Table of Contents
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, 2014
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)
1111 Main Street, Suite 660
Vancouver, Washington
(Address of principal executive offices)
75-3056237
(I.R.S. Employer
Identification No.)
98660
(Zip Code)
Registrant’s Telephone Number, including area code: (360) 980-8524
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: $67,262,130 (as of November 29, 2013).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of
June 30, 2014, the registrant had 55,753,311 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders
Parts Into Which
Incorporated
Part III
Table of Contents
CYTODYN INC.
FORM 10-K FOR THE YEAR ENDED MAY 31, 2014
Table of Contents
PART I
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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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FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to
predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as
“believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense,
identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Our forward-looking statements
are not guarantees of performance and actual results could differ materially from those contained in or expressed by such statements. In
evaluating all such statements we urge you to specifically consider various risk factors identified in this prospectus, including the matters set
forth under the heading “Risk Factors,” any of which could cause actual results to differ materially from those indicated by our forward-
looking statements.
Our forward-looking statements reflect our current views with respect to future events and are based on currently available financial,
economic, scientific, and competitive data and information on current business plans. You should not place undue reliance on our forward-
looking statements, which are subject to risks and uncertainties relating to, among other things: (i) general economic and business conditions,
(ii) changes in foreign, political, and social conditions, (iii) regulatory initiatives, compliance with governmental regulations and the regulatory
approval process, (iv) our ability to achieve approval of a marketable product, (v) design, implementation and conduct of clinical trials, (vi) the
results of our clinical trials, including the possibility of unfavorable clinical trial results, (vii) the market for, and marketability of, any product
that is approved, (viii) the existence or development of vaccines, drugs, or other treatments for infection with the Human Immunodeficiency
Virus that are viewed by medical professionals or patients as superior to our products, (ix) the specific risk factors discussed under the
heading “Risk Factors” below, and (x) various other matters, many of which are beyond our control. Should one or more of these risks or
uncertainties develop, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated, or otherwise indicated by our forward-looking statements.
We intend that all forward-looking statements made in this annual report will be subject to safe harbor protection of the federal securities
laws pursuant to Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, to the extent applicable. Except as required by law, we do not undertake any responsibility to update these forward-looking
statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any
responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or
implied by these forward-looking statements.
Item 1.
Business.
Overview / Corporate History
PART I
CytoDyn Inc. is a Colorado corporation with its principal business office at 1111 Main Street, Suite 660, Vancouver, Washington
98660. Our website can be found at www.cytodyn.com. We do not intend to incorporate any contents from our website into this annual
report. Unless the context otherwise requires, references in this annual report to “CytoDyn,” the “Company,” “we,” “our,” or “us” are to
CytoDyn Inc. and its subsidiaries.
We are a publicly traded biotechnology company focused on developing and potentially marketing a class of therapeutic monoclonal
antibodies to treat Human Immunodeficiency Virus (“HIV”) infection. Our lead product candidate, PRO 140, belongs to a class of HIV
therapies known as entry inhibitors. These therapies potentially block HIV from entering into and infecting certain cells. Although CytoDyn
intends to focus its efforts on PRO 140, the Company also holds certain rights in two proprietary platform technologies: Cytolin®, a
monoclonal antibody targeting HIV with a mechanism of action which may prove to be synergistic to that of PRO 140 and other treatments;
and CytoFeline™, a monoclonal antibody targeting Feline Immunodeficiency Virus (“FIV”).
PRO 140
We believe the PRO 140 antibody shows promise as a powerful anti-viral agent while not being a drug, which means fewer side effects
and less frequent dosing requirements as compared to daily drug therapies currently in use. The PRO 140 antibody belongs to a class of HIV
therapies known as entry inhibitors that block HIV from entering into and infecting certain cells. PRO 140 blocks HIV from entering a cell by
binding to a molecule called CCR5, a normal cell surface receptor protein to which HIV attaches as part of HIV’s entry into a cell.
PRO 140 is an antibody and not a drug, and through preliminary, short-term trials it has demonstrated efficacy without issues relating to
toxicity and autoimmune resistance. Moreover, these trials suggested that PRO 140 does not affect the normal function of the CCR5 receptor.
Instead, PRO 140 binds to a precise site on CCR5 that HIV uses to enter the cell and, in doing so, inhibits the ability of HIV to infect the cell
without affecting the cell’s normal function.
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PRO 140 was originally developed by Progenics Pharmaceuticals, Inc. (“Progenics”), which led, and contributed to funding of,
PRO 140 development and trials through 2011. We acquired the asset from Progenics in October 2012. Jeffrey M. Jacobson, M.D., Professor
of Medicine, Microbiology and Immunology, Chief, Drexel University College of Medicine (“Drexel”), has conducted prior research relating
to PRO 140, and is continuing to pursue two clinical trials partially funded through two grants awarded to Drexel and Dr. Jacobson by the
National Institutes of Health (“NIH”). We have also initiated steps to explore additional therapeutic indications for PRO 140 under our own
auspices, primary among which is our current clinical trial exploring PRO 140 as a short-term treatment substitution for existing drug
regimens.
To facilitate our self-funded and sponsored clinical research plans, we have engaged Amarex Clinical Research, LLC (“Amarex”), our
principal contract research organization, to provide comprehensive clinical trial services with respect to our treatment substitution study,
including managing our chemistry and manufacturing control (“CMC”) activities. The estimated cost for this study is approximately $3.7
million, of which $1.0 million represents estimated direct service fees payable to Amarex. Under the terms of our agreement with Amarex, we
are required to pay Amarex 30% of the unpaid balance of direct service fees upon early termination of the agreement. We paid Amarex a
combined deposit of approximately $790,000 in December 2013 and have an unamortized balance of $256,800 as of May 31, 2014.
In furtherance of our business strategy and subsequent to fiscal year-end 2014, the Company has entered into a manufacturing agreement
with a contract manufacturing organization to initiate preparations for the potential future manufacturing of additional PRO 140.
To date, PRO 140 has only been tested and administered to test subjects either intravenously or as a subcutaneous injection. We believe
that, if PRO 140 is approved for use as an injectable by the FDA, it may nonetheless be an attractive and marketable therapeutic option (for
patients with healthy CCR5), particularly in the following scenarios:
•
•
•
•
•
Patients desiring a break from existing treatment regimens, whether due to side-effects or for personal reasons;
Patients with difficulty adhering to daily drug regimens;
Patients who poorly tolerate existing therapies;
Patients with compromised organ function, such as HCV co-infection; and
Patients with complex concomitant medical requirements.
We believe PRO 140 has demonstrated potent (as compared to existing treatments) antiretroviral activity and an encouraging safety
profile in prior clinical testing, that PRO 140 has the potential to be the first long-acting (weekly or every other week), self-administered HIV
therapy, and that PRO 140 may inhibit CCR5-tropic HIV while preserving CCR5’s natural activity. PRO 140 also appears to broadly inhibit
drug-resistant CCR5-tropic HIV viruses, including one resistant to small-molecule anti-CCR5 HIV therapies. (PRO 140 has no effect on
strains of HIV that enter through the CXCR4 cell portal.) Overall, we believe PRO 140 represents a distinct class of CCR5 inhibitors with
unique virological and immunological properties and may provide another distinct tool to treat HIV-infected subjects.
Current Clinical Trials
PRO 140 is currently being studied in three clinical trials. Two studies are led by Drexel and Dr. Jeffrey Jacobson. These studies are
funded directly through grants from NIH. Pursuant to a clinical trial agreement with us, Drexel is now carrying the investigational new drug
(“IND”) application. As such, the Company is precluded from commenting on the Drexel sponsored studies. A third clinical trial of PRO 140
commenced in May 2014 and is sponsored and funded by the Company. This Phase 2b trial is known as “treatment substitution.”
Our ongoing treatment substitution study has two objectives: (1) to assess the efficacy of PRO 140 monotherapy for the maintenance of
viral suppression after being used in substitution of a patient’s antiretroviral therapy regimen and (2) to assess the clinical safety and
tolerability parameters for PRO 140 following use in substitution of antiretroviral therapy. The study protocol requires patients to be stable on
combination antiretroviral therapy. The current trial design provides that patients will be shifted from combination antiretroviral regimen to
PRO 140 monotherapy for 12 weeks. Total treatment duration with PRO 140 will be up to 14 weeks with one week overlap of existing
retroviral regimen and PRO 140 at the beginning of the study period and also one week of overlap at the end in subjects who did not
experience virologic failure. PRO 140 is being administered as a 350mg subcutaneous dosage weekly for up to 14 weeks and participants are
monitored for viral rebound on a weekly basis.
Other Product Candidates
A second product candidate, Cytolin, is also a humanized monoclonal antibody for the treatment of HIV infection. It targets a normal cell
molecule called CD11a, part of the heterodimer that makes up the cell adhesion molecule lymphocyte function cell associated antigen.
Published reports have suggested that blocking or engaging CD11a might limit or prevent HIV infection of CD4 cells and monocytes.
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We acquired rights to Cytolin in October 2003 pursuant to an agreement with CytoDyn of New Mexico, Inc. (“CytoDyn NM”). As part
of the transaction, we acquired the drug candidate Cytolin and were assigned rights under the patent license agreement dated July 1, 1994,
between CytoDyn NM and Allen D. Allen, covering United States Patent No. 5,651,970 (which describes a method for treating HIV disease
with the use of monoclonal antibodies), including the worldwide, exclusive right to develop, market and sell compounds disclosed by the
patent, to practice methods taught by the patent, and to exploit specified technology related to the patent. This patent is for a murine (mouse)
version of the drug. The license agreement expires on the original expiration date of the patent in July 2014. 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. On
September 13, 2012, we filed an international patent application (Serial No. PCT/US2012/055132) claiming priority to a United States
provisional patent application for our humanized version of Cytolin.
In May 2011, we formed CytoDyn Veterinary Medicine LLC (“CVM”) to explore the possible application of feline reactive monoclonal
antibodies for the treatment of Feline Immunodeficiency Virus (“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. CytoFeline is the Company’s proprietary product targeted to treat FIV.
Until the clinical trials for PRO 140 have advanced further, we do not plan to devote any resources towards the development, research,
testing, approval, or commercialization of Cytolin or CytoFeline.
PRO 140 Acquisition
We acquired PRO 140, as well as certain other related assets, including the existing inventory of PRO 140 bulk drug substance,
intellectual property, and FDA regulatory filings, pursuant to an Asset Purchase Agreement, dated as of July 25, 2012 (the “Progenics
Agreement”), between CytoDyn and Progenics. The terms of the Progenics Agreement provided for an initial cash payment of $3,500,000,
which was paid at closing in October 2012, as well as the following milestone payments and royalties to be paid to Progenics in the future:
(i) $1,500,000 at the time of the first dosing in a U.S. Phase 3 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-U.S. approval for the sale of PRO 140; and (iii) royalty payments of 5% of 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 commercialization sale of PRO 140, in each case determined on a country-by-country
basis. The foregoing summary of the Progenics Agreement is qualified in its entirety by reference to the full terms of the Progenics
Agreement, which is incorporated by reference as an exhibit to this report.
Payments to Progenics are in addition to payments due under a Development and License Agreement, dated April 30, 1999 (the “PDL
License”), between Protein Design Labs (now AbbVie Inc.) and Progenics, which was assigned to us in the PRO 140 transaction, pursuant to
which we must pay additional milestone payments and royalties as follows: (i) $1,000,000 upon initiation of a Phase 3 clinical trial;
(ii) $500,000 upon filing a Biologic License Application with the FDA or non-U.S. equivalent regulatory body; (iii) $500,000 upon FDA
approval or approval by another non-U.S. equivalent regulatory body; and (iv) royalties of up to 7.5% of net sales for the longer of 10 years
and the date of expiration of the last to expire licensed patent. Additionally, the PDL License provides for an annual maintenance fee of
$150,000 until royalties paid exceed that amount. The foregoing summary of the PDL License is qualified in its entirety by reference to the full
terms of the Progenics Agreement, which is incorporated by reference as an exhibit to this report.
As part of our acquisition of PRO 140, we entered into a collaboration agreement with Drexel, under which CytoDyn has provided
Drexel with the necessary quantity of PRO 140 to conduct certain clinical trials. CytoDyn will have access to all clinical trial data and the right
to use such data. During fiscal 2014, CytoDyn fulfilled its obligation to Drexel to deliver finished drug product for use in its clinical trials.
Patents and Proprietary Technology
Protection of our intellectual property rights is important to our business. We may file patent applications in the U.S., Canada, and Japan,
European countries that are party to the European Patent Convention and other countries on a selective basis in order to protect inventions we
consider to be important to the development of our business.
Generally, patents issued in the U.S. are effective for either (i) 20 years from the earliest asserted filing date, if the application was filed
on or after June 8, 1995, or (ii) the longer of 17 years from the date of issue or 20 years from the earliest asserted filing date, if the application
was filed prior to that date, subject to a five-year extension in certain instances. The duration of foreign patents varies in accordance with the
provisions of applicable local law, although most countries provide for patent terms of 20 years from the earliest asserted filing date and allow
patent extensions similar to those permitted in the U.S.
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Patents may not enable us to preclude competitors from commercializing drugs in direct competition with our products, and consequently
may not provide us with any meaningful competitive advantage. See related risk factors under Item 1A “Risk Factors” below. We may also
rely on trade secrets and proprietary know-how to develop and attempt to achieve a competitive position with our product candidates. We
generally require our employees, consultants and partners who have access to our proprietary information to sign confidentiality agreements in
an effort to protect our intellectual property.
Information with respect to our current patent portfolio is set forth below.
Product Candidates
PRO 140
Cytolin
CytoFeline
Number of Patents
U.S.
15
—
—
International
26
—
—
Expiration
Dates(1)
2015-2031
2014
—
Number of Patent
Applications
U.S.
7
1
2
International
16
—
3
(1) Patent term extensions and pending patent applications may extend periods of patent protection.
Research, development and commercialization of a biopharmaceutical product often require choosing between alternative development
and optimization routes at various stages in the development process. Preferred routes depend upon current—and may be affected by
subsequent—discoveries and test results, availability of financial resources, and other factors, and cannot be identified with certainty. There are
numerous third-party patents in fields in which we work, and we may need to obtain licenses under patents of others in order to pursue a
preferred development route of one or more of our product candidates. The need to obtain a license would decrease the ultimate value and
profitability of an affected product. If we cannot negotiate such a license, we might have to pursue a less desirable development route or
terminate the program altogether. See Item 1A “Risk Factors” below.
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.
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.
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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. The Company’s current business strategy is to focus primarily
on its PRO 140 treatment substitution clinical trial, which it sponsors and funds. Additional clinical studies of the Company’s lead product
candidate, PRO 140, are being sponsored by Drexel and funded at least in part by the NIH but are less critical to the viability of our business.
Phase 1
Phase 1 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 1, sufficient information about the investigational product’s
pharmacokinetics and pharmacological effects are obtained to permit the design of well-controlled, scientifically valid, Phase 2 studies. Phase 1
studies of Pro 140 have been conducted and completed by or on behalf of Progenics by Dr. Jacobson and others prior to our acquisition of
PRO 140.
Phase 2
Phase 2 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 2 studies are typically well-controlled, closely monitored, and conducted in a relatively
small number of patients, often involving several hundred people. In some cases, depending upon the need for a new drug, a particular drug
candidate may be licensed for sale in interstate commerce after a “pivotal” Phase 2 trial.
Phase 2 is often broken into Phase 2a, which can be used to refer to “pilot trials,” or more limited trials evaluating exposure response in
patients, and Phase 2b trials that are designed to evaluate dosing efficacy and ranges. We believe studies conducted under the direction of
Dr. Jacobson at Drexel will collectively constitute a Phase 2b trial. The Company’s treatment substitution clinical trial is a Phase 2b trial.
Phase 3
Phase 3 studies are expanded controlled clinical studies. They are performed after preliminary evidence suggesting effectiveness of the
drug has been obtained in Phase 2, 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 3 studies also provide an adequate basis for extrapolating the results to the
general population and transmitting that information in the physician labeling. Phase 3 studies usually involve significantly larger groups of
patients, and considerable additional expense. We are required to pay significant fees to third parties if we initiate a Phase 3 trial of PRO 140.
See the discussion under the subheading “PRO 140 Acquisition” in this Item 1 above.
Competition
The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Our
development efforts may compete with more established biotechnology companies that have significantly greater financial and managerial
resources than we do.
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Advancing PRO 140 is our highest priority. PRO 140 blocks a cell receptor called CCR5, which is the entry point for most strains of
HIV virus. Pfizer’s maraviroc (Selzentry®) is the only currently approved CCR5 blocking agent. Another recent entry into the HIV treatment
space is Truvada, an HIV drug produced by Gilead Sciences, Inc. Both of these drugs must be taken daily and are believed to have significant
side effects. For these reasons, we believe that our lead product, PRO 140, a monoclonal antibody may prove to be useful in patients that
cannot tolerate existing HIV therapies or desire a respite from those therapies. Nonetheless, manufacturers of current therapies, such as Pfizer
and Gilead Sciences, are very large, multi-national corporations with significant resources. We expect that these companies will compete
fiercely to defend and expand their market share.
Our potential competitors include entities that develop and produce therapeutic agents. 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. All of these potential competitors have
substantially greater capital resources, management expertise, research and development capabilities, manufacturing and marketing resources
and experience than we do.
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 drug candidates. Worldwide, there are many antiviral drugs for treating
HIV. In seeking to manufacture, distribute and market the potential drugs we hope to have approved, we face competition from established
pharmaceutical companies. All of our potential competitors have considerably greater financial and management 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 HIV treatments.
Research and Development Costs
Our research and development expenses totaled approximately $4.0 million and $0.6 million for the fiscal years ended May 31, 2014 and
May 31, 2013, respectively. We expect that research and development expenses will continue to be a significant expense as we seek to develop
our current and future product pipeline.
Employees and Consultants
We have three full-time employees, our CEO, CFO and Director of Accounting, as well as several independent consultants assisting us
with our Phase 2b clinical trials of PRO 140. There can be no assurance that we will be able to identify or hire and retain additional employees
or consultants on acceptable terms in the future.
Item 1A.
Risk Factors.
The risks enumerated below are not the only risks we face, and the listed risk factors are not intended to be an all-inclusive discussion of
all of the potential risks relating to our business. Any of the risk factors described below could significantly and adversely affect our business,
prospects, financial condition and results of operations. Additional risks and uncertainties not currently known or that are currently considered
to be immaterial may also materially and adversely affect our business.
We are a biotechnology company and have a history of significant operating losses; we expect to continue to incur operating losses, and
we may never achieve or maintain profitability.
We have not generated any revenue from product sales, licensing, or other potential sales to date. Since our inception, we have incurred
operating losses in each year due to costs incurred in connection with research and development activities and general and administrative
expenses associated with our operations. Our current drug candidate is in the early stages of testing, and we or our current and future partners
must conduct significant additional clinical trials before we can seek the regulatory approvals necessary to begin commercial sales. We expect
to incur losses for at least several more years as we continue development of, and seek regulatory approvals for, our drug candidate and
commercialize any approved product usages. If our current drug candidate fails to gain regulatory approval, or if it or other candidates we own
do not achieve approval and market acceptance, we will not be able to generate any revenue, or explore other opportunities to enhance
shareholder value, such as through a sale. If we fail to generate revenue and eventually become and remain profitable, or if we are unable to
fund our continuing losses, our shareholders could lose all or part of their investments.
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We will need substantial additional funding, which may not be available or, if it is available, such financing may substantially dilute our
existing shareholders.
The discovery, development, and commercialization of new treatments, such as our PRO 140 product candidate, entail significant costs.
As a result, to the extent our product candidate by us or our partners continues to appear promising and we elect to fund its further
development and commercialization, we will need to raise additional capital, or enter into strategic partnerships, to enable us to:
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fund clinical trials and seek regulatory approvals;
build or access manufacturing and commercialization capabilities;
pay required license fees, milestone payments, and maintenance fees;
develop, test, and, if approved, market our product candidates;
acquire or license additional internal systems and other infrastructure; and
hire and support additional management and scientific personnel.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never achieve, we expect
to finance our cash needs primarily through public or private equity offerings, debt financings or through strategic alliances. We cannot be
certain that additional funding will be available on acceptable terms or at all. If we are not able to secure additional funding when needed, we
may have to delay, reduce the scope of or eliminate one or more of our clinical trials, collaborative development programs or future
commercialization initiatives. In addition, any additional funding that we do obtain will dilute the ownership held by our existing security
holders. The amount of this dilution may be substantially increased if the trading price of our common stock is lower at the time of any
financing then it is now. The economic dilution to shareholders will be significant if our stock price does not increase significantly, or if the
effective price of any sale is below the price paid by a particular shareholder. Any debt financing could involve substantial restrictions on
activities and creditors could seek a pledge of some or all of our assets. We have not identified the sources for the additional financing that we
will require, and we do not have commitments from any third parties to provide this future financing. If we fail to obtain additional funding as
needed, we may be forced to cease or scale back operations, and our results, financial condition and stock price would be adversely affected.
The amount of financing we require will depend on a number of factors, many of which are beyond our control. Our results of
operations, financial condition and stock price are likely to be adversely affected if our funding requirements increase or are otherwise
greater than we expect.
Our future funding requirements will depend on many factors, including, but not limited to:
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our stock price, which, if it declines, would serve as a disincentive to holders of the Company’s convertible promissory notes,
totaling approximately $4.3 million in face amount of notes at May 31, 2014, to exercise their conversion rights, thereby prolonging
our interest expense burden and increasing the probability that repayment of principal of $4.3 million will be required in fiscal 2016;
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the costs of clinical trials of PRO 140 and other development activities conducted by us directly, and our ability to successfully
conclude the studies and achieve favorable results;
our ability to attract strategic partners to pay for or share costs related to our product development efforts;
the costs and timing of seeking and obtaining regulatory approvals and making related milestone payments due to Progenics and
other third parties;
the costs of filing, prosecuting, maintaining and enforcing patents and other intellectual property rights and defending against
potential claims of infringement;
decisions to hire additional scientific or administrative personnel or consultants;
our ability to manage administrative and other costs of our operations; and
the presence or absence of adverse developments in our research program.
If any of these factors cause our funding needs to be greater than expected, our operations, financial condition, ability to continue
operations and stock price may be adversely affected.
Our future cash requirements may differ significantly from our current estimates.
Our cash requirements may differ significantly from our estimates from time to time, depending on a number of factors, including:
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the costs and results of clinical trials we are undertaking or may in the future pursue with PRO 140;
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the ability to maintain and benefit from our clinical trial agreement with Drexel;
the time and costs involved in obtaining regulatory approvals;
whether our outstanding convertible notes are converted into equity or we receive additional cash upon the exercise of our
outstanding common stock warrants;
whether we are able to obtain funding under future licensing agreements, strategic partnerships, or other collaborative relationships,
if any;
the costs of compliance with laws, regulations, or judicial decisions applicable to us; and
the costs of general and administrative infrastructure required to manage our business and protect corporate assets and shareholder
interests.
If we fail to raise additional funds on a timely basis we will need to scale back our business plans, which would adversely affect our
business, financial condition, and stock price, and we may even be forced to discontinue our operations and liquidate our assets.
We have significant debt as a result of prior financings, all of which is scheduled to mature at various dates in less than two years. Our
substantial indebtedness could adversely affect our business, financial condition and results of operations.
Our level of debt, which includes convertible promissory notes totaling $4.3 million in face amount at May 31, 2014, could have
significant consequences for our future operations, including, among others:
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making it more difficult for us to meet our other obligations or raise additional capital;
resulting in an event of default, if we fail to comply with our payment obligations;
reducing the availability of any financing proceeds to fund operating expenses, other debt repayment, and working capital
requirements; and
limiting our financial flexibility and hindering our ability to obtain additional financing.
Any of the above-listed factors could have a material adverse effect on our business, financial condition, results of operations, and ability
to continue as a going concern.
Our ability to make interest and principal payments on our outstanding promissory notes will depend entirely on our ability to raise
sufficient funds to satisfy our debt service obligations and our noteholders’ willingness to convert their notes to common shares, which will
likely depend on our stock price from time to time. If noteholders do not elect to convert, it is likely that we will need to borrow or raise
additional funds to make required principal and interest payments, as such payments become due and payable, or undertake alternative
financing plans, such as refinancing or restructuring our debt, selling additional shares of capital stock, selling assets or reducing or delaying
investments in our business. Any inability to obtain additional funds or alternative financing on acceptable terms would likely cause us to be
unable to meet our payment obligations, which could have a material adverse effect on our business, financial condition and results of
operations and our ability to continue to operate.
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The agreement with Progenics pursuant to which we acquired our PRO 140 product candidate, and related license agreements assumed
in the PRO 140 acquisition, require us to make significant milestone, royalty, and other payments, which will require additional
financing and, in the event we do commercialize our PRO 140 product, decrease the revenues we may ultimately receive on sales.
Under the Progenics Agreement, we must pay to Progenics and third party licensors significant milestone payments and royalties. For
more information, please see the Progenics Agreement, which is attached as Exhibit 10.1 to our Current Report on Form 8-K filed with the
Securities and Exchange Commission (the “SEC”) on July 30, 2012, and the PDL License Agreement, which is filed as Exhibit 10.21 to our
Annual Report on Form 10-K for the fiscal year ended May 31, 2013, filed with the SEC on August 29, 2013. In order to make the various
milestone payments that are required, we will need to raise additional funds. In addition, our royalty obligations will reduce the economic
benefits to us of any future sales if we do receive regulatory approval and seek to commercialize PRO 140.
Certain clinical trials of PRO 140 depend on funding from the NIH grants awarded to Drexel and its principal investigator, Dr. Jeffrey
M. Jacobson.
Prior to our acquisition of PRO 140, Progenics and Drexel and its principal investigator, Dr. Jeffrey M. Jacobson, were awarded
various grants from the NIH to fund clinical trials of PRO 140, including two grants that remain open. Our ability to benefit commercially
from this continued funding will depend on whether Dr. Jacobson’s protocols are structured in a manner that facilitates efforts to maintain
PRO 140’s “fast track” drug candidate designation by the United States Food and Drug Administration (“FDA”) and obtain regulatory
approval of commercially viable uses of PRO 140 in HIV-infected patients. We believe these clinical trials may constitute a Phase 2 study of
PRO 140, but there can be no assurance that will be the case. If study protocols are not designed in a manner that provides commercial and
regulatory benefits for us or if NIH funding is not maintained, is withdrawn, or proves insufficient, we will need significant additional
financing to continue to self-fund our trials, including our treatment substitution trial, and our expected costs and time to completion would
increase significantly, which could have a material adverse effect on our results of operations and financial condition.
Clinical trials are expensive, time-consuming and subject to delay.
Clinical trials are subject to rigorous regulatory requirements and are expensive and time-consuming to design and implement. The length
of time and number of trial sites and patients required for clinical trials vary substantially based on the type, complexity, novelty, intended use
and any safety concerns relating to a drug candidate. We estimate that it will take at least three years to complete the necessary clinical trials,
obtain regulatory approval from the FDA or other non-U.S. regulatory agency, and begin to commercialize PRO 140, even if trials are
successful. Clinical trials for our other drug candidates, including Cytolin, may take significantly longer to complete, if they are pursued at all.
The commencement and completion of clinical trials conducted by Drexel or which we are undertaking ourselves could be delayed or
prevented by many factors, including, but not limited to:
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our ability to obtain regulatory or other approvals to commence and conduct clinical trials in the manner we or our partners consider
appropriate for timely development;
our ability to identify and reach agreement on acceptable terms with prospective clinical trial sites and entities involved in the conduct
of our clinical trials;
slower than expected rates of patient recruitment and enrollment, including as a result of competition with other clinical trials for
patients, limited numbers of patients that meet the enrollment criteria, or the introduction of alternative therapies or drugs by others;
unforeseen issues with our relationship with our contract clinical management services provider;
delays in paying third-party vendors of biopharmaceutical services;
lack of effectiveness of our drug candidates during clinical trials;
unforeseen safety issues; or
inadequate supply of clinical trial materials.
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Testing of our primary product candidate, PRO 140, is in early stages and our clinical trial results may not ultimately confirm initial
positive indications, which would materially and adversely affect our business, financial condition and stock price.
Our efforts to commercialize PRO 140 are dependent on obtaining FDA or other non-U.S. regulatory agency approval of its use in
HIV-infected patients. Although early test results are positive, the process of obtaining approval of a drug product for use in humans is
extremely lengthy and time-consuming, and numerous factors may prevent our successful development of PRO 140, including negative
results in future clinical trials, the development by competitors of other products with equal or better results, or inability to obtain sufficient
additional funding to continue to pursue development. In addition, although PRO 140 has not demonstrated significant immunogenic response
in trials conducted to date, these completed trials have been quite short (up to three weeks) and further trials are needed to determine whether
the length of time until development of immunogenic response in humans is long enough for PRO 140 to be a viable treatment regimen.
Failure to successfully develop PRO 140 would have a material and adverse effect on our business, financial condition and stock price, and
would threaten our ability to continue to operate our business, particularly since PRO 140 is the only product candidate we are actively
pursuing at this time.
Although PRO 140 has been designated as a candidate for fast track approval by the FDA, our ability to obtain accelerated approval may
be lost.
The FDA designated PRO 140 as a candidate for fast track consideration in 2006. The letter ascribing this designation stated that, if the
clinical development program pursued for PRO 140 did not continue to meet the criteria for fast track designation, the Investigational New
Drug (“IND”) application would not be reviewed under the fast track program. There is no assurance that the FDA will ultimately consider
PRO 140 for approval on an accelerated basis. Any failure to maintain eligibility for fast track review will likely result in requirements for
longer or additional clinical trials and a slower approval process, resulting in additional costs and further delay in the potential realization of
revenues from commercialization of PRO 140.
Any failure to attract and retain skilled directors, executives, employees and consultants could impair our drug development and
commercialization activities.
Our business depends on the skills, performance, and dedication of our directors, executive officers and key scientific and technical
advisors. All of our current scientific advisors are independent contractors and are either self-employed or employed by other organizations.
As a result, they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, which
may affect their ability to provide services to us in a timely manner. We may need to recruit additional directors, executive management
employees, and advisors, particularly scientific and technical personnel, which will require additional financial resources. In addition, there is
currently intense competition for skilled directors, executives and employees with relevant scientific and technical expertise, and this
competition is likely to continue. If we are unable to attract and retain persons with sufficient scientific, technical and managerial experience,
we may be forced to limit or delay our product development activities or may experience difficulties in successfully conducting our business,
which would adversely affect our operations and financial condition.
We do not have internal research and development personnel, making us dependent on consulting relationships and strategic alliances
with industry partners.
We currently have no research and development staff or coordinators. We rely and intend to continue to rely on third parties for many of
these functions. We engaged Amarex Clinical Research, LLC (“Amarex”), a full service clinical research organization, to manage our treatment
substitution clinical trial and CMC endeavors. As a result, we will be dependent on consultants and strategic partners in our development and
commercialization activities, and it may be administratively challenging to monitor and coordinate these relationships. If we are unable to
successfully manage our relationships with third parties, we may not be able to successfully manage development, testing, and approval of our
PRO 140 drug candidate or other products or commercialize any products that are approved, which would have a material and adverse effect
on our business, financial condition and stock price.
We will need to outsource and rely on third parties for the clinical development and manufacture, sales and marketing of product
candidates, and our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.
We are dependent on third parties for important aspects of our product development strategy. We do not have the required financial and
human resources to carry out independently the pre-clinical and clinical development for our product candidate, and do not have the capability
or resources to manufacture, market or sell our current product candidates. As a result, we contract with and rely on third parties for important
functions, including testing, storing, and manufacturing our products and managing and conducting clinical trials from which we may obtain a
benefit. We have recently entered into several agreements with third parties for such services. If problems develop in our relationships with
third parties, or if such parties fail to perform as expected, it could lead to delays or lack of progress, significant cost increases, changes in our
strategies, and even failure of our product initiatives.
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We may not be able to identify, negotiate and maintain the strategic alliances necessary to develop and commercialize our products and
technologies, and we will be dependent on our corporate partners if we do.
We may seek to enter into a strategic alliance with a pharmaceutical company for the further development and approval of one or more of
our product candidates. Strategic alliances may provide us with additional funds, expertise, access, and other resources in exchange for
exclusive or non-exclusive licenses or other rights to the technologies and products that we are currently developing or may explore in the
future. We cannot give any assurance that we will be able to enter into additional strategic relationships with a pharmaceutical company or
others in the near future or at all, or maintain our current relationships. In addition, we cannot assure you that any agreements we do reach will
achieve our goals or be on terms that prove to be economically beneficial to us. When we do enter into strategic or contractual relationships,
we become dependent on the successful performance of our partners or counter-parties. If they fail to perform as expected, such failure could
adversely affect our financial condition, lead to increases in our capital needs, or hinder or delay our development efforts.
Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates, which could prevent or significantly delay
completion of clinical development and regulatory approval.
Prior to receiving approval to commercialize PRO 140 or any other drug candidates, we must adequately demonstrate to the FDA and
any non-U.S. regulatory authorities in jurisdictions in which we seek approval that it or any other product candidate is sufficiently safe and
effective with substantial evidence from well-controlled clinical trials. In clinical trials, we will need to demonstrate efficacy for the treatment of
specific indications and monitor safety throughout the clinical development process and following approval. If clinical work by us or others
leads to undesirable adverse effects in patients, it could delay or prevent us from furthering the regulatory approval process or cause us to
cease clinical trials with respect to any drug candidate. If our current or future preclinical studies or clinical trials are unsuccessful, our
business will be significantly harmed and our stock price would be negatively affected.
Our drug candidates are subject to the risks of failure inherent in drug-related product development. Preclinical studies may not yield
results that adequately support our regulatory applications. Even if these applications are filed with respect to our drug candidates, the results
of preclinical studies do not necessarily predict the results of clinical trials. In addition, even if we believe the data collected from clinical trials
of our drug candidates are promising, these data may not be sufficient to support approval by the FDA or non-U.S. regulatory authorities. If
regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable to commercialize our
products, and our business, results of operations and financial condition would be harmed.
One or more patients in our study may experience virologic failure, which could result in termination of our clinical trials.
As part of the PRO 140 Phase 2b study, consenting subjects will be shifted from their combination antiretroviral regimen to PRO 140
monotherapy for 12 weeks. Total treatment duration with PRO 140 will be 14 weeks, with one week overlap with existing retroviral regimen
and PRO 140 at the beginning of treatment and one week overlap at the end of treatment in subjects who do not experience virologic failure.
Virologic failure is a risk related to HIV treatment failure, which occurs when a therapy fails to suppress the amount of virus in a person’s
blood. Factors that can contribute to virologic failure include drug resistance, drug toxicity, and poor treatment adherence. Virologic failure can
lead to development of drug resistance, limit future treatment options, and increase risk of negative clinical events, which could result in patient
injury or death. If any of these risks occur, our study would likely fail to achieve the results we need for our trials to continue.
Our competitors may develop drugs that are more effective, safer and less expensive than ours.
We are engaged in the HIV treatment sector of the biopharmaceutical industry, which is intensely competitive and changes rapidly.
Current treatments are quite effective at controlling the effects of HIV, and we expect that new developments by other companies and academic
institutions in the areas of HIV treatment will continue. If approved for marketing by the FDA, depending on the approved clinical indication,
our drug candidates may be competing with existing and future antiviral treatments for HIV.
Our competitors may:
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develop drug candidates and market drugs that increase the levels of safety or efficacy that our drug candidates will need to show in
order to obtain regulatory approval;
develop drug candidates and market drugs that are less expensive or more effective than our drugs;
commercialize competing drugs before we or our partners can launch any products developed from our drug candidates;
hold or obtain proprietary rights that could prevent us from commercializing our products; or
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introduce therapies or market drugs that render our potential drugs obsolete.
We expect to compete against large pharmaceutical and biotechnology companies and smaller companies that are collaborating with
larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research
organizations. These competitors in nearly all cases operate research and development programs that have substantially greater financial
resources than we do. Our competitors also have significantly greater experience in:
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developing drug candidates;
undertaking preclinical testing and clinical trials;
building relationships with key customers and opinion-leading physicians;
obtaining and maintaining FDA and other regulatory approvals;
formulating and manufacturing drugs;
launching, marketing and selling drugs; and
providing management oversight for all of the above-listed operational functions.
If we fail to achieve technical superiority over other treatments, we may be unable to obtain regulatory approval. If our competitors
market drugs that are less expensive, safer or more effective than our potential drugs, or that gain or maintain greater market acceptance, we
may not be able to compete effectively.
We expect to rely on third party manufacturers and will be dependent on their quality and effectiveness.
Our primary product candidate and potential drug candidates require precise, high-quality manufacturing. The failure to achieve and
maintain high manufacturing standards, including failure to detect or control anticipated or unanticipated manufacturing errors or the frequent
occurrence of such errors, could result in patient injury or death, discontinuance or delay of ongoing or planned clinical trials, delays or
failures in product testing or delivery, cost overruns, product recalls or withdrawals and other problems that could seriously hurt our business.
Contract drug manufacturers often encounter difficulties involving production yields, quality control and quality assurance and shortages of
qualified personnel. These manufacturers are subject to stringent regulatory requirements, including the FDA’s current good-manufacturing-
practices regulations and similar foreign laws and standards. If our contract manufacturers fail to maintain ongoing compliance at any time, the
production of our drug candidates could be interrupted, resulting in delays or discontinuance of our clinical trials, additional costs and loss of
potential revenues.
We may not be able to successfully scale-up manufacturing of our drug candidates in sufficient quality and quantity, which would delay
or prevent us from developing our drug candidates and commercializing approved drugs, if any.
To date, our drug candidates have been manufactured in small quantities for preclinical studies and early-stage clinical trials. In order to
conduct larger-scale or late-stage clinical trials and for commercialization of any resulting drug, if that drug candidate is approved for sale, we
will need to manufacture it in larger quantities. We may not be able to successfully increase the manufacturing capacity for any of our drug
candidates in a timely or cost-effective manner, or at all. In addition, quality issues may arise during scale-up activities. If we are unable to
successfully scale up the manufacture of our drug candidates in sufficient quality and quantity, the development and testing of that drug
candidate and regulatory approval or commercial launch of any resulting drug may be delayed, which could significantly harm our business.
There is uncertainty relating to our drug candidate Cytolin, and our business may be adversely affected if it later proves not to have the
novel and beneficial characteristics we currently believe it to possess.
Until late 2012, the primary focus of our business was on the development of Cytolin, a monoclonal antibody that has, what we believe,
are novel mechanisms of action directed against the replication of HIV. We do not understand all of the biomechanical mechanisms of Cytolin
and we are not actively pursuing its development and review at this time. If we cannot determine how Cytolin acts to reduce the viral load of
HIV infection, we may not seek or be able to obtain regulatory approval of its use in human patients.
We may be subject to potential product liability and other claims that could materially impact our business and financial condition.
The development and sale of medical products exposes us to the risk of significant damages from product liability and other claims. The
use of our drug candidates in clinical trials may result in adverse effects. We cannot predict all the possible harms or adverse effects that may
result. We maintain a modest amount of product liability insurance. We may not have sufficient resources to pay for any
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liabilities resulting from a personal injury or other claim, even if we do later become insured. In addition to the possibility of direct claims, we
may be required to indemnify third parties against damages and other liabilities arising out of our development, commercialization and other
business activities, which would increase our liability exposure. If third parties that have agreed to indemnify us fail to do so, we may be held
responsible for those damages and other liabilities as well.
Legislative, regulatory, or medical cost reimbursement changes may adversely impact our business.
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to the health
care system in the U.S. and in other jurisdictions may change the nature of and regulatory requirements relating to drug discovery, clinical
testing and regulatory approvals, limit or eliminate payments for medical procedures and treatments, or subject the pricing of pharmaceuticals
to government control. Outside the U.S., and particularly in the European Union, the pricing of prescription pharmaceuticals is subject to
governmental control. In addition, third-party payers in the U.S. are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of
newly approved health care products. Significant changes in the health care system in the U.S. or elsewhere, including changes resulting from
adverse trends in third-party reimbursement programs, could have a material adverse effect on our projected future operating results and our
ability to raise capital, commercialize products, and remain in business.
If we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to
accurately or timely report our financial results and our stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations require us to evaluate the effectiveness of our internal control
over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control
over financial reporting in our Annual Report on Form 10-K for that fiscal year. Management determined that as of both May 31, 2014, and
May 31, 2013, our disclosure controls and procedures and internal control over financial reporting were not effective due to material
weaknesses in our internal control over financial reporting related to inadequate segregation of duties over authorization, review and recording
of transactions as well as the financial reporting of such transactions. Any failure to implement new or improved controls necessary to remedy
the material weaknesses described above, or difficulties encountered in the implementation or operation of these controls, could harm our
operations, decrease the reliability of our financial reporting, and cause us to fail to meet our financial reporting obligations, which could
adversely affect our business and reduce our stock price.
Our success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our product
candidates and research technologies.
Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and
the claim scope of patents, our ability to enforce our existing patents and to obtain and enforce patents that may issue from any pending or
future patent applications is uncertain and involves complex legal, scientific and factual questions. To date, no consistent policy has emerged
regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. Thus, we cannot be sure that any patents will issue from
any pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims of these
patents will be held valid or enforceable by a court of law, will provide us with any significant protection against competing products, or will
afford us a commercial advantage over competitive products. If one or more products resulting from our product candidates is approved for
sale by the FDA and we do not have adequate intellectual property protection for those products, competitors could duplicate them for
approval and sale in the U.S. without repeating the extensive testing required of us or our partners to obtain FDA approval.
Known third party patent rights could delay or otherwise adversely affect our planned development and sale of PRO 140. We have
identified but not exhaustively analyzed other patents that could relate to our proposed products.
We are aware of patent rights held by a third party that may cover certain compositions within our PRO 140 drug candidate. The patent
holder has the right to prevent others from making, using, or selling a drug that incorporates the patented compositions, while the patent
remains in force. We believe that the third party’s patent rights will not affect our planned development, regulatory clearance, and eventual
marketing, commercial production, and sale of PRO 140. The relevant patent expires before we expect to commercially introduce that drug
candidate. In addition, the Hatch-Waxman exemption to U.S. patent law permits all uses of compounds in clinical trials and for other purposes
reasonably related to obtaining FDA clearance of drugs that will be sold only after patent expiration, so our use of PRO 140 in those FDA-
related activities does not infringe the patent holder’s rights. However, were the patent holder to assert its rights against us before expiration of
the patent for activities unrelated to FDA clearance, the development and ultimate sale of a PRO 140 product could be significantly delayed,
and we could incur the expense of defending a patent infringement suit and potential liability for damages for periods prior to the patent’s
expiration.
In connection with our acquisition of rights to PRO 140, our patent counsel conducted a freedom-to-operate search that identified other
patents that could relate to our proposed PRO 140 drug candidate. Sufficient research and analysis was conducted to enable us to reach the
conclusion that PRO 140 likely does not infringe those patent rights. However, we did not have an exhaustive analysis
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conducted as to the identified patent rights, because doing so would have been more costly than appeared to be justified. If any of the holders
of the identified patents were to assert patent rights against us, the development and sale of PRO 140 could be delayed, we could be required
to spend time and money defending patent litigation, and we could incur liability for infringement or be enjoined from producing our products
if the patent holders prevailed in an infringement suit.
If we are sued for infringing on third-party intellectual property rights, it will be costly and time-consuming, and an unfavorable
outcome would have a significant adverse effect on our business.
Our ability to commercialize our product candidates depends on our ability to use, manufacture and sell those products without
infringing the patents or other proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications
owned by third parties exist in the monoclonal antibody therapeutic area in which we are developing drug candidates and seeking new
potential drug candidates. There may be existing patents, unknown to us, on which our activities with our drug candidates could infringe.
If a third party claims that our actions infringe on its patents or other proprietary rights, we could face a number of issues that could
seriously harm our competitive position, including, but not limited to:
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infringement and other intellectual property claims that, even if meritless, can be costly and time-consuming, delay the regulatory
approval process and divert management’s attention from our core business operations;
substantial damages for infringement, if a court determines that our drugs or technologies infringe a third party’s patent or other
proprietary rights;
a court prohibiting us from selling or licensing our products or technologies unless the holder licenses the patent or other proprietary
rights to us, which it is not required to do; and
even if a license is available from a holder, we may have to pay substantial royalties or grant cross-licenses to our patents or other
proprietary rights.
If any of these events occur, it could significantly harm our operations and financial condition and negatively affect our stock price.
We may undertake infringement or other legal proceedings against third parties, causing us to spend substantial resources on litigation
and exposing our own intellectual property portfolio to challenge.
We may come to believe that third parties are infringing on our patents or other proprietary rights. To prevent infringement or
unauthorized use, we may need to file infringement and/or misappropriation suits, which are very expensive and time-consuming and would
distract management’s attention. Also, in an infringement or misappropriation proceeding a court may decide that one or more of our patents is
invalid, unenforceable, or both, in which case third parties may be able to use our technology without paying license fees or royalties. Even if
the validity of our patents is upheld, a court may refuse to stop the other party from using the technology at issue on the ground that the other
party’s activities are not covered by our patents.
We may become involved in disputes with our present or future contract partners over intellectual property ownership or other matters,
which would have a significant effect on our business.
Inventions discovered in the course of performance of contracts with third parties may become jointly owned by our strategic partners
and us, in some cases, and the exclusive property of one of us, in other cases. Under some circumstances, it may be difficult to determine who
owns a particular invention or whether it is jointly owned, and disputes could arise regarding ownership or use of those inventions. Other
disputes may also arise relating to the performance or alleged breach of our agreements with third parties. Any disputes could be costly and
time-consuming, and an unfavorable outcome could have a significant adverse effect on our business.
We are subject to the oversight of the SEC and other regulatory agencies. Investigations by those agencies could divert management’s
focus and could have a material adverse effect on our reputation and financial condition.
We are subject to the regulation and oversight of the SEC and state regulatory agencies, in addition to the FDA. As a result, we may face
legal or administrative proceedings by these agencies. We are unable to predict the effect of any investigations on our business, financial
condition or reputation. In addition, publicity surrounding any investigation, even if ultimately resolved in our favor, could have a material
adverse effect on our business.
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Our auditors have issued a going concern opinion, and we will not be able to achieve our objectives and will have to cease operations if
we cannot adequately fund our operations.
Our auditors issued a going concern opinion in connection with the audit of our annual financial statements for the fiscal year ended
May 31, 2014. A going concern opinion means that there is doubt that the company can continue as an ongoing business for the next 12
months. There is no assurance that we will be able to adequately fund our operations in the future.
Risks Relating to Our Common Stock
The significant number of common shares issuable upon conversion of outstanding notes and exercise of outstanding warrants could
adversely affect the trading price of our common shares.
Conversion of outstanding notes into common shares and the sale of such shares into the trading market of common shares or exercise
of our warrants and sale of the underlying common stock could depress the market price of our shares.
The market price for our common shares has been and is likely to continue to be volatile.
The market price for our common shares has been and is likely to continue to be volatile. The volatile nature of our common share price
may cause investment losses for our shareholders. The market price of stock in a development stage biotech company may often be driven by
investor sentiment, expectation and perception, all of which are independent of fundamental valuation metrics or traditional financial
performance metrics, thereby exacerbating volatility. In addition, our common shares are quoted on the OTCQB of the OTC Markets
marketplace, which may increase price quotation volatility and could limit liquidity, all of which may adversely affect the market price of our
shares.
You may experience dilution of your ownership because of the future issuance of additional common shares or other securities.
We may conduct sales of our securities at prices per share below the current market price for our common stock, resulting in dilution to
shareholders at the time. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, may also
adversely affect the prevailing market price of our common stock and make it more difficult for us to raise additional capital.
We do not expect to pay cash dividends on our shares in the foreseeable future.
We have never declared or paid a cash dividend and we do not anticipate declaring or paying dividends for the foreseeable future. We
expect to use future financing proceeds and earnings, if any, to fund operating expenses. Consequently, shareholders’ only opportunity to
achieve a return on their investment is if the price of our stock appreciates and they sell their shares at a profit. We cannot assure shareholders
of a positive return on their investment when they sell their shares or that shareholders will not lose the entire amount of their investment.
If the beneficial ownership of our stock continues to be highly concentrated, it may prevent you and other shareholders from influencing
significant corporate decisions.
Our significant shareholders may exercise substantial influence over the outcome of corporate actions requiring shareholder approval,
including the election of directors, any merger, consolidation or sale of all or substantially all of our assets, or any other significant corporate
transactions. These shareholders may also vote against a change of control, even if such a change of control would benefit our other
shareholders.
Our common shares are classified as “penny stock” and trading of our shares may be restricted by the SEC’s penny stock regulations.
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) impose sales practice and
disclosure requirements on certain brokers-dealers who engage in transactions involving a “penny stock.” The SEC has adopted regulations
which generally define “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our common shares are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each
penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock that is not
otherwise exempt, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the
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transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for stock that is
subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules may discourage investor interest in and limit the marketability of our common shares.
We may continue to have potential liability with respect to the rights of some shareholders to rescind their investment in our securities.
In March 2011, we disclosed that certain of our shares sold between 2008 and the date of disclosure may have been sold in violation of
the United States federal and state securities laws and those of certain foreign jurisdictions. For further information on the sale of securities in
violation of applicable securities laws, please see Note 3 to our Consolidated Financial Statements included in this Form 10-K. Management’s
analysis, based upon various statutes of limitations, among other issues, indicates that the Company’s estimated rescission liability as of
May 31, 2014, has declined to a total of $378,000. Since the issue of potential rescission liability was first disclosed by the Company in early
2011, no investor has asserted rescission rights.
Future sales of our securities could adversely affect the market price of our common stock and our future capital-raising activities could
involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading price of our
common stock.
We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate
need for additional capital at that time. Sales of substantial amounts of shares of our common stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of our shares and our ability to raise capital. We may issue additional shares of
common stock in future financing transactions or as incentive compensation for our executive management and other key personnel,
consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of
common stock.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
We relocated our principal office to our current address at 1111 Main Street, Suite 660, Vancouver, Washington 98660 effective as of
October 1, 2013. We lease 1,383 square feet in a commercial office building pursuant to a lease that expires on September 30, 2016, at a cost
of $2,478 per month, plus modest annual increases. The lease also provides for early termination after 12 and 24 months.
Item 3.
Legal Proceedings.
From time to time, we are involved in claims and suits that arise in the ordinary course of the Company’s business. Management
currently believes that the resolution of any such claims against us, if any, will not have a material adverse effect on our business, financial
condition 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 is presently quoted on the OTCQB of the OTC Markets marketplace under the trading symbol CYDY. Historically,
trading in our stock has been very limited and the trades that have occurred cannot be characterized as amounting to an established public
trading market. As a result, the trading prices of our common stock may not reflect the price that would result if our stock was actively traded.
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The following are high and low bid prices quoted on the OTCQB during the periods indicated. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual transactions:
Fiscal Year Ended May 31, 2014
First quarter ended August 31, 2013
Second quarter ended November 30, 2013
Third quarter ended February 28, 2014
Fourth quarter ended May 31, 2014
Fiscal Year Ended May 31, 2013
First quarter ended August 31, 2012
Second quarter ended November 30, 2012
Third quarter ended February 28, 2013
Fourth quarter ended May 31, 2013
High
Low
$1.10
$1.50
$1.40
$1.00
$1.55
$2.10
$1.60
$0.96
$0.65
$0.70
$0.79
$0.54
$0.62
$0.67
$0.76
$0.41
Holders
The number of record holders of our common stock on May 31, 2014, was approximately 350.
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. The Company’s current policy
is to retain earnings, if any, for use in our operations.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no repurchases of our equity securities during the three months ended May 31, 2014.
Item 6.
Selected Financial Data.
This item is not required for smaller reporting companies.
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 set forth in Item 8. This discussion and
analysis contains forward-looking statements, including information about possible or assumed results of our financial condition, operations,
plans, objectives and performance that involve risks, uncertainties and assumptions. The actual results may differ materially from those
anticipated and set forth in such forward-looking statements.
Business Highlights
During fiscal 2014, the Company commenced several initiatives to advance its lead product candidate, PRO 140. The following is a brief
summary of key accomplishments:
•
•
•
•
•
Raised $14.5 million in capital through a private equity offering;
Engaged a full service clinical research organization to manage our regulatory affairs, CMC activities and clinical trials;
Advanced PRO 140 from a frozen bulk drug substance state through “fill and finish” and delivered finished drug product to Drexel
University College of Medicine for its self-sponsored, NIH-funded clinical trials of PRO 140;
Obtained FDA approval and commenced a self-sponsored, self-funded Phase 2b clinical trial for a PRO 140 monotherapy study
referred to as treatment substitution; and
Prepared and delivered finished drug product of PRO 140 for our first self-sponsored Phase 2b clinical trial, our treatment
substitution study.
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Results of Operations
Results of operations for the year ended May 31, 2014, compared to May 31, 2013 are as follows:
For the years ended May 31, 2014 and 2013, we had no activities that produced revenues from operations.
For the years ended May 31, 2014 and 2013, we had net losses of approximately $12.4 million and $9.6 million, respectively. The
increase in net loss of approximately $2.8 million for fiscal 2014 over fiscal 2013 was primarily attributable to increased amortization of
discount on convertible debt, which is reported as interest expense, coupled with higher research and development expenses, offset by lower
general and administrative costs and legal fees.
Total operating expenses for the years ended May 31, 2014 and 2013, are as follows:
General and administrative:
Salaries and other compensation
Stock-based compensation
Accounting and consulting
Other
Total general and administrative
Legal
Research and development
Amortization and depreciation
Total operating expenses
2014
2013
$ 900,000
928,000
216,000
1,063,000
3,107,000
672,000
3,982,000
352,000
$8,113,000
$1,411,000
3,262,000
421,000
1,110,000
6,204,000
946,000
620,000
223,000
$7,993,000
The increase in fiscal 2014 total operating expenses of approximately $120,000, or 1.5%, over fiscal 2013 was primarily related to the
increase in research and development expenditures and patent amortization, which is attributable to our PRO 140 patent portfolio. These
comparably higher expenses for fiscal 2014 were offset by a reduction in stock-based compensation, legal, salary and consulting expenses as
compared to fiscal 2013.
Salaries and other compensation decreased approximately $511,000, or 36.2%, from approximately $1,411,000 in fiscal year 2013 to
approximately $900,000 for the year ended May 31, 2014. The decrease in fiscal 2014 from fiscal 2013 was due to the reduction in the
number of employees and lower incentive compensation.
Stock-based compensation decreased approximately $2,334,000, or 71.5%, from approximately $3,262,000 for the year ended May 31,
2013, to approximately $928,000 for the year ended May 31, 2014. The decrease primarily related to the acceleration of vesting in fiscal 2013
of certain options granted to the Company’s former CEO in connection with his Transition Agreement (see Note 11 to the Company’s
financial statements include under Item 8 below), and to fewer stock options awarded in fiscal 2014.
Accounting and consulting expenses decreased approximately $205,000, or 48.7%, from $421,000 in fiscal year 2013 to approximately
$216,000 for the year ended May 31, 2014. The decrease in accounting and consulting expenses for fiscal 2014 as compared to fiscal 2013
reflects a more efficient utilization of third party resources.
Legal expenses decreased approximately $274,000, or 29%, from approximately $946,000 for the year ended May 31, 2013 to
approximately $672,000 for the year ended May 31, 2014. The trend in the Company’s legal expenses will depend on the Company’s future
capital raising efforts, complexity of certain regulatory filings, effective management of intellectual property, and continued strengthening of
the internal staff.
Research and development (“R&D”) expenses of approximately $4.0 million for fiscal 2014 rose approximately $3.4 million over fiscal
2013. The fiscal 2014 expenditures were primarily focused on (1) CMC activities to advance PRO 140 from a frozen bulk drug substance
state through a finished drug product for Drexel’s clinical trials and the Company’s preparations for future manufacturing requirements and
(2) clinical trial development and management.
Other operating expenses of $1,063,000 for fiscal 2014 declined approximately $47,000, or 4.2%, from fiscal 2013 owing to lower
expense levels for travel, insurance and corporate governance, offset in part by higher patent fees, as compared to fiscal 2013.
For fiscal 2014, the Company realized a non-cash gain of approximately $184,000 in connection with the negotiated settlements of
previously accrued expenses, for which approximately $46,000 was related to legal fees and $138,000 to research and development expenses.
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The increase in interest expense of approximately $2,562,000 in fiscal 2014 over fiscal 2013 was primarily attributable to a full year of
interest and amortization of debt discount associated with the Company’s convertible promissory notes, as compared to eight months in fiscal
2013. Generally accepted accounting principles require the recognition of debt discounts when the conversion option is beneficial at the
commitment date. The debt discounts represent the sum of the intrinsic value of the conversion option and the fair value of the detachable
warrants issued with the notes. The combined discounts are limited to the note proceeds. The value of the debt discount is amortized over the
term of the note as interest expense and the amortization is accelerated upon conversion. Interest expense for fiscal 2014 also includes
approximately $193,000 of non-cash expense related to the value of warrants issued to induce the conversion of certain notes.
The future trends in all of our expenses will be driven, in part, by the future outcomes of our clinical trials and the correlative effect on
general and administrative expenses, especially FDA regulatory requirements, in addition to the possibility that all or a portion of the holders
of the Company’s outstanding convertible notes may elect to convert their notes into common stock, which would reduce future interest
expense. See, in particular, Item 1A “Risk Factors” above.
Liquidity and Capital Resources
We had cash and cash equivalents of approximately $4.9 million as of May 31, 2014, compared with $0.6 million as of May 31, 2013.
The net increase in our cash and cash equivalents over a year ago was attributable to the $14.5 million private equity offering completed in
October 2013, offset in part by net cash used in operating activities of $7.4 million, $2.2 million for offering costs and $1.0 million for debt
repayments.
As of May 31, 2014, the Company had working capital of approximately $3.3 million, which compares to negative working capital of
$2.4 million at May 31, 2013.
Cash Flows
Net cash used in operating activities was approximately $7.4 million during fiscal year 2014, which represents an increase of
approximately $4.0 million from net cash used in operating activities of approximately $3.4 million in fiscal 2013. The increase in the net cash
used in operating activities for fiscal 2014 as compared to fiscal 2013 was primarily attributable to an increase in research and development
expenses of $3.4 million, offset in part by higher non-cash interest expense related to the amortization of debt discount and inducement of
conversion of certain convertible debt.
The reduction of cash used in investing activities of approximately $3.5 million for fiscal 2014 as compared to fiscal 2013 reflects the
purchase of PRO 140 in the prior fiscal year.
Cash flows provided by financing activities of approximately $11.7 million during fiscal 2014 increased approximately $4.5 million over
fiscal 2013. The increase in cash provided by financing activities was principally due to a private equity offering that provided net cash of
approximately $11.6 million, after offering costs of approximately $2.1 million, and the effect of conversion of certain convertible notes in the
principal amount of $850,000 which were converted in connection with the private equity offering. During fiscal year 2014, the Company
issued $1.2 million of convertible notes, of which $250,000 in principal amount was repaid. The Company also paid, at maturity, a note to a
related party in the principal amount of $500,000 and another convertible note in principal amount of $250,000.
As mentioned above, we have no activities that produced revenue in fiscal year 2013 and 2014 and have sustained operating losses since
inception. Our ability to continue as a going concern is dependent upon our ability to raise financing until we can commence sales operations
and 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 debt and equity securities, combined with additional funding from other traditional financing sources.
As of the date of this filing, it is management’s conclusion that the probability of achieving certain future scientific research milestones is
not reasonably determinable, such that the future milestone payments payable to Progenics and its sub-licensors are deemed contingent
consideration and therefore are not currently accrued in our financial statements.
The Company is current with its interest payment obligations to all note holders and is in compliance with all other terms of outstanding
promissory notes. As of May 31, 2014, the Company had a total of approximately $4.3 million outstanding in face amount of convertible
promissory notes. In the event our promissory notes, which mature as early as October 1, 2015, do not convert into shares of common stock,
the Company’s ability to continue as a going concern will be contingent upon its ability to raise additional capital to meet these obligations, or
refinance. If the Company is unsuccessful in raising additional capital or refinancing in the future, it may be required to cease its operations.
We have not generated revenue to date, and will not generate product revenue in the foreseeable future. We expect to continue to incur
operating losses as we proceed with our clinical trials with respect to PRO 140 and continue to advance it through the product development
and regulatory process. In addition to increasing research and development expenses, we expect general and administrative and manufacturing
costs to increase, as we add personnel and other administrative expenses associated with our current efforts.
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In furtherance of our business strategy and subsequent to fiscal year-end 2014, the Company entered into a manufacturing agreement
with a contract manufacturing organization to initiate preparations for the potential future manufacturing of additional PRO 140. In the event
this agreement is terminated by the Company, it will incur financial penalties up to $1.9 million determined by the date the notice of termination
is delivered in relation to the anticipated manufacturing date. If the notice is delivered more than three months in advance of the anticipated
manufacturing date, the penalty is approximately $1.1 million, or approximately $1.9 million thereafter.
Under the Asset Purchase Agreement (the “Asset Purchase Agreement”), dated July 22, 2012, between the Company and Progenics
Pharmaceuticals, Inc. (“Progenics”), the Company acquired 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 U.S. Food and Drug administration (“FDA”)
regulatory filings. On October 16, 2012, the Company paid $3,500,000 in cash to Progenics to close the acquisition transaction. The Company
is also required to pay Progenics the following milestone payments and royalties: (i) $1,500,000 at the time of the first dosing in a U.S. Phase
3 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-U.S. 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, in
each case determined on a country-by country basis. Payments to Progenics are in addition to payments due under a Development and License
Agreement, dated April 30, 1999 (the “PDL License”), between Protein Design Labs (now AbbVie Inc.) and Progenics, which was assigned
to us in the PRO 140 transaction, pursuant to which we must pay additional milestone payments and royalties as follows: (i) $1,000,000 upon
initiation of a Phase 3 clinical trial; (ii) $500,000 upon filing a Biologic License Application with the FDA or non-U.S. equivalent regulatory
body; (iii) $500,000 upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iv) royalties of up to 7.5% of net
sales for the longer of 10 years and the date of expiration of the last to expire licensed patent. Additionally, the PDL License provides for an
annual maintenance fee of $150,000 until royalties paid exceed that amount.
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. The Company has incurred losses for all periods presented and has a
substantial accumulated deficit. As of May 31, 2014, 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 product candidates, obtain FDA approval,
outsource manufacturing of its products, and ultimately to attain profitability. The Company intends to seek additional funding through debt
and equity offerings or licensing agreements or strategic alliances to implement its business plan. There are no assurances, however, 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.
We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our consolidated
financial statements.
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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, stock options and warrants 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 have issued convertible promissory notes with detachable warrants to purchase common stock. The conversion options are fixed, but
beneficial to the note holders at the respective commitment dates. The valuation of the beneficial conversion feature of the notes and of the
warrants gives rise to the recognition of a debt discount, which requires the use of certain assumptions inherent in the Black-Scholes option
pricing model, including various judgments and estimates.
As discussed in Note 11 to the consolidated financial statements, we have significant contingent potential milestone and royalty
liabilities. We must estimate the likelihood of paying these contingent liabilities periodically based on the progress of our clinical trials.
We estimated an amount that is a probable indicator of our rescission liability and recorded rescission liabilities at May 31, 2014 and
May 31, 2013 of $378,000 and $536,500, respectively. These amounts represent the believed potential rescission liability as of the dates
presented, excluding 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. 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 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 Note 3 to our consolidated financial statements in Item 8 for further information.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
This item is not required for smaller reporting companies.
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Item 8.
Financial Statements and Supplementary Data.
CYTODYN INC.
CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2014 AND MAY 31, 2013
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2014 AND 2013
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED
MAY 31, 2014 AND 2013
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 2014 AND 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
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24
26
27
28
32
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Table of Contents
Board of Directors and Shareholders
CytoDyn Inc.
Vancouver, Washington
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of CytoDyn Inc. as of May 31, 2014, and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 2014 and the results of its operations and its cash flows for the year then ended 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 $12,431,413 for the year ended May 31,
2014, and has an accumulated deficit of $46,434,232 through May 31, 2014, 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/ Warren Averett, LLC
Warren Averett, LLC
Certified Public Accountants
Tampa, Florida
July 10, 2014
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Board of Directors and Shareholders
CytoDyn Inc.
Lake Oswego, Oregon
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of CytoDyn Inc. as of May 31, 2013, and the related consolidated statements of
operations, changes in stockholders’ (deficit), and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 2013 and the results of its operations and its cash flows for the year then ended 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 $9,568,301 for the year ended May 31, 2013,
has a working capital deficit of $2,388,138, and has an accumulated deficit of $34,002,819 through May 31, 2013, 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/ Warren Averett, LLC
Warren Averett, LLC
Certified Public Accountants
Tampa, Florida
August 29, 2013
25
CytoDyn Inc.
Consolidated Balance Sheets
Table of Contents
Assets
Current assets:
Cash
Prepaid expenses
Deferred offering costs
Total current assets
Furniture and equipment, net
Intangibles, net
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable
Accrued liabilities
Accrued salaries and severance
Accrued interest payable
Indebtedness to related parties
Convertible notes payable, net
Stock rescission liability
Total current liabilities
Long-term liabilities
Convertible notes payable, net
Total liabilities
Shareholders’ equity (deficit):
May 31,
2014
2013
$ 4,886,122
488,821
68,292
5,443,235
16,797
2,967,239
$ 8,427,271
$
603,681
139,849
96,930
840,460
—
3,317,239
$ 4,157,699
$ 1,286,715
65,000
395,364
41,276
—
—
378,000
2,166,355
$ 1,111,285
321,884
364,698
56,884
509,000
328,347
536,500
3,228,598
2,338,684
4,505,039
1,153,017
4,381,615
Series B convertible preferred stock, no par value; 400,000 shares authorized, 95,100 shares
issued and outstanding at May 31, 2014 and 2013, respectively
266,251
274,091
Common stock, no par value; 100,000,000 shares authorized, 55,753,311 and 30,908,292
outstanding at May 31, 2014 and 2013, respectively; 55,753,311 and 30,908,292 issued at
May 31, 2014 and May 31, 2013, respectively
Common stock payable
Additional paid-in capital
Common and preferred stock subject to rescission
Accumulated deficit
Total shareholders’ equity (deficit)
30,367,779
—
20,100,434
(378,000)
(46,434,232)
3,922,232
$ 8,427,271
16,144,673
117,778
17,778,861
(536,500)
(34,002,819)
(223,916)
$ 4,157,699
See accompanying notes to consolidated financial statements.
26
Table of Contents
CytoDyn Inc.
Consolidated Statements of Operations
Operating expenses:
General and administrative
Legal fees
Research and development
Amortization and depreciation
Total operating expenses
Operating loss
Interest income
Gain on settlement of accounts payable
Interest expense:
Amortization of discount on convertible debt
Amortization of debt issuance costs
Interest on debt
Total interest expense
Loss before income taxes
Provision for taxes on income
Net loss
Constructive preferred stock dividends
Convertible preferred stock dividends
Net loss applicable to common shareholders
Basic and diluted loss per share
Basic and diluted weighted average common shares outstanding
See accompanying notes to consolidated financial statements.
27
Year ended May 31,
2014
2013
$ 3,106,678 $ 6,204,865
946,030
619,838
222,684
7,993,417
(7,993,417)
1,167
372,759
672,153
3,981,468
352,429
8,112,728
(8,112,728)
7,767
183,944
(3,807,320)
(120,000)
(583,076)
(4,510,396)
(12,431,413)
—
(1,703,616)
—
(245,194)
(1,948,810)
(9,568,301)
—
$(12,431,413) $ (9,568,301)
—
— $
$
$
(2,190)
— $
$(12,431,413) $ (9,570,491)
(0.32)
(.27) $
$
29,942,393
46,900,643
Table of Contents
CytoDyn Inc.
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Balance May 31, 2012
Rescission expirations and exclusions
Amortization of deferred offering costs related to rescission liability
Conversion of Series B Convertible Preferred Stock to Common
Stock
Series B Convertible Preferred Stock Dividends
Common Stock issued related to legal settlement ($.97/share)
Common Stock issued to consultants for services ($2.68/share)
Amortization of prepaid stock services
Common Stock issued to directors for services ($1.60/share)
Common Stock issued to directors for services ($.77/share)
Common Stock issued to directors for services ($1.00/share)
Common Stock issued to directors for services ($.80/share)
Exercise of Common Stock warrants ($.25/share)
Exercise of Common Stock warrants ($1.00/share)
Exercise of Common Stock options ($.34/share)
Conversion of convertible debt to common stock ($.75/share)
Conversion of accrued interest on convertible debt to common stock
($.75/share)
Issuance of common stock for accounts payable ($1.21/share)
Common stock issuable for accrued interest
Common stock issuable for bonuses
Stock-based compensation
Debt discount related to warrants and beneficial conversion feature
associated with convertible debt
Net (Loss) for year ended May 31, 2013
Balance at May 31, 2013
See accompanying notes to consolidated financial statements.
Preferred Stock
Amount
Shares
98,900 $ 451,993
—
—
(158,902)
—
(3,800)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(19,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
95,100 $ 274,091
28
Shares
Common Stock
Common
Stock
Payable
Amount
28,746,672 $15,050,261 $ 388,000
—
—
—
(377,258)
—
—
38,000
4,380
400,000
60,000
—
7,810
16,230
12,500
14,980
750,000
5,000
25,000
756,000
5,604
66,116
—
—
—
19,000
2,190
388,000
160,800
—
12,496
12,497
12,500
11,984
187,500
5,000
8,500
567,000
—
—
(388,000)
—
—
—
—
—
—
—
—
—
—
4,203
80,000
—
—
—
—
—
10,278
107,500
—
—
—
—
—
30,908,292 $16,144,673 $ 117,778
—
—
Table of Contents
CytoDyn Inc.
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Additional
Paid-In Capital
$ 8,319,830
—
Rescission
Amount
$(3,749,000)
3,212,500
$
Balance May 31, 2012
Rescission expirations and exclusions
Amortization of deferred offering costs related to
rescission liability
Conversion of Series B Convertible Preferred Stock to
Common Stock
Series B Convertible Preferred Stock Dividends
Common Stock issued related to legal settlement
($.97/share)
Common Stock issued to consultants for services
($2.68/share)
Amortization of prepaid stock service
Common Stock issued to directors for services
($1.60/share)
Common Stock issued to directors for services
($.77/share)
Common Stock issued to directors for services
($1.00/share)
Common Stock issued to directors for services
($.80/share)
Exercise of Common Stock warrants ($.25/share)
Exercise of Common Stock warrants ($1.00/share)
Exercise of Common Stock options ($.34/share)
Conversion of convertible debt to common stock
($.75/share)
Conversion of accrued interest on convertible debt to
common stock ($.75/share)
Issuance of common stock for accounts payable
($1.21/share)
Common stock issuable for accrued interest
Common stock issuable for bonuses
Stock-based compensation
Debt discount related to warrants and beneficial
conversion feature associated with convertible debt
Net (Loss) for year ended May 31, 2013
Balance at May 31, 2013
(44,232)
—
(2,190)
—
—
—
—
—
—
—
—
—
—
—
—
—
3,261,951
See accompanying notes to consolidated financial statements.
29
6,243,502
—
$17,778,861
—
—
$ (536,500)
Stock for
Prepaid
Services
—
—
—
—
—
—
—
—
(160,800)
160,800
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Accumulated
Deficit
$(24,434,518)
—
Total
$(3,973,434)
3,212,500
—
(580,392)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
160,800
12,496
12,497
12,500
11,984
187,500
5,000
8,500
—
567,000
—
—
—
—
—
4,203
80,000
10,278
107,500
3,261,951
—
(9,568,301)
$(34,002,819)
6,243,502
(9,568,301)
$ (223,916)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Table of Contents
CytoDyn Inc.
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Common
Balance May 31, 2013
Rescission expirations and exclusions
Amortization of deferred offering costs related to rescission liability
Proceeds from unit offering ($1.30/unit)
Deferred offering costs
Inducement warrants
Conversion of convertible debt to common stock ($.65/share)
Conversion of convertible debt to common stock ($.75/share)
Conversion of accrued interest on convertible debt to common stock
Shares
Amount
Preferred Stock
Common Stock
—
(7,840)
Stock
Payable
Shares Amount
95,100 $274,091 30,908,292 $16,144,673 $ 117,778
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(20,796)
—
— 20,989,494 13,642,667
— (2,084,063)
—
—
—
—
— 2,046,148 1,330,000
— 1,493,333 1,120,000
($.65/share)
—
—
24,363
15,837
—
Conversion of accrued interest on convertible debt to common stock
($.75/share)
Exercise of Common Stock warrants ($1.00/share)
Common stock issued for accrued interest
Common stock issued for bonuses
Conversion of note payable and accrued interest to common stock
($.45/share)
Stock-based compensation
Debt discount related to warrants and beneficial conversion feature associated
—
—
—
—
—
—
—
—
—
—
—
—
16,117
50,000
150,000
53,601
12,088
—
50,000
—
(10,278)
75,000
72,361 (107,500)
21,963
—
10,012
—
with convertible debt
Net (Loss) for year ended May 31, 2014
Balance at May 31, 2014
See accompanying notes to consolidated financial statements.
30
—
—
—
—
95,100 $266,251 55,753,311 $30,367,779
—
—
—
—
—
—
—
—
—
Table of Contents
CytoDyn Inc.
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Additional
Paid-In Capital
Rescission
Amount
Accumulated
Deficit
Balance May 31, 2013
Rescission expirations and exclusions
Amortization of deferred offering costs related to rescission liability
Proceeds from unit offering ($1.30/unit)
Deferred offering costs
Inducement warrants
Conversion of convertible debt to common stock ($.65/share)
Conversion of convertible debt to common stock ($.75/share)
Conversion of accrued interest on convertible debt to common stock
($.65/share)
Conversion of accrued interest on convertible debt to common stock
($.75/share)
Exercise of Common Stock warrants ($1.00/share)
Common stock issued for accrued interest
Common stock issued for bonuses
Conversion of note payable and accrued interest to common stock
($.45/share)
Stock-based compensation
Debt discount related to warrants and beneficial conversion feature associated
with convertible debt
Net (Loss) for year ended May 31, 2014
Balance at May 31, 2014
See accompanying notes to consolidated financial statements.
31
17,778,861 $(536,500) $(34,002,819) $
—
—
—
—
193,160
—
—
158,500
—
—
—
—
—
—
—
—
—
—
—
—
928,413
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
(223,916)
158,500
(28,636)
13,642,667
(2,084,063)
193,160
1,330,000
1,120,000
15,837
12,088
50,000
64,722
(35,139)
10,012
928,413
1,200,000
—
1,200,000
(12,431,413)
$20,100,434 $(378,000) $(46,434,232) $ 3,922,232
—
(12,431,413)
—
—
Table of Contents
CytoDyn Inc.
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 and depreciation
Amortization of debt issuance costs
Amortization of discount on convertible debt
Interest expense associated with conversion inducement
Gain on settlement of accounts payable
Stock-based compensation
Changes in current assets and liabilities:
(Increase) in prepaid expenses
Decrease in other assets
Increase in accounts payable, accrued salaries, accrued interest and accrued liabilities
Net cash used in operating activities
Cash flows from investing activities:
Asset acquisition of intangibles
Furniture and equipment purchases
Net cash used in investing activities
Cash flows from financing activities:
Payments on indebtedness to related parties
Proceeds from issuance of convertible notes payable
Proceeds from notes payable related party
Payments on convertible notes payable
Proceeds from sale of common stock
Payments of debt issuance costs
Payments of offering costs, common stock
Proceeds from exercise of warrants and options
Net cash provided by financing activities
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
See accompanying notes to consolidated financial statements.
32
Year Ended May 31,
2014
2013
$(12,431,413) $(9,568,301)
352,429
120,000
3,807,320
193,160
(183,944)
928,413
222,684
—
1,703,616
—
(372,759)
3,590,011
(348,972)
—
176,064
(7,386,943)
(73,867)
5,744
1,099,939
(3,392,933)
—
(19,220)
(19,220)
(3,500,000)
(3,135)
(3,503,135)
(500,000)
1,200,000
—
(500,000)
13,642,667
(120,000)
(2,084,063)
50,000
11,688,604
4,282,441
603,681
(74,492)
6,588,250
500,000
—
—
—
—
201,000
7,214,758
318,690
284,991
603,681
$ 4,886,122 $
$
$
— $
311,991 $
—
224,724
Table of Contents
CytoDyn Inc.
Consolidated Statements of Cash Flows
Non-cash investing and financing transactions:
Common stock issued for convertible debt
Common stock issued or to be issued for accrued interest payable
Original issue discount and intrinsic value of beneficial conversion feature related to debt issued with warrants
Common stock issued on payment of accounts payable
Preferred and common stock subject to rescission
Amortization of deferred offering costs related to rescission liability
Common stock issued for Series B convertible preferred stock
Series B convertible preferred stock dividends
Accounts payable extinguished through settlements
Year Ended May 31,
2014
2013
58,518 $
$2,459,000 $ 567,000
$
4,205
$1,200,000 $6,243,502
80,000
— $
$
$ 158,500 $3,212,500
28,638 $ 580,398
$
19,000
— $
$
2,190
— $
$
—
$ 183,944 $
See accompanying notes to consolidated financial statements.
33
Table of Contents
1 – Organization
CYTODYN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2014
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 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 is developing a class of therapeutic monoclonal antibodies to address unmet medical needs in the areas of HIV and Acquired
Immune Deficiency Syndrome (“AIDS”).
Advanced Genetic Technologies, Inc. (“AGTI”) was incorporated under the laws of Florida on December 18, 2006 pursuant to an acquisition
during 2006.
On May 16, 2011, the Company formed a wholly owned subsidiary, CytoDyn Veterinary Medicine LLC (“CVM”), to explore the possible
application of the Company’s existing proprietary monoclonal antibody technology to the treatment of Feline Immunodeficiency Virus
(“FIV”). The Company views the formation of CVM as an effort to strategically diversify the use of its proprietary monoclonal antibody
technology.
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 2014
presentation. These reclassifications did not have any effect on total current assets, total assets, total current liabilities, total liabilities, total
shareholders’ equity (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 had losses for all periods presented. The Company incurred a net loss of $12,431,413 and $9,568,301 for the years ended May 31,
2014, and May 31, 2013, respectively. 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 (“FDA”) approval, outsource manufacturing of the product candidates, and ultimately achieve initial revenues and attain
profitability. The Company is currently engaging in significant research and development activities related to these product candidates, and
expects to incur significant research and development expenses in the future. These research and development activities are subject to
significant risks and uncertainties. We intend to finance our future development activities and our working capital needs largely from the sale
of debt and equity securities, combined with additional funding from other traditional sources. There can be no assurance, however, that the
Company will be successful in these endeavors.
34
Table of Contents
Use of Estimates
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
Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses
related to these balances. All of our non-interest bearing cash balances were fully insured through December 31, 2012, due to a temporary
federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there was no limit to the amount of
insurance for eligible accounts. Beginning 2013, insurance coverage reverted back to $250,000 per depositor at each financial institution, and
our cash balances may again exceed federally insured limits. Balances in excess of federally insured limits at May 31, 2014 and 2013
approximated $4,589,000 and $386,000, respectively.
Identified Intangible Assets
The Company follows the provisions of FASB ASC Topic 350 Intangibles-Goodwill and Other, which establishes accounting standards for
the impairment of long-lived assets such as intangible assets subject to amortization. The Company reviews long-lived assets to be held and
used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the
sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying value,
the asset is considered impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the
fair value of the asset (See Note 12 for acquisition of patents). There were no impairment charges for the years ended May 31, 2014 and 2013.
The value of the Company’s patents would be significantly impaired by any adverse developments as they relate to the clinical trials pursuant
to the patents acquired as discussed in Notes 11 and 12.
Research and Development
Research and development costs are expensed as incurred.
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 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 periodic 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% for
all periods presented.
35
Table of Contents
Preferred Stock
As of May 31, 2014, the Company’s Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock without shareholder
approval. As of May 31, 2014, the Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock (see Note
4). The remaining preferred shares authorized have no specified rights other than the shares are non-voting.
Deferred Offering Costs
In connection with a stock rescission liability as discussed at Note 3, the Company has recorded approximately $68,300 and $97,000 in
deferred offering costs as of May 31, 2014 and May 31, 2013, 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 at the end of the applicable period during which the
respective rescission rights expire. Conversely, if the investors assert their rescission rights and forfeit their shares, the deferred offering costs
will be expensed at that time.
During the year ended May 31, 2014, the Company incurred $120,000 in direct costs associated with the issuance of convertible notes as
described in Note 4, and recorded $120,000 in amortization expense for the year ended May 31, 2014.
During the year ended May 31, 2014, the Company incurred approximately $2,084,000 in direct incremental costs associated with sale of the
equity securities as described in Note 6. The offering costs were recorded as a component of equity when the proceeds were received. The
offering was completed on October 23, 2013.
Stock for Services
The Company periodically issues common stock, warrants and common stock options to consultants for various services. Costs of 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 (ii) 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 30,806,373 and
18,146,938 shares of common stock were not included in the computation of basic and diluted weighted average common shares outstanding
for the years ended May 31, 2014 and May 31, 2013, respectively, as inclusion would be anti-dilutive for these periods. Additionally, as of
May 31, 2014, 95,100 shares of Series B convertible preferred stock can potentially convert into 951,000 shares of common stock, and
$4,271,250 of convertible debt can potentially convert into 5,695,000 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
differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating
loss carry forwards 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 for all periods presented. 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.
36
Table of Contents
Note 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 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”).
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 shareholders’ equity in the
Company’s balance sheet. As the statutory periods for pursuing such rights expire in the respective states, such amounts for those shares have
been reclassified to shareholders’ equity. 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.
The Company estimates an amount that is a probable indicator of the rescission liability and recorded rescission liabilities for May 31, 2014
and May 31, 2013 of $378,000 and $536,500, respectively. These amounts represent the believed remaining potential rescission liability as of
the dates presented to investors who pursue their rescission rights 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 application
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
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 considered methods to offer to rescind the previous investment purchase or subscription by persons who acquired or
subscribed for investments during the period April 15, 2008 to February 18, 2011, but did not pursue any such methods.
Note 4 – Convertible Instruments
During fiscal 2010, the Company issued 400,000 shares of Series B Convertible Preferred Stock (“Series B”) at $5.00 per share for cash
proceeds totaling $2,009,000, of which 95,100 shares remain outstanding at May 31, 2014. Each share of 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 $.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 its authorized common shares, which
occurred in April 2010, when the Company’s shareholders approved an increase in the authorized shares of common stock to 100,000,000. At
the commitment date, which occurred upon such shareholder approval, 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 identical amounts. The Series B has liquidation
preferences over the common shares 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 $.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. The Series B holders have no
voting rights.
During the years ended May 31, 2014 and May 31, 2013 the Company issued $1,200,000 and $6,588,250, respectively, of unsecured
convertible notes (the “Notes”) to investors for cash. Each Note is convertible, at the election of the holder, at any time into common shares at
a fixed conversion price. At May 31, 2014, $4,271,250 principal amount of Notes was convertible at $.75 per share.
During the year ended May 31, 2014, the holders of notes in a principal amount totaling $1,330,000 converted their Notes into common stock
at a conversion price of $.65 per share, resulting in the issuance of 2,046,148 shares of common stock. In addition, one holder of a six-month
convertible note with a principal amount of $250,000 exercised his right to receive repayment. The holders that converted their Notes received
warrants to purchase 292,307 shares of common stock at an exercise price of $.75 per share which will expire five years after issuance.
Pursuant to U.S. GAAP, these warrants were characterized as inducements to convert the debt and, as such, gave rise to the recognition of
non-cash interest expense of approximately $193,000 during the year ended May 31, 2014 based upon a Black-Scholes valuation.
During the year ended May 31, 2014, the holder of a one-year convertible note with a principal amount of $250,000 was paid in full upon
maturity.
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The holders of three-year convertible notes with principal totaling $1,120,000 also converted, during the year ended May 31, 2014, the
aggregate principal amount into common stock at a conversion price of $.75 per share, resulting in the issuance of 1,493,333 shares of
common stock. The remaining notes totaling $4,271,250 are payable in full between October 1, 2015 and March 6, 2016 and bear interest at
rates that range from 5% to 10% per year, payable in cash semi-annually in arrears beginning on April 1, 2013.
In connection with the initial sale of the Company’s convertible notes, detachable common stock warrants, with terms of two or three years,
were issued to the investors to purchase a total of 9,451,056 common shares at exercise prices ranging from $.50 to $2.00 per share. During
the year ended May 31, 2014, 923,072 of these warrants were issued to investors at an exercise price of $.50 per share. All of the warrants are
currently exercisable in full. The Company determined the fair value of the warrants using the Black-Scholes option pricing model utilizing
certain weighted average assumptions such as expected stock price volatility, term of the warrants, risk-free interest rates, and expected
dividend yield at the commitment date.
Additionally, at the commitment date, the Company determined that the conversion feature related to the Notes was beneficial to the investors.
As a result, the Company determined the intrinsic value of the conversion feature utilizing the fair value of the underlying common stock at the
commitment date and the effective conversion price after discounting the Notes for the fair value of the warrants. The fair value of the warrants
and the intrinsic value of the conversion feature were recorded as a debt discount to the Notes, and a corresponding increase to additional paid-
in capital. The debt discounts are amortized over the life of the Notes. During the years ended May 31, 2014 and 2013, the Company
recognized approximately $3,807,000 and $1,704,000, respectively, as interest expense related to amortization of the debt discount. The
unamortized discounts are fully amortized upon any conversion of the Notes before maturity. Activity related to the Notes was as follows:
Face amount of Notes
Unamortized discount
Repayments
Conversions
Total carrying value of Notes
Short-term portion of Notes
Long-term portion of Notes
May 31, 2014
$ 7,221,250
(1,932,566)
(500,000)
(2,450,000)
2,338,684
—
$ 2,338,684
May 31, 2013
$ 6,588,250
(4,539,886)
—
(567,000)
1,481,364
(328,347)
$ 1,153,017
The Company utilized the following weighted average assumptions to value the above investor warrants:
Expected dividend yield
Stock price volatility
Expected term
Risk-free interest rate
Grant-date fair value
Note 5 – Stock Options and Warrants
2014
-0-%
78 - 93%
3-5 years
.64 -1.42%
2013
-0-%
70 - 94%
2 years
0.28%
$ .66 - $.72 $ .11 - $1.10
The Company has one active stock-based equity plan at May 31, 2014, the CytoDyn Inc. 2012 Equity Incentive Plan (the “2012 Plan”). The
2012 Plan was approved by shareholders at the Company’s 2012 annual meeting to replace the Company’s 2004 Stock Incentive Plan, which
was approved by the Company’s shareholders in 2005. The 2012 Plan provides for the issuance of up to 3,000,000 shares of common stock
pursuant to various forms of incentive awards permitted under the 2012 Plan. As of May 31, 2014, the Company had 1,238,903 shares
available for future stock-based grants under the 2012 Plan.
During the year ended May 31, 2014, the Company granted options to purchase a total of 749,452 shares of common stock to directors and
employees with exercise prices ranging from $.64 to $1.09 per share. The director option awards vest at 25% per quarter over one year and the
employee awards vest one-third annually and have a five-year term. The weighted average grant date fair value related to these options was
$.40 to $.43 per share.
During the year ended May 31, 2014, the Company granted to a consultant options to purchase 305,000 shares of common stock at an
exercise price of $.75 per share and a grant-date fair value of $.43 per share. The options expire on September 4, 2018, and vested as to
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50,000 shares on the date of issuance and were scheduled to vest at the monthly rate of 15,000 shares for the duration of the consulting
agreement. The consulting agreement, which had an initial term of up to 18 months and was subject to termination for any reason after six
months, was terminated on March 17, 2014. At the time of termination, options to purchase 140,000 shares had vested and an additional
15,000 options vested during the notice period. The termination of the consulting agreement resulted in a forfeiture of options to purchase
150,000 shares.
During the year ended May 31, 2014, the holder of a warrant covering 50,000 shares exercised the right to purchase such shares at $1.00 per
share, resulting in cash proceeds upon exercise of $50,000. The Company received $201,000 during the year ended May 31, 2013, upon
exercise of warrants.
During the year ended May 31, 2014, the Company issued a warrant to purchase 50,000 shares of common stock at an exercise price of $.75
per share and a term expiring November 1, 2016, in settlement of a claim for telecommunications services provided to the Company in the fall
of 2012. The grant date fair value was $.67 per share.
During the year ended May 31, 2014, the Company issued warrants to purchase 11,153,850 shares of common stock to investors in the
Company’s $14.5 million private equity offering (see Note 7). Investors in the offering purchased Units at $1.30 per Unit, which each Unit
consisting of two shares of common stock plus a warrant to purchase one additional share of common stock at a price of $.75 per share. Each
warrant has a five-year term. In connection with this private placement and pursuant to the Placement Agent Agreement dated June 1, 2013, as
amended, between the Company and Paulson Investment Company (the “Placement Agent”), the Company issued to the Placement Agent, as
additional compensation, a warrant covering 4,940,092 shares of common stock with an exercise price of $.75 per share and a seven-year
term. The warrants vested immediately and had a grant-date fair value of $1.03 per share. The fair value of the warrants was included as a
component of equity, increasing and decreasing equity by the fair value attributable to the warrants.
Compensation expense related to stock options and warrants issued as compensation was approximately $928,400 and $3,262,000 for the
year ended May 31, 2014 and 2013, respectively. The grant date fair value of options and warrants vested during the years ended May 31,
2014 and 2013, was approximately $2,274,000 and $8,889,000, respectively. As of May 31, 2014, there was approximately $752,000 of
unrecognized compensation costs related to share-based payments for unvested options, which is expected to be recognized over a weighted
average period of 1.89 years.
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, 2014 and 2013:
Risk free rate
Dividend yield
Volatility
Expected term
Grant date fair value
2014
2013
0.52% - 1.85% 0.12% - .70%
—
78.73% - 92.92%
2.5 – 3.5 years
$ .40 - $.67
—
87% - 102%
1 – 4 years
$ .56 - $.89
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The following table represents stock option and warrant activity for the periods ended May 31, 2014 and 2013:
Options and warrants outstanding – May 31, 2012
Granted
Exercised
Forfeited/expired/cancelled
Options and warrants outstanding – May 31, 2013
Granted
Exercised
Forfeited/expired/cancelled
Options and warrants outstanding – May 31, 2014
Outstanding exercisable – May 31, 2014
Number of
Shares
10,327,664
11,166,274
(780,000)
(2,567,000)
18,146,938
18,414,144
(50,000)
(5,704,721)
30,806,361
29,986,581
Weighted
Average
Exercise Price
1.60
$
1.61
0.26
1.73
1.65
0.74
—
1.49
1.13
1.15
$
Weighted
Average
Remaining
Contractual Life
in Years
3.20
—
—
—
1.86
—
—
—
3.29
3.21
Aggregate
Intrinsic Value
$ 2,308,279
—
—
—
140,321
—
—
—
177,042
170,042
$
Note 6 – Common Stock and Common Stock Payable Issued for Services
During the year ended May 31, 2013, the Company issued 51,520 fully vested shares of common stock at prices ranging from $.80 to $1.60
per share, and recognized approximately $49,000 in compensation expense to directors for past services.
During the year ended May 31, 2013, the Company issued 60,000 shares of common stock to a consultant at $2.68 per share, which was the
fair value at the commitment date, which was amortized over the requisite service period. During the year ended May 31, 2013 the Company
recognized approximately $161,000 in stock-based compensation related to this grant.
Effective December 28, 2012, the Company settled trade payable balances of approximately $447,000 owed to its previous principal law firm
in exchange for a cash payment of $45,000 and 66,116 shares of Company common stock with a value of $80,000 as determined by the
closing price of the stock on December 24, 2012. The Company recorded a gain on the satisfaction of the payables of approximately $322,000
for the year ended May 31, 2013.
At May 31, 2013, the Company was committed, subject to satisfaction of certain conditions, to issue approximately $108,000 of common
stock to two executives of the Company for past services. This amount is included in common stock payable as of May 31, 2013. The
Company recognized approximately $108,000 in compensation expense during 2013 related to these services. During the year ended May 31,
2014, the Company issued 53,601 shares of common stock to the executives to satisfy the payable, net of tax withholding.
During the period ended May 31, 2014, the Company had no stock-based compensation related to issuance of common stock.
Note 7 – Private Equity Offering
On October 23, 2013, the Company completed a private equity offering (the “Offering”). Pursuant to the Offering, the Company sold to
investors a total of 11,153,850 Units at a price of $1.30 per Unit, for total gross proceeds of approximately $14.5 million. Each Unit consisted
of two shares of common stock and one warrant to purchase common stock at an exercise price of $.75 per share. During the fiscal year ended
May 31, 2014, the Company issued a total of 20,989,494 shares of common stock. In conjunction with the Offering, the Company also issued
warrants to purchase 11,153,850 shares of common stock at the $.75 per share exercise price (see Notes 2 and 5 for a description of the
warrants and offering costs related to the Offering).
Note 8 – Recent Accounting Pronouncements
Recent accounting pronouncements other than below issued by the FASB (including its EITF), the AICPA and the SEC did not or are not
believed by management to have a material effect on the Company’s present or future financial statements.
In June 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-10, “Development Stage Entities (Topic 915) Elimination of
Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. This
ASU does the following among other things: a) eliminates the requirement to present inception-to-date information on the statements of
income, cash flows, and shareholders’ equity, b) eliminates the need to label the financial statements as those of a development stage entity, c)
eliminates the need to disclose a description of the development stage activities in which the entity is engaged, and d) amends FASB ASC 275,
Risks and Uncertainties, to clarify that information on risks and uncertainties for entities that have not commenced planned principal operations
is required. The amendments in ASU No. 2014-10 related to the elimination of Topic 915 disclosures and the additional disclosure for Topic
275 are effective for public companies for annual and interim reporting periods beginning after December 15, 2014. Early adoption is
permitted. The Company has evaluated this ASU and determined that it will early adopt beginning with the annual period ended May 31,
2014.
Note 9 – Related Party Transactions
During the year ended May 31, 2014, the Company paid in cash a note payable to a director of the Company for $500,000 with accrued
interest at 15%. The principal and accrued interest were paid in full at the April 11, 2014 maturity date. Interest was payable in the form of
interest at 15%. The principal and accrued interest were paid in full at the April 11, 2014 maturity date. Interest was payable in the form of
shares of common stock not to exceed 150,000 shares at a fixed price of $.50 per share. For the years ended May 31, 2014 and May 31, 2013,
the Company recorded approximately $64,700 and $10,300 in interest expense, respectively, and issued a total of 150,000 shares.
During the year ended May 31, 2013, the Company issued to a director a convertible note (see Note 4) in a principal amount of $1,000,000,
with interest payable in cash at a rate of 5% semi-annually beginning on April 1, 2013. The principal of the note is due in full at the
October 16, 2015 maturity date. The note is convertible into common shares at a fixed conversion price of $.75 per share at any time at the
election of the holder. In conjunction with the note, the Company issued 1,333,333 detachable common stock warrants at an exercise price of
$2.00 per share. The warrants expire on October 16, 2014. The Company recorded debt discounts related to the fair value of the warrants and
the intrinsic value of the beneficial conversion feature at the commitment date of the note. As of May 31, 2014, the carrying value of this
convertible note was approximately $540,000, which is included in convertible notes payable, net, in long-term liabilities on the consolidated
balance sheet. During the years ended May 31, 2014 and 2013, the Company recognized approximately $334,000 and $207,000, respectively,
in interest expense related to the amortization of the above discounts.
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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.
Note 10 – Income Taxes
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, 2014 and 2013.
Reconciliation of the federal statutory income tax rate of 34% 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
2014
34.0%
0.4
(9.6)
0.0
(24.8)
0.0%
2013
34.0%
5.1
0.0
0.0
(39.1)
0.0%
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2014 and 2013:
Deferred tax asset (liability) current:
Accrued salary and expenses
Debt discount amortization
Valuation allowance
Deferred tax asset (liability) non-current:
Net operating loss
Debt discount
Expense on non-qualified stock options
Other
Valuation allowance
2014
2013
$
$
159,300
—
(159,300)
—
$ 9,957,400
(663,700)
2,893,300
176,200
(12,363,200)
—
$
$
$
291,100
(118,100)
(173,000)
—
$ 8,256,000
(1,659,300)
2,928,000
155,500
(9,680,200)
—
$
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.
At May 31, 2014, the Company had available net operating loss carryforwards of approximately $29,000,000 which expire beginning in
2022.
The Company’s income tax returns remain subject to examination by all tax jurisdictions for tax years May 31, 2011 through 2013.
Note 11 – Commitments and Contingencies
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 Chairman of the Board, effective immediately, and as President and CEO of the
Company on September 10, 2012. Mr. Van Ness ceased to be a director on December 12, 2012.
The Transition Agreement provided 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 between the Company and
Mr. Van Ness, during the period beginning on July 18, 2012 through October 16, 2012 (the “Transition Period”), Mr. Van Ness would be
paid a salary equal to $13,890 per month and 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 following the Transition Period, (ii) the opportunity to elect the timing of
distribution of his account balance in the Company’s 401(k) Plan, and (iii) reimbursement for continuing health care insurance coverage under
COBRA for nine months.
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The Transition Agreement also amended (A) the CytoDyn Inc. Stock Option Award Agreement, dated December 6, 2010, with Mr. Van Ness
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, with Mr. Van Ness 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 options. In addition, the expiration date of the
25,000 options granted to Mr. Van Ness on September 22, 2010, as well as the options described above, is August 8, 2016.
Pursuant to the terms of the Transition Agreement described above, during the year ended May 31, 2014, the Company recognized
approximately $172,000 in severance expense and has an accrued liability of approximately $193,000, which is included in accrued salaries
and severance on the consolidated balance sheet as of May 31, 2014. The Company accrued for the severance to be paid to Mr. Van Ness, as
Mr. Van Ness has no significant continuing service obligation to the Company. Additionally, related to the modification of the above stock
option awards to Mr. Van Ness, the Company recognized approximately $1,128,000 of stock-based compensation expense during the year
ended May 31, 2013.
Under the Asset Purchase Agreement (the “Asset Purchase Agreement”), dated July 25, 2012, between the Company and Progenics
Pharmaceuticals, Inc. (“Progenics”), the Company acquired 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 U.S. Food and Drug administration (“FDA”)
regulatory filings. On October 16, 2012, the Company paid to Progenics $3,500,000 in cash to close the transaction. The Company is also
required to pay Progenics the following milestone payments and royalties: (i) $1,500,000 at the time of the first dosing in a U.S. Phase 3 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-U.S. approval for the
sale of PRO 140; and (iii) royalty payments of up to 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, in each case
determined on a country-by country basis. Payments to Progenics are in addition to payments due under a Development and License
Agreement, dated April 30, 1999 (the “PDL License”), between Protein Design Labs (now AbbVie Inc.) and Progenics, which was assigned
to us in the PRO 140 transaction, pursuant to which we must pay additional milestone payments and royalties as follows: (i) $1,000,000 upon
initiation of a Phase 3 clinical trial; (ii) $500,000 upon filing a Biologic License Application with the FDA or non-U.S. equivalent regulatory
body; (iii) $500,000 upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iv) royalties of up to 7.5% of net
sales for the longer of 10 years and the date of expiration of the last to expire licensed patent. Additionally, the PDL License provides for an
annual maintenance fee of $150,000 until royalties paid exceed that amount.
Effective January 20, 2014, CytoDyn Inc. (the “Company”) entered into two Project Work Orders (the “PWOs”) with its principal clinical
research organization, Amarex Clinical Research, LLC (the “CRO”). The services to be provided under the PWOs are intended to facilitate the
Company’s plan to expand and accelerate the concurrent evaluation of additional potential treatment applications of its principal product
candidate, PRO 140. Subsequently, one of the PWOs was terminated upon 30-days’ notice.
The CRO is currently providing comprehensive clinical trial management services and oversight of all CMC activities in connection with our
research study involving PRO 140. The original estimated combined cost of two separate studies was $9.3 million, of which one study with
estimated costs totaling $4.3 million was terminated without penalty. The scope and cost of the remaining study was subsequently revised
downward to approximately $3.7 million, of which $1.0 million relates to services to be provided directly by the CRO and the remainder to
pass-through costs to be provided by third parties. The Company paid the CRO a total deposit of approximately $790,000 in December 2013.
A PWO may be terminated by either party at any time upon 30 days’ prior written notice, provided the CRO will be entitled to payment for
services provided through the date of termination, plus an amount equal to 30% of the remaining contract amount for direct services. For the
PWO that was terminated, the CRO has agreed not to impose a financial penalty and has applied the portion of the December 2013 deposit
related to this study of approximately $343,000 to other amounts due to the CRO.
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 the resolution of any such claims against the Company, if any, will not have a material adverse effect on the Company’s business,
financial condition or results of operations.
Note 12 – Acquisition of patents
As discussed in Note 11 above, the Company consummated an asset purchase on October 16, 2012 and paid $3,500,000 for certain assets,
including intellectual property, certain related licenses and sublicenses, FDA filings and various forms of the PRO 140 drug
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product. The Company followed the guidance in Financial Accounting Standards topic 805 to determine if the Company acquired a business.
Based on the prescribed accounting, the Company acquired assets and not a business. As of May 31, 2014, the Company has recorded
$3,500,000 of intangible assets in the form of patents. The Company estimates the patents have an estimated life of ten years.
As of the date of this filing, management cannot reasonably estimate the likelihood of paying the milestone payments and royalties described in
Note 11 and, accordingly, as of May 31, 2014, the Company has not accrued any liabilities related to these contingent payments, as more fully
described above in Note 11.
The following presents intangible assets activity:
Gross carrying amounts
Accumulated amortization
Total amortizable intangible assets, net
Patents currently not amortized
Carrying value of intangibles, net
May 31, 2014
$ 3,500,000
(568,750)
2,931,250
35,989
$ 2,967,239
May 31, 2013
$ 3,500,000
(218,750)
3,281,250
35,989
$ 3,317,239
Amortization expense related to intangible patents was approximately $350,000 and $219,000 for the year ended May 31, 2014 and May 31,
2013, respectively. The estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives is
estimated at approximately $350,000 per year for the next five years.
Note 13 – Subsequent Events
In furtherance of our business strategy and subsequent to fiscal year-end 2014, the Company entered into a manufacturing agreement with a
contract manufacturing organization to initiate preparations for the potential future manufacturing of additional PRO 140. In the event this
agreement is terminated by the Company, it will incur financial penalties up to $1.9 million determined by the date the notice of termination is
delivered in relation to the anticipated manufacturing date. If the notice is delivered more than three months in advance of the anticipated
manufacturing date, the penalty is approximately $1.1 million, or approximately $1.9 million thereafter.
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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, 2014, 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, 2014 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, 2014 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, 2014 because of material weaknesses in our internal control over financial reporting. A
material weakness is a control deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a
material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. Our 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 and staffing, 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 generally accepted accounting principles in the United States.
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 is not subject to attestation by the Company’s registered public accounting firm because the
Company is not an accelerated filer under the Exchange Act.
Changes in Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the year ended May 31, 2014, that materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. During the fiscal year ended
May 31, 2014, management has, however, continued to strengthen internal controls and procedures through the implementation of entity-level
controls and the addition of qualified internal staff.
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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 2014 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of the end
of the Company’s fiscal year, May 31, 2014 (the “2014 Proxy Statement”).
We have adopted a Code of Ethics for our Senior Executive Officers (the Chief Executive Officer, Chief Financial Officer, Treasurer,
and Secretary), as well as an Insider Trading Policy for the Company. Copies are available 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 2014 Proxy Statement.
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 2014 Proxy Statement.
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 2014 Proxy Statement.
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 2014
Proxy Statement.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following are filed as part of this Annual Report on Form 10-K:
Consolidated Financial Statements
The Consolidated Financial Statements for the years ended May 31, 2014 and 2013 are included under Item 8 of this report.
Exhibits
Exhibits are listed in the Exhibit Index which appears immediately following the signature page of this report.
45
Table of Contents
SIGNATURES
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.
Date: July 10, 2014
CYTODYN INC.
(Registrant)
By: /s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on July 10, 2014.
Principal Executive Officer and Director:
/s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph.D.
President and Chief Executive Officer, Director
Principal Financial and Accounting Officer:
/s/ Michael D. Mulholland
Michael D. Mulholland
Chief Financial Officer, Treasurer and Corporate
Secretary
Remaining Directors:
* Anthony D. Caracciolo
* Gregory A. Gould
* Jordan G. Naydenov
* A. Bruce Montgomery, M.D.
* Denis R. Burger, Ph.D.
* S. Michael Nobel, Ph.D.
* By /s/ Michael D. Mulholland
Michael D. Mulholland
Attorney-In-Fact
46
Table of Contents
Exhibit
Number
EXHIBIT INDEX
Description
Plan of Acquisition
2.1
Asset Purchase Agreement, dated as of July 25, 2012, between CytoDyn Inc. and Progenics Pharmaceuticals, Inc. (incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 30, 2012).
3.1
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10SB12G filed July 11, 2002).
Articles of Incorporation and Bylaws
3.2
3.3
3.4
3.5
4.1
4.2
4.3
Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K
filed November 12, 2003).
Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.4 to the Registrant’s Annual Report on Form 10-
K filed March 12, 2010).
Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.5 to the Registrant’s Current Report on Form 8-K
filed April 29, 2010).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed
November 10, 2011).
Instruments Defining Rights of Security Holders
Form of Convertible Promissory Note bearing interest at 10% per annum with related common stock warrant (incorporated by
reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed April 12, 2013).
Form of Convertible Promissory Note bearing interest at 5% per annum with related common stock warrant (incorporated by
reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed April 12, 2013).
Form of Convertible Promissory Note bearing interest at 5% per annum (incorporated by reference to Exhibit 4.3 to the
Registrant’s Form S-1 Registration Statement filed November 15, 2013 (the “Form S-1”)).
4.4
Form of common stock warrant (incorporated by reference to Exhibit 4.4 to the Form S-1).
4.5
Form of purchase warrant issued to Paulson Investment Company, Inc. (incorporated by reference to Exhibit 4.5 to the Form S-
1).
Material Contracts
10.1
10.2
10.3*
10.4*
10.5*
10.6*
10.7*
Patent License Agreement between Allen D. Allen and CytoDyn of New Mexico Inc. (incorporated by reference to Exhibit 10.2
to the Registrant’s Annual Report on Form 10-KSB filed September 14, 2004).
Amendment to Patent License Agreement (incorporated by reference to Exhibit 10.6.1 to the Registrant’s Form SB-2/A filed
March 21, 2005).
CytoDyn Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s Amendment No. 1 to
Annual Report on Form 10-K filed August 5, 2011).
CytoDyn Inc. 2004 Stock Incentive Plan (the “2004 Plan”) (incorporated by reference to Exhibit 10.10 to the Registrant’s
Amendment No. 1 to Annual Report on Form 10-K filed August 5, 2011).
Form of Stock Option Award for Employees under the 2004 Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s
Annual Report on Form 10-K filed August 29, 2013 (the “2013 10-K”)).
Form of Stock Option Award for Non-Employee Directors under the 2004 Plan (incorporated by reference to Exhibit 10.6 to the
2013 10-K).
CytoDyn Inc. 2012 Equity Incentive Plan (the “2012 Plan”) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed December 18, 2012).
47
Table of Contents
Exhibit
Number
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21
10.22
10.23
10.24
Description
Form of Stock Option Award Agreement for Employees under the 2012 Plan (incorporated by reference to Exhibit 10.8 to the
2013 10-K).
Form of Stock Option Award Agreement for Non-Employee Directors under the 2012 Plan (incorporated by reference to Exhibit
10.9 to the 2013 10-K).
Form of Stock Option Award Agreement for Employees granted under an arrangement not approved by the Registrant’s
shareholders (incorporated by reference to Exhibit 10.10 to the 2013 10-K).
Form of Stock Option Award Agreement for Non-Employee Directors granted under an arrangement not approved by the
Registrant’s shareholders (incorporated by reference to Exhibit 10.11 to the 2013 10-K).
Form of Indemnification Agreement with directors and officers of the Registrant (incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q filed January 14, 2013).
Summary of Non-Employee Director Compensation Program Effective June 1, 2013 (incorporated by reference to Exhibit 10.13
to the 2013 10-K).
Transition Agreement, dated as of July 25, 2012, between CytoDyn Inc. and Kenneth J. Van Ness (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 25, 2012).
Separation Agreement and Release, dated as of May 31, 2013, between CytoDyn Inc. and Richard J. Trauger (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 10, 2013).
Employment Agreement and Non-Compete Agreement between CytoDyn Inc. and Nader Pourhassan dated October 17, 2011
(incorporated by reference to Exhibit 10.16 to the 2013 10-K).
Convertible Promissory Note dated October 16, 2012, in the principal amount of $1,000,000 issued to Jordan Naydenov, together
with a related common stock warrant to purchase 1,333,333 shares of the Registrant’s common stock (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed April 12, 2013).
Promissory Note dated April 11, 2013, in the principal amount of $500,000 issued to Jordan Naydenov (incorporated by
reference to Exhibit 10.18 to the 2013 10-K).
Form of Common Stock Warrant Agreements for Jordan Naydenov covering a total of 303,200 shares of the Registrant’s
common stock and expiring March to May of 2014 (incorporated by reference to Exhibit 10.19 to the 2013 10-K).
Consulting Agreement between CytoDyn Inc. and S. Michael Nobel dated March 28, 2013 (incorporated by reference to Exhibit
10.20 to the 2013 10-K).
Development and License Agreement between Protein Design Labs, Inc. (to which AbbVie Biotherapeutics Inc. is successor in
interest) and Progenics Pharmaceuticals, Inc. (to which CytoDyn Inc. is successor in interest) effective as of April 30, 1999, as
amended by letter agreement dated November 24, 2003 (incorporated by reference to Exhibit 10.21 to the 2013 10-K).
Clinical Research Collaboration Agreement between CytoDyn Inc. and Philadelphia Health and Education Corporation dba Drexel
University College of Medicine effective November 15, 2012 (incorporated by reference to Exhibit 10.22 to the 2013 10-K).
Amendment to Clinical Research Collaboration Agreement between CytoDyn Inc. and Philadelphia Health and Education
Corporation dba Drexel University College of Medicine effective February 10, 2014 (incorporated by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q filed April 11, 2014).
Clinical Trial Agreement between CytoDyn Inc. and Philadelphia Health and Education Corporation dba Drexel University
College of Medicine effective February 10, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q filed April 11, 2014).
10.25*
Consulting Agreement between CytoDyn Inc. and Denis R. Burger dated February 21, 2014.
21
23.1
24
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the 2013 10-K).
Other
Consent of Warren Averett LLP
Power of Attorney of executive officers and directors
48
Table of Contents
Exhibit
Number
31.1
31.2
32
Description
Certifications
Certification of Chief Executive Officer under Rule 13a-14(a)
Certification of Chief Financial Officer under Rule 13a-14(a)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
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
Note: All exhibits have SEC File No. 000-49908.
49
CYTODYN INC.
CONSULTING AGREEMENT
Exhibit 10.25
This Consulting Agreement (this “Agreement”) is made and entered into effective February 21, 2014 (the “Effective Date”), by and
between CytoDyn Inc., a Colorado corporation (the “Company”), and Denis R. Burger, Ph.D., an individual (“Consultant”).
WHEREAS, Consultant has served as an outside director of the Company’s Board of Directors (the “Board”) since February 7,
2014;
WHEREAS, Consultant has over 25 years of experience managing scientific, operational, financial, and executive responsibilities
in the biotech industry; and
WHEREAS, the Company wishes to retain Consultant to advise the Company’s executive management team (the “Team”) and
Consultant has agreed to be available for that purpose.
NOW, THEREFORE, in consideration of the material promises set forth herein and for other good and valuable consideration, the
parties agree as follows:
1. Engagement. The Company hereby engages Consultant, and Consultant hereby accepts engagement, as an independent consultant to
the Company upon the terms and conditions set forth in this Agreement. The Company and Consultant acknowledge and agree that Consultant
is an independent contractor under this Agreement and will not be an agent or employee of the Company and will have no authority to bind the
Company.
2. Services. During the term of this Agreement, Consultant will personally provide the following services to the Team (the “Services”).
(a) Advising on all matters related to the Company including, but not limited to, the research, development, and clinical studies
relating to PRO 140 and other proprietary compounds;
(b) Attending weekly meetings with the Team at the principal office of the Company or any other location and at a time mutually
agreed to by Consultant and the Team;
(c) Attending periodic meetings or telephone conference calls with the Chairman of the Board (the “Chairman”) at a time and
location mutually agreed to by the Chairman and Consultant;
(d) Upon reasonable request from the Team or Chairman, preparing reports, analyses and other written products to advise the Team
of scientific, operational, or financial matters related to the Company; and
(e) Reporting to the Board on the decisions and progress of the Team.
-1-
3. Term. The term of this Agreement commences on the Effective Date and will end on the earliest to occur of the following events:
(a) the death of Consultant;
(b) 10 days after CytoDyn receives written notice to terminate this Agreement from Consultant or Consultant receives written notice
of termination from the Chairman; or
(c) Consultant ceasing to be a member of the Board.
Notwithstanding any termination of this Agreement, the provisions of Sections 7, 8 and 9 hereof will survive indefinitely.
4. Payments to Consultant. Consultant’s compensation hereunder will be as follows:
(a) Monthly Fee. Consultant will receive as compensation hereunder monthly payments of $5,000, in cash, payable on or before the
15th day of each month, beginning with the first full month during the term of this Agreement.
(b) Expenses. Consultant will be entitled to be reimbursed for travel and related expenses that are pre-approved by the Chairman in
writing; provided that Consultant complies with the Company’s then-current policies regarding such reimbursement. Requests for
reimbursement of any authorized expenses will be accompanied by receipts or other appropriate documentation deemed acceptable by the
Company’s Chief Financial Officer to substantiate the charges in question.
(c) Invoices; Payment. Unless otherwise agreed by the Company in writing, payment of all authorized expenses will be due on the
15th day of the month following the month in which the invoice is received.
(d) No Benefits. Recognizing that Consultant is an independent contractor, Consultant and the Company agree that the Company
will not be responsible for any medical, retirement or other benefits for Consultant, or for the withholding, collection, determination or
payment of any tax or other imposition on the amounts due to Consultant hereunder, including, without limitation, unemployment, payroll,
social security or workers’ compensation withholdings.
5. Resignation from Board Committees. Consultant hereby resigns from membership on the Board’s Compensation Committee and
Nominating and Governance Committee as of the Effective Date.
6. Confidential Information and Trade Secret Definitions. For purposes of this Agreement, “Confidential Information” is any nonpublic
knowledge or information including Trade Secret information, whether or not such is specifically identified as confidential or as a trade secret
in any oral or written communication, which specifically relates to the Company’s business and finances or the Company’s affiliates,
consultants, clients, vendors, distributors, and others with whom the Company plans to do, does, or has in the past done
-2-
business, which the Company deems to be confidential and proprietary, including the whole or any portion or phase of any scientific or
technical information, design, process, procedure, formula, invention (whether or not such is patentable), unpublished patent application, idea,
concept, compilation, presentation, study, analysis, program, device, method, technique, improvement, or any business, regulatory, market or
financial information, or listing of names, addresses or telephone numbers, regardless of when and by whom such information was developed
or acquired, and regardless of whether any of these are described in writing or fixed in tangible form, or are copyrightable, considered
copyrightable, patentable or considered patentable. Confidential Information also specifically includes information or knowledge received by
the Company from others, including its consultants, vendors, clients and affiliates, which the Company has an obligation to treat as
confidential and also includes any confidential information generated or acquired by Consultant while retained by the Company.
For purposes of this Agreement, a “Trade Secret” includes any Confidential Information that: (1) derives economic value, actual or
potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic
value from their disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain their secrecy.
7. Restrictions on Use and Disclosure. Consultant will not, during the term of this Agreement or at any time thereafter, disclose,
distribute, or publish or cause to be disclosed, distributed, or published in whole or in part any Confidential Information or Trade Secrets, to
any person, firm, corporation, association, or any other operation or entity, except to employees, consultants, vendors, or agents of the
Company who are authorized by the Company to receive such information and then, only on behalf of the Company and only to the extent
necessary in order for Consultant to perform faithfully his duties pursuant to this Agreement. Consultant further agrees that he will not at any
time reproduce or permit the reproduction of any Confidential Information or Trade Secrets, except on behalf of the Company and then only to
the extent necessary in order for Consultant to perform his job duties and responsibilities. Consultant will take all reasonable care to avoid the
unauthorized use, disclosure, publication, distribution, or reproduction of any Confidential Information or Trade Secrets. Further, Consultant
will not, during the term of this Agreement or at any time thereafter, use for his own benefit or the benefit of any other person, firm,
corporation, association or other entity, or misappropriate, or participate or assist in the misappropriation of any Confidential Information or
Trade Secrets, whether for his own benefit, or the benefit of any other person, firm, corporation, association or other entity. Consultant agrees
that upon the Company’s request or instruction, Consultant will immediately either return to the Company or destroy all Confidential
Information and Trade Secrets in Consultant’s possession or control, as well as all related notes, records, memoranda, correspondence, files
and other papers, and all copies or duplication (whether in writing, electronic, or digital format).
8. Work Product.
(a) Ownership by Company. All reports, inventions, concepts, processes, methods, know-how, documentation, improvements,
technology, information, data, products and other results which Consultant may discover, conceive of, create, reduce to practice, author,
develop, make, or deliver to the Company, either alone or with others, in connection with
-3-
Services hereunder (the “Work Product”), together with any Trade Secret or Confidential Information related thereto, shall be owned by and
belong exclusively to the Company. To the extent applicable, all Work Product shall constitute “works made for hire” by or for the Company
and the Company shall be the “author” of all Work Product under applicable copyright laws. Consultant hereby assigns and conveys to the
Company any and all rights, title, interests and claims which Consultant has or may have to the Work Product and all Trade Secrets or
Confidential Information related thereto. Consultant will not contest the Company’s ownership of the Work Product, and Consultant agrees to
fully cooperate and execute all instruments and documents including, but not limited to, assignments, reasonably requested by the Company to
confirm, evidence or perfect its rights to the Work Product. Consultant hereby waives any moral rights that Consultant may have in the Work
Product.
(b) Infringement. Consultant warrants that: (a) the Work Product will not knowingly infringe any patent, trademark, copyright,
trade secret or other rights of any third party; and (b) to the best of Consultant’s knowledge, title to the Work Product will pass to the
Company free and clear of all claims, liens and interests of any third party.
9. Diversion of Business. Consultant will not, during the period of this Agreement, or at any time thereafter, either for Consultant, or on
behalf of any other person, firm, corporation or other operation or entity, directly or indirectly;
(a) Business. Divert or attempt to divert from the Company or any of its affiliates any business whatsoever by influencing or
attempting to influence, or soliciting or attempting to solicit, any of the customers or strategic partners of the Company or any of the
Company’s affiliates with whom Consultant may have communicated at any time; or
(b) Employees and Affiliates. Divert or attempt to divert from the Company or any of its affiliates any person employed by the
Company or acting on behalf of or as a representative of the Company or any of its affiliates by influencing or attempting to influence
such person to leave the Company’s employment or to work for or on behalf of any other business.
10. Remedies. Consultant recognizes that a breach of any of the restrictive covenants set forth in Sections 7, 8 and 9 hereof will cause
irreparable harm to the Company and that actual damages may be difficult to ascertain and in any event may be inadequate. Accordingly,
Consultant agrees that in the event of any such breach, the Company will be entitled, without the posting of bond or other security, to
injunctive relief in addition to such other legal or equitable remedies as may be available.
11. Compliance with Laws. In performance of the Services, Consultant will comply with all laws, rules, regulations, applicable to
Consultant and the Services, and will comply with all applicable provisions of the Company’s Code of Business Conduct and Insider Trading
Policy.
-4-
12. Miscellaneous.
(a) Notices. Notices under this Agreement will be in writing and will be delivered in person, by registered or certified mail, by
overnight courier, by facsimile transmission, or by other similar means to the recipient’s address set forth below:
If to Consultant, to:
If to the Company, to:
cc.:
Denis R. Burger, Ph.D.
1534 S.W. Myrtle Street
Portland, Oregon 97207-1248
Fax:
CytoDyn Inc.
Nader Pourhassan, Ph.D.
1111 Main Street, Suite 660
Vancouver, Washington 98660
Miller Nash LLP
111 S.W. Fifth Avenue, Suite 3400
Portland, Oregon 97204
Attn: Mary Ann Frantz
Fax: (503) 224-0155
(b) Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and
supersedes all previous agreements by and between the parties as well as all proposals, oral or written, and all negotiations, conversations,
or discussions heretofore had between the parties related to this agreement.
(c) Amendment. This Agreement will not be deemed or construed to be modified, amended, rescinded, canceled, or waived, in
whole or in part, except by written amendment signed by the parties hereto.
(d) Severability. In the event that any of the terms of this Agreement are in conflict with any rule of law or statutory provision or are
otherwise unenforceable under the laws or regulations of any government or subdivision thereof, such terms will be deemed stricken from
this Agreement, but such invalidity or unenforceability will not invalidate any of the other terms of this Agreement and this Agreement
will continue in force, unless the invalidity or unenforceability of any such provisions hereof does substantial harm to, or where the
invalid or unenforceable provisions comprise an integral part of, or are otherwise inseparable from, the remainder of this Agreement.
(e) Assignment. Consultant may not assign his rights or delegate his duties under this Agreement without the prior written consent
of the Company. This Agreement will be binding upon Consultant’s permitted assigns, heirs, and legal representatives, and will inure to
the benefit of the Company and its successors and assigns.
-5-
(f) Counterparts. This Agreement may be executed in two or more counterparts and each such counterpart will be deemed an original
hereof.
(g) Headings. Headings and subheadings in this Agreement are not intended to and do not have any substantive content whatsoever.
(h) Governing Law. This Agreement will be governed in all respects by the laws of the state of Washington.
[signature page follows]
-6-
IN WITNESS WHEREOF, the parties have set their hands as of the Effective Date.
THE COMPANY
CytoDyn Inc.
By: /s/ Anthony Caracciolo
Anthony Caracciolo
Chairman of the Board
CONSULTANT
/s/ Denis R. Burger
Denis R. Burger, Ph.D.
-7-
CONSENT OF WARREN AVERETT, LLC
Independent Registered Certified Public Accountants
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-186920) of our report dated
July 10, 2014, with respect to the consolidated financial statements of CytoDyn Inc. (the “Company”) appearing in this Annual Report on
Form 10-K for the year ended May 31, 2014.
/s/ Warren Averett, LLC
Warren Averett, LLC
Tampa, Florida
July 10, 2014
POWER OF ATTORNEY
EXHIBIT 24
Each person signing below designates and appoints NADER Z. POURHASSAN and MICHAEL D. MULHOLLAND, and each of them,
his true and lawful attorneys-in-fact and agents to sign the Annual Report on Form 10-K for the year ended May 31, 2014, of CytoDyn Inc., a
Colorado corporation, and to file said report, with all exhibits thereto, with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Each person whose signature appears below also grants to these attorneys-in-fact and agents full power and authority
to perform every act and execute any instruments that they deem necessary or desirable in connection with said report, as fully as he could do
in person, hereby ratifying and confirming all that the attorneys-in-fact and agents or their substitutes may lawfully do or cause to be done.
IN WITNESS WHEREOF, this power of attorney has been executed by each of the undersigned as of the 27th day of June, 2014.
Signature
/s/ Denis R. Burger, Ph.D.
Denis R. Burger, Ph.D.
/s/ Anthony D. Caracciolo
Anthony D. Caracciolo
/s/ Gregory A. Gould
Gregory A. Gould
/s/ A. Bruce Montgomery, M.D.
A. Bruce Montgomery, M.D.
/s/ Jordan G. Naydenov
Jordan G. Naydenov
/s/ S. Michael Nobel, Ph.D.
S. Michael Nobel, Ph.D.
/s/ Nader Z. Pourhassan, Ph.D.
Nader Z. Pourhassan, Ph.D.
Title
Director
Chairman of the Board and Director
Director
Director
Director
Director
President and Chief Executive Officer, Director
Exhibit 31.1
Certification of Chief Executive Officer
I, Nader Z. Pourhassan, certify that:
1. I have reviewed this Annual Report on Form 10-K of CytoDyn Inc.;
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 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 annual 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 annual 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 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
reasonably 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: July 10, 2014
/s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph. D.
President and Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
I, Michael D. Mulholland, certify that:
1. I have reviewed this Annual Report on Form 10-K of CytoDyn Inc.;
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 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 annual 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 annual 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 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
reasonably 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: July 10, 2014
/s/ Michael D. Mulholland
Michael D. Mulholland
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Exhibit 32
In connection with the Annual Report of CytoDyn Inc. (the “Company”) on Form 10-K for the year ended May 31, 2014 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to 18 U.S.C. § 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Nader Z. Pourhassan
Nader Z. Pourhassan, Ph. D.
President and Chief Executive Officer
July 10, 2014
/s/ Michael D. Mulholland
Michael D. Mulholland
Chief Financial Officer
July 10, 2014
A signed original of this written statement required by Section 906 has been provided to CytoDyn Inc. and will be retained by CytoDyn Inc.
and furnished to the Securities and Exchange Commission or its staff upon request.