view of a subsequent determination that these payments violated
applicable securities laws. Such violations gave rise to the Company’s rescission obligation reflected in the Consolidated Financial Statements.
It was unclear whether the Company had any defenses to payment, whether the Company had any rights to recover payments made to
Mr. Pourhassan or
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
others at his direction or as contemplated in the Personal Services Agreement (including payments in the form of securities); or whether, even
if the Company does have such rights, Mr. Pourhassan (and perhaps others) would have certain equitable remedies that would entitle
Mr. Pourhassan (and perhaps others) to set off against the Company’s rights or would obligate the Company to make compensatory payments
for services performed by Mr. Pourhassan (and others under his direction).
The Personal Services Agreement provided for compensation to Dr. Pourhassan at an annual salary of $200,000. Additionally, as incentive
compensation, Dr. Pourhassan’s personal assistant and one additional person were to receive 50,000 common shares each of the Company
stock for every $500,000 in capital received by the Company through Dr. Pourhassan’s efforts.
On October 11, 2011, Dr. Pourhassan and the Company entered into a Mutual Release and Personal Services Termination Agreement (the
“MRPSTA”) which relieves the Company of liability for any claims of compensation under the Personal Services Agreement.
Simultaneously, with the signing of the MRPSTA, Dr. Pourhassan and the Company entered into a new Employment and Non-Compete
Agreement whereby Dr. Pourhassan will serve as Managing Director of Business Development at an annual salary of $225,000. The
Company had been accruing stock compensation and deferred offering costs related to the Personal Services Agreement as described above.
Upon the signing of the MRPSTA, the Company at May 31, 2011 reversed all related accrued stock compensation and deferring offering
costs, as the Company currently has no further obligations under the Personal Services Agreement.
4 - Convertible Instruments
During fiscal year 2010 the Company authorized the issuance of 400,000 shares of Series B Convertible Preferred Stock (Series B) at $5.00
per share. During the period ended May 31, 2012, 212,900 shares of the Series B were converted into 2,129,000 shares of common stock.
The Series B is convertible into ten shares of the Company’s common stock including any accrued dividend, with an effective fixed
conversion price of $0.50 per share. The holders of the Series B can only convert their shares to common shares provided the Company has
sufficient authorized common shares at the time of conversion. Accordingly, the conversion option was contingent upon the Company
increasing their authorized common shares, which occurred April 2010 when the Company’s shareholders approved an increase to the
authorized shares. At the commitment date, which occurred upon the shareholders approving the increase in the authorized shares, the
conversion option related to the Series B was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a
constructive dividend to the Series B holders of approximately $6,000,000. The constructive dividend increased and decreased additional paid-
in capital by the same amount. The Series B has liquidation preferences over the common share holders at $5.00 per share plus any accrued
dividends. Dividends are payable to the Series B holders when declared by the board of directors at the rate of $0.25 per share per annum.
Such dividends are cumulative and accrue whether or not declared and whether or not there are any profits, surplus or other funds or assets of
the Company legally available therefore. The Series B holders have no voting rights.
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
5 - Stock Options and Warrants
The Company has one stock-based equity plan at May 31, 2012. Pursuant to the 2004 Stock Incentive Plan as amended (the “Plan”), which
was originally adopted by the Company’s shareholders in 2005, the Company was authorized to issue options and warrants to purchase up to
7,600,000 shares of the Company’s common stock. As of May 31, 2012 the Company had 3,941,500 shares available for future stock option
grants under the Plan.
The estimated fair value of options and warrants is determined using the Black-Scholes option valuation model with the following weighted-
average assumptions for the periods ended May 31, 2012 and 2011:
Risk free rate
Dividend yield
Volatility
Expected term
2012
0.12% - 0.87%
—
93% - 102%
1-4 years
2011
0.74%
—
106%
6.25 years
Net cash proceeds from the exercise of stock options and warrants were approximately $327,000 and $0 for the periods ended May 31, 2012
and May 31, 2011, respectively.
Compensation expense related to stock options and warrants was approximately $1,692,000, and $952,000 for the periods ended May 31,
2012 and 2011, respectively. During 2012 and 2011, the Company granted 3,416,088 and 550,000 options to employees, consultants and
directors, which were valued and recorded as compensation expense above. Additionally, the Company granted 40,000 and 0 of warrants in
conjunction with the issuance of common stock. All options and warrants granted during 2012 and 2011 were granted outside of the Plan.
The grant date fair value of options and warrants vested during the periods ended May 31, 2012 and 2011 was approximately $1,562,000 and
$895,000, respectively. The weighted average grant date fair value of options and warrants granted during the periods ended May 31, 2012
and 2011 was $1.44 and $0.97 respectively. As of May 31, 2012, there was approximately $5,039,000 of unrecognized compensation costs
related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 3.31 years.
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
The following table represents stock option and warrants activity for the periods ended May 31, 2012 and 2011:
Options and warrants outstanding - May 31, 2010
Granted
Exercised
Forfeited/expired/cancelled
Options and warrants outstanding - May 31, 2011
Granted
Exercised
Forfeited/expired/cancelled
Options and warrants outstanding May 31, 2012
Exercisable - May 31, 2012
Number of
Shares
7,660,176
550,000
(18,000)
(718,600)
7,473,576
3,456,088
(527,500)
(74,500)
10,327,664
6,627,649
Weighted
Average
Exercise Price
1.42
$
$
$
$
$
$
$
$
$
$
1.19
1.20
2.13
1.34
2.04
0.62
2.49
1.60
1.42
Weighted
Average
Remaining
Contractual
Life
5.41
—
—
—
3.84
—
—
—
3.20
2.86
Aggregate
Intrinsic Value
2,761,129
—
—
—
10,495,913
—
1,147,425
—
2,308,279
2,207,529
6 - Stock issued for services and cash
On November 14, 2011, the Board approved a private placement to sell up to 2,000,000 shares of the Company’s common stock, no par
value, at a price of $1.50 per share. During the three months ended February 29, 2012, 1,997,388 shares were sold for proceeds totaling
approximately $2,996,000.
During the fiscal year ended May 31, 2012, the Company issued 72,500 shares of common stock at $2.80 per share to consultants for past
services, and recognized $203,000 of stock-based compensation based on the fair market value of the Company’s stock price at the
commitment date for the services.
During the fiscal year ended May 31, 2012, the Company issued 16,675 shares of common stock at prices ranging from $2.00 to $2.71 per
share to directors for past services, and recognized approximately $35,000 in stock-based compensation.
7 - Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB (including its 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.
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8 - Income Taxes
CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
Deferred taxes are recorded for all existing temporary differences in the Company’s assets and liabilities for income tax and financial reporting
purposes. Due to the valuation allowance for deferred tax assets, as noted below, there was no net deferred tax benefit or expense for the
periods ended May 31, 2012 and 2011, and for the period ended October 28, 2003 through May 31, 2012.
Reconciliation of the federal statutory income tax rate of 34 percent to the effective income tax rate is as follows for all periods presented:
Income tax provision at statutory rate
State income taxes, net
Rate change
Other
Valuation allowance
2012
2011
34.0%
5.1
0.0
0.0
(39.1)
0.0%
34.0%
5.1
5.3
3.6
(48.0)
0.0%
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2012 and 2011:
Deferred tax asset (liability) current:
Accrued salary and expenses
Warrant amortization
Valuation allowance
Deferred tax asset (liability) non-current
Net operating loss
Expense on non-qualified stock options and OID
amortization
Other
Valuation allowance
2012
2011
$
$
49,100
—
(49,100)
-0-
$
$
10,500
(800)
(9,700)
-0-
$ 6,317,000
$ 4,112,700
2,093,100
96,500
$(8,506,600)
-0-
$
1,450,000
58,000
$(5,620,700)
-0-
$
The tax benefit for the period presented is offset by a valuation allowance established against deferred tax assets arising from operating losses
and other temporary differences, the realization of which could not be considered more likely than not. In future periods, tax benefits and
related tax deferred assets will be recognized when management considers realization of such amounts to be more likely than not.
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
At May 31, 2012, the Company had available net operating loss carryforwards of approximately $16,000,000 which expire beginning in
2022.
9 - Commitments and Contingencies
During the fiscal year ended May 31, 2012, the Company entered into employment agreements with three executives. The salaries for the
executives range from $200,000 to $398,000 for fiscal year 2012, and each executive is reviewed annually for renewal of the agreement and
salary merit increases. Bonuses for two of the executives are discretionary based on Board approval, and may range between 25 and 50
percent of the executives’ salaries. Additionally, one executive has an incentive bonus based upon achievement of certain targeted annual
performance goals to be recommended by the Company’s compensation committee and approval of the Company’s Board. Pursuant to the
employment agreements, during fiscal year 2012, the Company granted 2,900,000 common stock options at an exercise price of $2.00 per
share. The options vest over four years, and expire five years from the date of grant. Subsequent to May 31, 2012, the Company entered into a
Transition Agreement with Kenneth J. Van Ness, the Company’s President and Chief Executive Officer (“CEO”) (see Note 11 below).
On or about December 22, 2011, William Carmichael and Mojdeh Javadi (the “Plaintiffs”) filed a complaint against the Company in the
Circuit Court of the State of Oregon for the County of Clackamas, alleging breach of contract. The Plaintiffs allege that the Company entered
into a contract with the Plaintiffs in November 2007, then breached the terms of the contract by failing to issue warrants to the Plaintiffs
entitling them to purchase shares of the Company’s stock (the “Breach of Contract” claims). The Plaintiffs filed an Amended Complaint
against the Company on May 11, 2012 in which they assert three additional claims each and amend the relief requested. In addition to the
Breach of Contract claims, Plaintiffs allege in their Amended Complaint that: (i) they are third-party beneficiaries of a promise made by the
Company to Nader Pourhassan in a Personal Services Agreement (the “Personal Services Agreement”), dated August 4, 2008 (the “Third
Party Beneficiary” claims), (ii) they provided services to the Company and are entitled to the reasonable value for such services (the “Quantum
Meruit” claims), and (iii) in reliance on the promises made in the Personal Services Agreement, the Company induced them to provide services
to the Company and they are entitled to compensation for damages resulting from their reliance on those promises (the “Promissory Estoppel”
claims). The Quantum Meruit and Promissory Estoppel claims are alternative claims to their Third Party Beneficiary claims. On the Breach of
Contract claims, the Plaintiffs seek either compensatory damages in an amount not less than $750,000 each or the delivery of warrants to each
Plaintiff to purchase 375,000 shares of the Company’s common stock for $0.25 per share. With respect to the Third Party Beneficiary claims,
the Plaintiffs seek a judgment requiring the Company to deliver 650,000 shares of its common stock to each Plaintiff. With respect to the
Quantum Meruit claims, Plaintiffs seek compensatory damages in an amount equal
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
to the reasonable value of their services to the Company. With respect to the Promissory Estoppel claims, the Plaintiffs seek compensation for
damages resulting from their reliance on the Company’s promises. The Plaintiffs also seek prejudgment interest, plus costs and disbursements
incurred in the litigation. The Company filed an answer to the complaint on February 15, 2012. An answer to the Amended Complaint was
filed on May 21, 2012.
On July 27, 2012, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with the above
Plaintiffs. Pursuant to the Settlement Agreement, the Company issued 200,000 shares of the Company’s common stock (“Shares”) to each of
the Plaintiffs, for an aggregate total of 400,000 Shares. In addition, the Company issued warrants (“Warrants”) to purchase up to 375,000
Shares to each of the Plaintiffs, for an aggregate total of 750,000 Warrants. The Warrants are immediately exercisable at $0.25 per Share and
shall expire on August 15, 2012. The Company issued the Shares and the Warrants to the Plaintiffs in exchange for their full and complete
release of any and all claims against the Company as of July 27, 2012. Pursuant to and in accordance with the Settlement Agreement, on
July 30, 2012, the Plaintiffs also dismissed with prejudice and without any award of costs, disbursements or attorney’s fees, their Amended
Complaint against the Company filed in the Circuit Court of the State of Oregon for the County of Clackamas. As of May 31, 2012, the
Company recognized approximately $540,000 and $388,000 of compensation expense related to the Warrant grant, and the issuance of the
Shares, respectively.
In addition, from time to time, the Company is involved in claims and suits that arise in the ordinary course of business. Management currently
believes that resolving any such claims against the Company will not have a material adverse impact on the Company’s business, financial
position or results of operations.
10 - Related Party Transactions
Prior to 2011, a director provided legal services to the Company for several years. As of May 31, 2012 the Company still owed the director
$19,493 and it is included in the accompanying consolidated financial statements as “indebtedness to related parties” as of May 31, 2012. The
amount has been classified as short-term, as the Company’s intention is to pay the note completely in the next twelve months. As of May 31,
2012 the note is past due.
In May and July 2007, the Company issued $150,000 in promissory notes with a stated interest rate of 14% to a director of the Company.
These notes are currently past due. As of May 31, 2012, the balance in the notes is $55,000. The Company has classified the balance as short-
term obligation as of May 31, 2012, as the Company’s intention is to pay the note completely in the next twelve months.
The Company uses on an at-will basis a portion of a building owned by an affiliate of Kenneth J. Van Ness, our President and Chief
Executive Officer, our principal offices that are located at 110 Crenshaw Lake Road, Lutz, Florida 33548. The Company uses approximately
1,600 square feet on a month-to-month basis at a rent of $1,650 per month, plus sales tax and utility reimbursement.
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable
transactions been entered into with independent parties.
11 - Subsequent Events
On July 25, 2012, the Company and Kenneth J. Van Ness entered into a Transition Agreement (the “Transition Agreement”). Pursuant to the
Transition Agreement, Mr. Van Ness stepped down as the Chairman of the Board, effective immediately. In addition, Mr. Van Ness will step
down as the President and CEO of the Company, effective no later than October 16, 2012 (the “Separation Date”). Mr. Van Ness will
continue to serve as a director on the Board and Gregory A. Gould, a current member of the Board, will serve as the Chairman of the Board.
The Transition Agreement provides that, in lieu of any compensation otherwise payable to Mr. Van Ness under the Executive Employment
Agreement, dated April 16, 2012, but effective as of August 9, 2011 (the “Employment Agreement”), by and among the Company and
Mr. Van Ness, during the period beginning on July 18, 2012 through October 16, 2012 (the “Transition Period”) Mr. Van Ness will be paid a
salary equal to $13,890 per month and will continue to receive, during the Transition Period, the fringe benefits, indemnification and
miscellaneous business expense benefits provided for in the Employment Agreement. Mr. Van Ness is also entitled to (i) receive a cash
severance payment equal to $13,890 per month for 33 months after the Separation Date, (ii) the opportunity to elect the timing of distribution
of his account balance in the Company’s 401(k) plan, (iii) reimbursement for continuing health care insurance coverage under COBRA for
nine months, and (iv) all amounts due by the Company to an affiliate of Mr. Van Ness for every month that the Company continues to occupy
a portion of the real property owned by an affiliate of Mr. Van Ness located at 110 Crenshaw Lake Road, Lutz, Florida.
The Transition Agreement also provides that: (i)(A) the CytoDyn Inc. Stock Option Award Agreement, dated December 6, 2010, by and
among the Company and Mr. Van Ness is amended to provide for immediate vesting of all of the 500,000 options granted at $1.19 per share,
and (B) the CytoDyn Inc. Stock Option Award Agreement, dated April 16, 2012, but effective as of August 9, 2011, by and among the
Company and Mr. Van Ness is amended to provide for (I) immediate vesting of 750,000 of the 1,500,000 options granted at $2.00 per share,
and (II) forfeiture of the remaining 750,000 of the 1,500,000 options granted at $2.00 per share; (ii) Mr. Van Ness agreed to shorten the
expiration date of the 25,000 options granted to him on September 22, 2010, the Company and Mr. Van Ness agreed that the expiration date
for exercise of such options is August 8, 2016, although the Company amended the grants to waive the earlier expiration of such options if
Mr. Van Ness no longer is in “Continuous Service” with the Company as that term is defined in the Company’s Stock Incentive Plan.
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CYTODYN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2012
Effective July 25, 2012, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Progenics
Pharmaceuticals, Inc. (“Progenics”) to acquire from Progenics its proprietary HIV viral-entry inhibitor drug candidate PRO 140 (“PRO 140”),
a humanized anti-CCR5 monoclonal antibody, as well as certain other related assets, including the existing inventory of bulk PRO 140 drug
product, intellectual property, certain related licenses and sublicenses, and United States Food and Drug Administration (“FDA”) regulatory
filings. The terms of the Asset Purchase Agreement provide for an initial cash payment of $3,500,000, as well as the following milestone
payments and royalties: (i) $1,500,000 at the time of the first dosing in a US Phase III trial or non-US equivalent; (ii) $5,000,000 at the time of
the first US new drug application approval by the FDA or other non-US approval for the sale of PRO 140; and (iii) royalty payments of up to
five percent (5%) on net sales during the period beginning on the date of the first commercial sale of PRO 140 until the later of (a) the
expiration of the last to expire patent included in the acquired assets, and (b) 10 years following the first commercial sale of PRO 140, in each
case determined on a country-by-country basis. The closing is expected to take place within 90 days of the effective date, but is subject to the
satisfaction of a number of closing conditions, including, among other matters: (i) Progenics having received all required authorizations,
consents and approvals of government authorities; (ii) Progenics having entered into and delivered intellectual property assignments; (iii) the
Company and Progenics having entered into a transition services agreement; (iv) the Company having obtained the financing and raising of
capital it needs in order to consummate the transactions contemplated by the Asset Purchase Agreement; and (v) the Company having
completed and been satisfied with its continuing due diligence investigation of PRO 140.
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Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of May 31, 2012, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, management has evaluated the effectiveness of the design and operations of the Company’s disclosure controls and procedures. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures
were not effective as of May 31, 2012 as a result of the material weakness in internal control over financial reporting discussed below.
Internal Control Over Financial Reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes
policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Company’s
transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements and that
receipts and expenditures of the Company’s assets are made in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of May 31, 2012 using
the criteria set forth in the Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon the evaluation, our management concluded that our internal control over
financial reporting was not effective as of May 31, 2012 because of material weaknesses in our internal control over financial reporting. A
material weakness is a control deficiency that results in a more than remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. Our
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Table of Contents
management concluded that the Company has several material weaknesses in our internal control over financial reporting because of
inadequate segregation of duties over authorization, review and recording of transactions as well as the financial reporting of such transactions.
Due to the Company’s limited resources, management has not developed a plan to mitigate the above material weaknesses. Despite the
existence of these material weaknesses, the Company believes the financial information presented herein is materially correct and in accordance
with the generally accepted accounting principles.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the year ended May 31, 2012, that materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by Item 10 relating to our directors, executive officers and corporate governance is incorporated herein by
reference to our definitive proxy statement for the 2012 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of May 31,
2012.
We have adopted a Code of Ethics for our Senior Executive Officers (the Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, Treasurer and Controller (or persons performing similar functions)), as well as a Code of Business Conduct and an Insider
Trading Policy for the Company. These can all be found on our website at www.cytodyn.com.
Item 11.
Executive Compensation
The information required by Item 11 relating to executive compensation is incorporated herein by reference to our definitive proxy
statement for the 2012 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of May 31, 2012.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 relating to security ownership of certain beneficial owners and management and related
stockholders matters is incorporated herein by reference to our definitive proxy statement for the 2012 Annual Meeting of Shareholders, to be
filed with the SEC within 120 days of May 31, 2012.
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See the table in “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities” above for our Equity Compensation Plan Information as of May 31, 2012.
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 relating to certain relationships and related transactions and director independence is incorporated
herein by reference to our definitive proxy statement for the 2012 Annual Meeting of Shareholders, to be filed with the SEC within 120 days
of May 31, 2012.
Item 14.
Principal Accountant Fees and Services
The information required by Item 14 relating to principal accountant fees and services is incorporated herein by reference to our
definitive proxy statement for the 2012 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of May 31, 2012.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Consolidated Financial Statements
See the Consolidated Financial Statements starting on page 24.
2.
Exhibits
The exhibits listed in the Exhibit Index, which appears immediately following the signature page and is incorporated herein by reference,
and filed as part of this Annual Report on Form 10-K.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 21, 2012
Date: August 21, 2012
CYTODYN INC.
By: /s/ Kenneth J. Van Ness
Kenneth J. Van Ness
President and
Chief Executive Officer, Director
By: /s/ Andrew T. Libby, Jr.
Andrew T. Libby, Jr.
Chief Financial Officer and Corporate Secretary
Pursuant to the requirements of the Securities Act of 1934 this Annual Report on Form 10-K was signed by the following persons on behalf
of the Registrant and in the capacities and on the dates stated.
Date: August 21, 2012
Date: August 21, 2012
Date: August 21, 2012
Date: August 21, 2012
By: /s/ Gregory A. Gould, CPA
Gregory A. Gould, CPA
Chairman of the Board of Directors
By: /s/ Ronald J. Tropp, Esq.
Ronald J. Tropp, Esq.
Director
By: /s/ Jordan Naydenov
Jordan Naydenov
Director
By: /s/ Anthony D. Caracciolo
Anthony D. Caracciolo
Director
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Exhibit
Number
EXHIBITS INDEX
Description
Articles of Incorporation and Bylaws
3.1
3.2
3.3
3.4
3.5
2.1
10.1
10.2
10.3
Rexray Articles of Incorporation shell company (incorporated herein by reference to Exhibit 3.1 on Form 10SB12G Registration
of Securities for Small Business Issuers filed July 11, 2002).
Amended and Restated Bylaws (incorporated by reference herein to Exhibit 3.1 filed with Form 8-K Current Report filed
November 10, 2011).
Amendment to the Articles of Incorporation changing company name from Rexray to CytoDyn Inc., and effective a one for two
reverse split of its common shares (incorporated herein by reference to filed Exhibit 3.2 on Current Form 8-K filed November 12,
2003).
Amendment to Articles of Incorporation dated September 2009 designating CytoDyn Inc.’s preferred Series B non-voting shares
sold in a private placement. (Incorporated by reference to Exhibit 3.4 to Form 10-K filed March 12, 2010).
Amendment to Articles of Incorporation dated April 24, 2010 increasing the number of authorized shares to 100,000,000
(incorporated herein by reference to Exhibit 3.5 on Current Form 8-K filed April 29, 2010).
Plan of Acquisition
Acquisition Agreement for reverse merger acquisition of shell company by CytoDyn of New Mexico Inc. (incorporated herein by
reference to Exhibit 10.1 with Current Form 8-K/A filed January 12, 2004).
Material Contracts
Patent License Agreement between Allen D. Allen and CytoDyn of New Mexico Inc. (incorporated herein by reference to Exhibit
10.2 with Form 10-KSB, Annual Report for Small Business Issuers filed September 14, 2004).
Amendment to Patent License Agreement (incorporated herein by reference to Exhibit 10.6.1 filed with Form SB-2/A Registration
of Securities for Small Business Issuer filed March 21, 2005).
Exclusive License Agreement between Advanced Genetic Technologies, Inc.
And The CBR Institute for Biomedical Research Inc. (incorporated herein by reference to Exhibit 10.2 filed with Current Form
8-K filed February 5, 2007).
65
Table of Contents
Exhibit
Number
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11*
10.12*
10.13
Description
Legal Settlement between CytoDyn of New Mexico Inc., Officers Allen D. Allen and Corinne Allen and CytoDyn Inc on the one
hand and Maya LLC, Rex Lewis, and AIDS Research LLC on the other hand entered into December 2008. (Incorporated by
reference to Exhibit 10.6 to Form 10-K filed March 12, 2010).
Clinical Trial Agreement between The General Hospital Corporation d/b/a Massachusetts General Hospital and CytoDyn Inc.,
entered into September 28, 2009 for conducting clinical trials using Cytolin (incorporated herein by reference to Exhibit 10.1 of
CytoDyn Inc. Current Report on Form 8-K dated September 29, 2009).
®
Amendment Number 1 to the Clinical Trial Agreement between The General Hospital Corporation d/b/a Massachusetts General
Hospital and CytoDyn Inc., entered into October 14, 2009 (incorporated by reference herein to Exhibit 10.7 filed with Form 10-
K/A Annual Report filed August 5, 2011).
Amendment Number 2 to the Clinical Trial Agreement between The General Hospital Corporation d/b/a Massachusetts General
Hospital and CytoDyn Inc., entered into December 1, 2009 (incorporated by reference herein to Exhibit 10.8 filed with Form 10-
K/A Annual Report filed August 5, 2011).
Amendment Number 3 to the Clinical Trial Agreement between The General Hospital Corporation d/b/a Massachusetts General
Hospital and CytoDyn Inc., entered into March 1, 2010 (incorporated by reference herein to Exhibit 10.9 filed with Form 10-K/A
Annual Report filed August 5, 2011).
Amendment Number 4 to the Clinical Trial Agreement between The General Hospital Corporation d/b/a Massachusetts General
Hospital and CytoDyn Inc., entered into December 7, 2010 (incorporated by reference herein to Exhibit 10.1 filed with Form 10-
Q Current Report filed October 7, 2011).
Amendment Number 5 to the Clinical Trial Agreement between The General Hospital Corporation d/b/a Massachusetts General
Hospital and CytoDyn Inc., entered into May 20, 2011 (incorporated by reference herein to Exhibit 10.10 filed with Form 10-K
Annual Report filed November 3, 2011).
CytoDyn Inc., 2004 Stock Incentive Plan (incorporated by reference herein to Exhibit 10.10 filed with Form 10-K/A Annual
Report filed August 5, 2011).
CytoDyn Inc., 401(k) Profit Sharing Plan (incorporated by reference herein to Exhibit 10.11 filed with Form 10-K/A Annual
Report filed August 5, 2011).
Research Funding and Option Agreement dated November 5, 2011 (incorporated by reference herein to Exhibit 10.1 filed with
Form 8-K Current Report filed November 16, 2011).
66
Table of Contents
Exhibit
Number
10.14*
Executive Employment Agreement dated April 16, 2012 but effective as of August 9, 2011 (incorporated by reference herein to
Exhibit 10.1 filed with Form 8-K Current Report filed April 20, 2012).
Description
21.1
Subsidiaries
Other
Certifications
31.1
31.2
32.1
32.2
Certification by CEO
Certification by CFO
Certification of CEO pursuant to 18. U.S.C. Section 1350 as adopted, pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Certification of CFO pursuant to 18. U.S.C. Section 1350 as adopted, pursuant to Section 906 of Sarbanes-Oxley Act of 2002
XBRL
101.INS
XBRL Instance Document **
101.SCH
XBRL Taxonomy Extension Schema Document **
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document **
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB
XBRL Taxonomy Extension Label Linkbase Document **
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document **
* Management contract or compensatory plan or arrangement
**
These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
67
Name
Advanced Genetic Technologies, Inc.
CytoDyn Veterinary Medicine LLC
Subsidiaries
Jurisdiction of Incorporation or
Organization
Florida
Florida
Exhibit 21.1
Exhibit 31.1
I, Kenneth J. Van Ness, certify that:
1. I have reviewed this Annual Report on Form 10-K of CytoDyn Inc.;
Certification of Chief Executive Officer
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: August 21, 2012
/s/ Kenneth J. Van Ness
Kenneth J. Van Ness
President and Chief Executive Officer
Exhibit 31.2
I, Andrew T. Libby, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K of CytoDyn Inc.;
Certification of the Chief Financial Officer
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: August 21, 2012
/s/ Andrew T. Libby, Jr.
Andrew T. Libby, Jr.
Chief Financial Officer
Exhibit 32.1
Certification of the Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CytoDyn Inc. (the “Company”) on Form 10-K for the fiscal year ended May 31, 2012 as filed
with the Securities and Exchange Commission on the date hereof (the “Form 10-K “), I, Kenneth J. Van Ness, President and Chief Executive
Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 21, 2012
/s/ Kenneth J. Van Ness
Kenneth J. Van Ness
President and Chief Executive Officer
Exhibit 32.2
Certification of the Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CytoDyn Inc. (the “Company”) on Form 10-K for the fiscal year ended May 31, 2012 as filed
with the Securities and Exchange Commission on the date hereof (the “Form 10-K “), I, Andrew T. Libby, Jr., Chief Financial Officer of the
Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 21, 2012
/s/ Andrew T. Libby, Jr.
Andrew T. Libby, Jr.
Chief Financial Officer