Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1933
For the transition period from _____________ to _____________
Commission File Number: 000-49908
CYTODYN, INC.
-------------
(Exact name of registrant as specified in its charter)
75-3056237 COLORADO
---------- --------
(I.R.S. Employer Identification No.) State or other jurisdiction
of incorporation or organization
1511 Third Street, Santa Fe, New Mexico 87505
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (505) 988-5520
(Former name, former address and former fiscal year,
if changed since last report)
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. Yes X No
--- ---
Indicate by check mark 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 (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes No
--- ---
--------------------------------------------------------------------------------
Indicate by check mark 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 Accelerated Filer
--- ---
Non-accelerated Filer Smaller Reporting Company X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes No X
--- ---
On January 14, 2011, there were 21,370,796 shares outstanding of the
registrant's no par common stock.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
---------------------
Item 1 Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of November 30, 2010
(unaudited) and May 31, 2010 1
Condensed Consolidated Statement of Operations for the Three
and six months Ended November 30, 2010 and 2009, and for the
Period from October 28, 2003 to November 30 2010 (unaudited) 2
Condensed Consolidated Statement of Changes in Stockholders'
Deficit for the Period from October 28, 2003 to
November 30, 2010 (unaudited) 3
Condensed Consolidated Statement of Cash Flows for the six
Months Ended November 30, 2010 and 2009 and for the Period
from October 28, 2003 to November 30, 2010 (unaudited) 10
Notes to Condensed Consolidated Financial Statements (unaudited) 12
Item 2 Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations. 19
--------------------------
Item 3 Quantitative and Qualitative Disclosures About Market Risk 24
----------------------------------------------------------
Item 4 Controls and Procedures 24
-----------------------
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 25
-----------------
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 25
-----------------------------------------------------------
Item 3 Defaults Upon Senior Securities 25
-------------------------------
Item 4 (Removed and Reserved) 25
----------------------
Item 5 Other Information 25
-----------------
Item 6 Exhibits 26
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SIGNATURES 26
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Cytodyn, Inc.
(A Development Stage Company)
Condensed Consolidated Balance Sheet
November 30, May 31,
2010 2010
(unaudited)
------------ ------------
Assets
Current Assets:
Cash $ 97,730 $ 700,497
Prepaid expenses 26,481 12,127
Prepaid license fees 7,500 7,500
------------ ------------
Total current assets 131,711 720,124
Furniture and equipment, net 6,905 3,549
Other Assets 20,225 23,975
------------ ------------
$ 158,841 $ 747,648
============ ============
Liabilities and Shareholders' (Deficit)equity
Current liabilities:
Accounts payable $ 253,935 $ 178,956
Accrued liabilities 13,209 15,209
Indebtedness to related parties - short-term portion 148,985 153,985
Accrued interest payable 18,437 25,575
------------ ------------
Total current liabilities 434,566 373,725
Long Term Liabilities
Accrued salaries - related party -- 229,500
Convertible notes payable, net 6,937 6,937
------------ ------------
Total Liabilities 441,503 610,162
------------ ------------
Shareholders' (deficit)equity:
Series B Convertible stock preferred stock,
no par value; 400,000 shares authorized,
342,000 and 400,000 shares issued and
outstanding at November 30, 2010 and
May 31, 2010, respectively 1,717,695 2,009,000
Treasury stock, at cost, 200,000 shares held at
November 30, 2010 and May 31, 2010, respectively (100,000) (100,000)
Additional paid-in capital - treasury stock 313,080 313,080
Common stock, no par value; 100,000,000 shares
authorized, 21,127,395 and 20,075,895 outstanding
at November 30, 2010 and May 31, 2010,
respectively; 20,927,395 and 19,875,895 issued at
November 2010 and May 31, 2010, respectively 7,939,859 7,145,304
Prepaid stock services -- (49,288)
Additional paid-in capital 5,381,826 4,703,875
Accumulated deficit on unrelated dormant operations (1,601,912) (1,601,912)
Deficit accumulated during development stage (13,933,210) (12,282,573)
------------ ------------
Total shareholders' (deficit) equity (282,662) 137,486
------------ ------------
$ 158,841 $ 747,648
============ ============
Prepaid stock services -- (49,288)
Additional paid-in capital 5,381,826 4,703,875
Accumulated deficit on unrelated dormant operations (1,601,912) (1,601,912)
Deficit accumulated during development stage (13,933,210) (12,282,573)
------------ ------------
Total shareholders' (deficit) equity (282,662) 137,486
------------ ------------
$ 158,841 $ 747,648
============ ============
See accompanying notes to condensed consolidated financial statements.
1
Cytodyn, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
October 28,
2003
Three months ended, Six months ended, through
11/30/2010 11/30/2009 11/30/2010 11/30/2009 11/30/2010
------------ ------------ ------------ ------------ ------------
Operating expenses:
General and administrative $ 822,298 $ 516,334 $ 1,379,728 $ 765,239 $ 10,505,361
Amortization / depreciation 800 461 1,349 1,046 179,318
Research and development 226,015 160,878 253,265 167,368 2,001,968
Legal fees 3,293 10,848 7,729 30,407 740,298
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,052,406 688,521 1,642,071 964,060 13,426,945
------------ ------------ ------------ ------------ ------------
Operating loss (1,052,406) (688,521) (1,642,071) (964,060) (13,426,945)
Interest income -- -- -- -- 1,627
Extinguishment of debt -- -- -- -- 337,342
Interest expense:
Interest on convertible debt -- -- -- (38,604) (734,863)
Interest on notes payable (4,481) (6,091) (8,566) (15,177) (110,371)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (1,056,887) (694,612) (1,650,637) (1,017,841) (13,933,210)
Income tax provision -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (1,056,887) $ (694,612) $ (1,650,637) $ (1,017,841) $(13,933,210)
============ ============ ============ ============ ============
Constructive preferred
Stock dividends $ -- $ -- $ -- $ -- $ (6,000,000)
============ ============ ============ ============ ============
Convertible preferred
Stock dividends $ (2,750) $ -- $ (2,750) $ -- $ (2,750)
============ ============ ============ ============ ============
Net loss applicable to
Common shareholders $ (1,059,637) $ (694,612) $ (1,653,387) $ (1,017,841) $(19,935,960)
============ ============ ============ ============ ============
Basic and diluted loss per share $ (.05) $ (0.04) $ (.08) $ (0.05) $ (1.64)
============ ============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 20,548,977 19,606,592 20,260,477 19,072,811 12,192,684
============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
2
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
Balance at October 28, 2003,
following recapitalization -- -- 6,252,640 $ 1,425,334 -- --
February through April 2004,
sale of common stock less
offering costs of $54,000
($.30/share) -- -- 1,800,000 486,000 -- --
February 2004, shares issued
to former officer as payment
for working capital advance
($.30/share) -- -- 16,667 5,000 -- --
Net loss at year ended
May 31, 2004 -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2004 -- -- 8,069,307 1,916,334 -- --
July 2004, capital
contribution by an officer -- -- -- -- -- --
November 2004, common
stock warrants granted -- -- -- -- -- --
February 2005, capital
contribution by an officer -- -- -- -- -- --
Net loss at year ended
May 31, 2005 -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2005 -- -- 8,069,307 1,916,334 -- --
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
Balance at October 28, 2003,
following recapitalization -- -- $ 23,502 $ (1,594,042) -- $ (145,206)
February through April 2004,
sale of common stock less
offering costs of $54,000
($.30/share) -- -- -- -- -- 486,000
February 2004, shares issued
to former officer as payment
for working capital advance
($.30/share) -- -- -- -- --
5,000
Net loss at year ended
May 31, 2004 -- -- -- (7,870) (338,044) (345,914)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2004 -- -- 23,502 (1,601,912) (338,044) (120)
July 2004, capital
contribution by an officer -- -- 512 -- --
512
November 2004,common
stock warrants granted -- -- 11,928 -- -- 11,928
February 2005, capital
contribution by an officer --
-- 5,000 -- -- 5,000
Net loss at year ended
May 31, 2005 -- -- -- -- (777,083) (777,083)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2005 -- -- 40,942 (1,601,912) (1,115,127) (759,763)
See accompanying notes to condensed consolidated financial statements
3
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
June through July 2005, sale
of common stock less offering
costs of $27,867($.75/share) -- -- 289,890 189,550 -- --
August 2005, common shares
issued to extinguish
promissory notes payable and
related interest ($.75/share) -- -- 160,110 120,082 -- --
May 2006, common shares issued
to extinguish convertible debt -- -- 350,000 437,500 -- --
November 2005, 94,500 warrants
exercised ($.30/share) -- -- 94,500 28,350 -- --
January through April 2006,
common shares issued for
prepaid services -- -- 183,857 370,750 -- --
Amortization of prepaid
stock services -- -- -- -- -- --
January through June 2006,
warrants issued
with convertible debt -- -- -- -- -- --
January through May 2006,
beneficial conversion feature
of convertible debt -- -- -- -- -- --
March through May 2006, stock
options granted to consultants -- -- -- -- -- --
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
June through July 2005, sale
of common stock less offering
costs of $27,867 ($.75/share) -- -- -- -- -- 189,550
August 2005, common shares
issued to extinguish
promissory notes payable and
related interest ($.75/share) -- -- -- -- -- 120,082
May 2006, common shares issued
to extinguish convertible debt -- -- -- -- -- 437,500
November 2005, 94,500 warrants
exercised ($.30/share) -- -- -- -- -- 28,350
January through April 2006,
common shares issued for
prepaid services -- (370,750) -- -- -- --
Amortization of prepaid
stock services -- 103,690 -- -- -- 103,690
January through June 2006,
warrants issued
with convertible debt -- -- 274,950 -- -- 274,950
January through May 2006,
beneficial conversion feature
of convertible debt -- -- 234,550 -- -- 234,550
March through May 2006, stock
options granted to consultants -- -- 687,726 -- -- 687,726
See accompanying notes to condensed consolidated financial statements
4
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
March 2006, stock options
issued to extinguish debt -- -- -- -- -- --
Net loss at year ended
May 31, 2006 -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2006 -- -- 9,147,664 3,062,566 -- --
Common stock issued to
extinguish convertible debt -- -- 119,600 149,500 -- --
Common stock issued for
AITI acquisition -- -- 2,000,000 934,399 -- --
Amortization of
prepaid stock services -- -- -- -- -- --
Common stock payable for
prepaid services -- -- -- -- -- --
Stock-based compensation -- -- -- -- -- --
Warrants issued with
convertible debt -- -- -- -- -- --
Common stock issued for
services -- -- 30,000 26,400 -- --
Preferred shares issued AGTI 100,000 167,500 -- -- -- --
Net loss, May 31, 2007 -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2007 100,000 167,500 11,297,264 4,172,865 -- --
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
March 2006, stock options
issued to extinguish debt -- -- 86,341 -- -- 86,341
Net loss at year ended
May 31, 2006 -- -- -- -- (2,053,944) (2,053,944)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2006 -- (267,060) 1,324,509 (1,601,912) (3,169,071) (650,968)
Common stock issued to
extinguish convertible debt -- -- -- -- -- 149,500
Common stock issued for
AITI acquisition -- -- -- -- -- 934,399
Amortization of
prepaid stock services -- 267,060 -- -- -- 267,060
Common stock payable for
prepaid services -- (106,521) 120,000 -- -- 13,479
Stock-based compensation -- -- 535,984 -- -- 535,984
Warrants issued with
convertible debt -- -- 92,500 -- -- 92,500
Common stock issued for
services -- -- -- -- -- 26,400
Preferred shares issued AGTI -- -- -- -- -- 167,500
Net loss, May 31, 2007 -- -- -- -- (2,610,070) (2,610,070)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2007 -- (106,521) 2,072,993 (1,601,912) (5,779,141) (1,074,216)
See accompanying notes to condensed consolidated financial statements
5
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
Amortization of prepaid
stock for services -- -- -- -- -- --
Stock based compensation -- -- -- -- -- --
Common stock issued to
extinguish convertible debt -- -- 750,000 75,000 -- --
Rescission of common
stock issued for services -- -- (142,857) (100,000) -- --
Original issue discount
convertible debt with
warrants -- -- -- -- -- --
Original issue discount
convertible debt with
beneficial conversion feature -- -- -- -- -- --
Stock issued for cash
($.50/share) -- -- 642,000 321,000 -- --
Net loss -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2008 100,000 $ 167,500 12,546,407 $ 4,468,865 -- --
Stock issued for cash
($.50/share) -- -- 3,023,308 $ 1,511,654 -- --
Stock issued for services
($.50/share) -- -- 388,200 194,100 -- --
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
Amortization of prepaid
stock for services -- 106,521 -- -- -- 106,521
Stock based compensation -- -- 461,602 -- -- 461,602
Common stock issued to
extinguish convertible debt -- -- -- -- -- 75,000
Rescission of common
stock issued for services -- -- -- -- -- (100,000)
Original issue discount
convertible debt with
warrants -- -- 3,662 -- -- 3,662
Original issue discount
convertible debt with
beneficial conversion feature -- -- 75,000 -- -- 75,000
Stock issued for cash
($.50/share) -- -- -- -- -- 321,000
Net loss -- -- -- -- (1,193,684) (1,193,684)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2008 -- -- $ 2,613,257 $ (1,601,912) $ (6,972,825) $ (1,325,115)
Stock issued for cash
($.50/share) -- -- -- -- -- $ 1,511,654
Stock issued for services
($.50/share) -- -- -- -- -- 194,100
See accompanying notes to condensed consolidated financial statements
6
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
Stock issued for services
($.37/share) -- -- 150,000 55,500 -- --
Stock based compensation -- -- -- -- -- --
Stock issued in payment
Of accounts payable,
($.50/share) -- -- 98,000 49,000 -- --
Stock issued for services
($.42/share) -- -- 15,400 6,468 -- --
Capital contribution -- -- -- -- -- --
Net loss ended May 31, 2009 -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2009 100,000 $ 167,500 16,221,315 $ 6,285,587 -- --
Stock issued for cash
($.50/share) -- -- 236,400 118,200 -- --
Stock issued for cash
($.50/share)less offering
Costs of $28,000 -- -- 632,000 290,500 -- --
Stock issued for cash
($.50/share)less offering
Costs of $15,229 -- -- 304,580 137,061 -- --
Conversion of debt to
Common stock ($.45/share) -- -- 325,458 146,456 -- --
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
Stock issued for services
($.37/share) -- -- -- -- -- 55,500
Stock based compensation -- -- 371,996 -- -- 371,996
Stock issued in payment
Of accounts payable,
($.50/share) -- -- -- -- -- 49,000
Stock issued for services
($.42/share) -- -- -- -- -- 6,468
Capital contribution -- -- 8,900 -- -- 8,900
Net loss ended May 31, 2009 -- -- -- -- (1,572,804) (1,572,804)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2009 -- -- $ 2,994,153 $ (1,601,912) $ (8,545,629) $ (700,301)
Stock issued for cash
($.50/share) -- -- -- -- -- 118,200
Stock issued for cash
($.50/share)less offering
Costs of $28,000 -- -- -- -- -- 290,500
Stock issued for cash
($.50/share) less offering
Costs of $15,229 -- -- -- -- -- 137,061
Conversion of debt to
Common stock ($.45/share) -- -- -- -- -- 146,456
See accompanying notes to condensed consolidated financial statements
7
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
Conversion of preferred
Stock to common stock (100,000) (167,500) 2,356,142 167,500 -- --
Stock-based compensation -- -- -- -- -- --
Original issue discount
Convertible debt with
Beneficial conversion Feature -- -- -- -- -- --
Repurchase of common stock
($.28/share) -- -- -- -- (1,200,000) (336,000)
Repurchase of common stock
($.50/share) -- -- -- -- (200,000) (100,000)
Stock issued for cash
($.50/share) -- -- -- -- 550,000 154,000
Stock issued for services
($1.45/share) -- -- -- -- 81,580 22,842
Stock issued for cash
($.50/share)less offering
Costs of $28,421 -- -- -- -- 568,420 159,158
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
Conversion of preferred
Stock to common stock -- -- -- -- -- --
Stock-based compensation -- -- 1,671,118 -- -- 1,671,118
Original issue discount
Convertible debt with
Beneficial conversion Feature -- -- 38,604 -- -- 38,604
Repurchase of common stock
($.28/share) -- -- -- -- -- (336,000)
Repurchase of common stock
($.50/share) -- -- -- -- -- (100,000)
Stock issued for cash
($.50/share) 123,000 -- -- -- -- 277,000
Stock issued for services
($1.45/share) 95,449 (118,291) -- -- -- --
Stock issued for cash
($.50/per share)less offering
Costs of $28,421 94,631 -- -- -- -- 253,789
See accompanying notes to condensed consolidated financial statements
8
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Period October 28, 2003 through November 30, 2010
Preferred Stock Common Stock Treasury Stock
--------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
Amortization of prepaid
Stock for services -- -- -- -- -- --
Series B Convertible
Preferred stock issued
For cash ($5.00/share) 400,000 2,009,000 -- -- -- --
Net Loss, ended
May 31, 2010 -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2010 400,000 $ 2,009,000 20,075,895 $ 7,145,304 (200,000) $ (100,000)
Conversion of Series B
Convertible Preferred
Stock to Common Stock (58,000) (291,305) 580,000 291,305 -- --
(unaudited)
Stock issued for services
($1.23/share)(unaudited) -- -- 150,000 184,500 -- --
Stock issued for cash
($1.00/share)(unaudited) -- -- 316,000 316,000 -- --
Series B convertible Preferred
Stock dividends(unaudited) -- -- 5,500 2,750 -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at November 30, 2010 342,000 $ 1,717,695 21,127,395 $ 7,939,859 (200,000) $ (100,000)
=========== ============ ============ ============ ============ ============
Accumulated
Treasury Stock for Additional During
Stock Prepaid Paid-in Accumulated Development
APIC Services Capital Deficit Stage Total
----------- ------------ ------------ ------------ ------------ ------------
Amortization of prepaid
Stock for services -- 69,003 -- -- -- 69,003
Series B Convertible
Preferred stock issued
For cash ($5.00/share) -- -- -- -- -- 2,009,000
Net Loss, ended
May 31, 2010 -- -- -- -- (3,736,944) (3,736,944)
----------- ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2010 $ 313,080 $ (49,288) $ 4,703,875 $ (1,601,912) $(12,282,573) $ 137,486
Conversion of Series B
Convertible Preferred
Stock to Common Stock -- -- -- -- -- --
(unaudited)
Stock issued for services
($1.23/share)(unaudited) -- -- -- -- -- 184,500
Stock issued for cash
($1.00/share)(unaudited) -- -- -- -- -- 316,000
Series B convertible Preferred
Stock dividends (unaudited) -- -- (2,750) -- -- --
Stock-based compensation
(unaudited) -- -- 451,201 -- -- 451,201
Capital contribution
(unaudited) -- -- 229,500 -- -- 229,500
Amortization of prepaid
Stock for services
(unaudited) -- 49,288 -- -- -- 49,288
Net Loss, ended November
30, 2010 (unaudited) -- -- -- -- (1,650,637) (1,650,637)
----------- ------------ ------------ ------------ ------------ ------------
Balance at November 30, 2010 $ 313,080 $ -- $ 5,381,826 $ (1,601,912) $(13,933,210) $ (282,662)
=========== ============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
9
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
October 28,
Six months ended 2003
---------------------------- through
11/30/2010 11/30/2009 11/30/2010
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (1,650,637) $ (1,017,841) (13,933,210)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization / depreciation 1,349 1,046 179,318
Extinguishment of debt -- -- (337,342)
Amortization of original issue discount -- 38,604 717,202
Purchased in process research and development -- -- 274,399
Stock-based compensation 684,989 155,950 5,219,010
Changes in current assets and liabilities:
Prepaid expenses (14,354) (14,797) (33,981)
Other assets 3,750 1,875 (20,225)
Accounts payable, accrued
interest and accrued liabilities 65,841 13,850 585,037
------------ ------------ ------------
Net cash used in operating activities (909,062) (821,313) (7,349,792)
------------ ------------ ------------
Cash flows from investing activities:
Furniture and equipment purchases (4,705) (2,004) (21,083)
------------ ------------ ------------
Net cash used in investing activities (4,705) (2,004) (21,083)
------------ ------------ ------------
Cash flows from financing activities:
Capital contributions by president -- -- 14,412
Proceeds from notes payable to related parties -- -- 705,649
Payments on notes payable to related parties (5,000) -- (165,498)
Proceeds from notes payable issued to individuals -- -- 145,000
Payments on notes payable issued to individuals -- -- (34,500)
Proceeds from convertible notes payable -- -- 686,000
Proceeds from the sale of common stock 316,000 118,200 3,495,061
Proceeds from Series B Preferred stock -- 625,000 2,009,000
Purchase of treasury stock -- (336,000) (436,000)
Proceeds from issuance of treasury stock -- 277,000 559,210
Payments for offering costs -- -- (153,517)
Proceeds from issuance of stock of AITI acquisition -- -- 512,200
Proceeds from issuance of stock of AGTI acquisition -- -- 100,000
Proceeds from exercise of warrants -- -- 28,350
------------ ------------ ------------
Net cash provided by financing activities 311,000 684,200 7,465,367
------------ ------------ ------------
Net change in cash (602,767) (139,117) 94,492
Cash, beginning of period 700,497 265,520 3,238
------------ ------------ ------------
Cash, end of period $ 97,730 $ 126,403 $ 97,730
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ -- $ -- --
============ ============ ============
Interest $ 15,824 $ -- 18,860
============ ============ ============
10
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
October 28,
Six months ended 2003
---------------------------- through
11/30/2010 11/30/2009 11/30/2010
------------ ------------ ------------
Non-cash investing and financing transactions:
Net assets acquired in exchange for common stock in
CytoDyn/Rexray business combination -- -- 7,542
============ ============ ============
Common stock issued to former officer to repay
working capital advance -- -- 5,000
============ ============ ============
Common stock issued for convertible debt -- -- 662,000
============ ============ ============
Common stock issued for debt -- 125,500 245,582
============ ============ ============
Common stock issued for accrued interest payable -- 20,956 20,956
============ ============ ============
Common stock issued on payment of accounts payable -- -- 49,000
============ ============ ============
Options to purchase common stock issued for debt -- -- 62,341
============ ============ ============
Original issue discount and intrinsic value of beneficial
conversion feature related to debt issued with warrants -- 38,604 719,266
============ ============ ============
Common stock issued for Series A preferred stock -- 167,500 167,500
============ ============ ============
Common stock issued for Series B preferred stock 291,305 -- 291,305
============ ============ ============
Accrued salaries related party contributed as capital 229,500 -- 229,500
============ ============ ============
Treasury stock issued for prepaid services -- 118,291 118,291
============ ============ ============
Series B Convertible Preferred stock dividends 2,750 -- 2,750
============ ============ ============
See accompanying notes to condensed consolidated financial statements
11
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2010
(UNAUDITED)
1 - Organization:
CytoDyn, Inc. (the "Company") was incorporated under the laws of Colorado on May
2, 2002 under the name Rexray Corporation ("Rexray"). In October 2003 we entered
into an Acquisition Agreement with CytoDyn of New Mexico, Inc., pursuant to
which we effected a one for two reverse split of our common stock, and amended
our articles of incorporation to change our name from Rexray Corporation to
CytoDyn, Inc. The acquisition was accounted for as a reverse merger and
recapitalization of the Company. Pursuant to the acquisition agreement, we were
assigned the patent license agreement dated July 1, 1994 between CytoDyn of New
Mexico and Allen D. Allen covering three United States patents along with
foreign counterpart patents which describe a method for treating HIV disease
with the use of monoclonal antibodies. We also acquired the trademarks, CytoDyn
and Cytolin, and a related trademark symbol. The license acquired gives us the
worldwide, exclusive right to develop, market, sell and profit from the HIV
therapies from the patents, technology and know-how invented by Mr. Allen. The
term of the license agreement is for the life of the patents. The original
expiration dates on the issued patents are 2013 to 2016. There is an automatic
extension of the expiration date on U.S. patents equal to the number of years
the drug under the patent is being studied in clinical trials. Typically this
provides another four to five years on the earliest claims. CytoDyn's counsel
expects its patents to be extended until 2017 to 2020 depending upon the
original date of the issued patents. As consideration for the intellectual
property and trademarks we paid CytoDyn of New Mexico $10,000 in cash and issued
5,362,640 post-split shares of common stock to CytoDyn of New Mexico.
The Company entered the development stage effective October 28, 2003 upon the
reverse merger and recapitalization of the Company and follows Financial
Standard Accounting Codification No. 915, Development Stage Entities.
Advanced Influenza Technologies, Inc. ("AITI") was incorporated under the laws
of Florida on June 9, 2006 pursuant to an acquisition during 2006.
Advanced Genetic Technologies, Inc. ("AGTI") was incorporated under the laws of
Florida on December 18, 2006 pursuant to an acquisition during 2006.
CytoDyn, Inc. discovered and is developing a class of therapeutic monoclonal
antibodies to address significant unmet medical needs in the areas of HIV and
AIDS.
2 - Summary of Significant Accounting Policies:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and reflect all adjustments, consisting solely of normal
recurring adjustments, needed to fairly present the financial results for these
periods. The condensed consolidated financial statements and notes are presented
as permitted by Form 10-Q. Accordingly, certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted.
The accompanying consolidated financial statements should be read in conjunction
with the financial statements for the years ended May 31, 2010 and 2009 and
notes thereto in the Company's Annual Report on Form 10-K for the year ended May
31, 2010, filed with the Securities and Exchange Commission on December 3, 2010.
Operating results for the three and six months ended November 30, 2010 and 2009
are not necessarily indicative of the results that may be expected for the
entire year. In the opinion of management, all adjustments consisting only of
normal recurring adjustments necessary for a fair statement of (a) the results
of operations for the three and six month periods ended November 30, 2010 and
2009 and the period October 28, 2003 through November 30, 2010, (b) the
financial position at November 30, 2010, and (c) cash flows for the six month
periods ended November 30, 2010 and 2009 and the period October 28, 2003 through
November 30, 2010, have been made.
12
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2010
(UNAUDITED)
Principles of Consolidation
The consolidated financials statements include the accounts of CytoDyn, Inc. and
its wholly owned subsidiaries; AITI and AGTI. All intercompany transactions and
balances are eliminated in consolidation.
Going Concern
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company is currently in the development
stage with losses for all periods presented. As of January 14, 2010 these
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional operating capital, complete development of its medical
treatment, obtain FDA approval, outsource manufacturing of the treatment, and
ultimately to attain profitability. The Company intends to seek additional
funding through equity offerings or licensing agreements to fund its business
plan. There is no assurance that the Company will be successful in these
endeavors.
Use of Estimates
The preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less when acquired to be cash equivalents. The
Company had no cash equivalents as of November 30, 2010 or May 31, 2010. The
Company maintains its cash in bank deposit accounts, which at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
Furniture, Equipment and Depreciation
Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally three to seven years. Maintenance and repairs are charged to expense
as incurred and major improvements or betterments are capitalized. Gains or
losses on sales or retirements are included in the consolidated statements of
operations in the year of disposition.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of any long-lived assets under U.S.
GAAP, which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
future cash flows estimated to be generated by those assets are less than the
assets' carrying amount. If such assets are impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying value or fair value, less costs to sell. There were no
impairment charges for the three and six months ended November 30, 2010 and
2009, and for the period October 28, 2003 through November 30, 2010.
Research and Development
Research and development costs are expensed as incurred.
13
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2010
(UNAUDITED)
Financial Instruments
At November 30, 2010 and May 31, 2010, the carrying value of the Company's
financial instruments approximate fair value due to the short-term maturity of
the instruments. The Company's notes payable have market rates of interest, and
accordingly, the carrying values of the notes approximates the fair value.
Stock-Based Compensation
U.S GAAP requires companies to measure the cost of employee services received in
exchange for the award of equity instruments based on the fair value of the
award at the date of grant. The expense is to be recognized over the period
during which an employee is required to provide services in exchange for the
award (requisite service period). U.S. GAAP provides for two transition methods.
The "modified prospective" method requires that share-based compensation expense
be recorded for any employee options granted after the adoption date and for the
unvested portion of any employee options outstanding as of the adoption date.
The "modified retrospective" method requires that, beginning upon adoption, all
prior periods presented be restated to reflect the impact of share-based
compensation expense consistent with the pro forma disclosures previously
required under U.S. GAAP. The Company adopted the modified prospective method,
and as a result, was not required to restate its financial results for prior
periods. The Company accounts for common stock options, and common stock
warrants granted based on the fair market value of the instrument using the
Black-Scholes option pricing model utilizing certain weighted average
assumptions such as expected stock price volatility, term of the options and
warrants, risk-free interest rates, and expected dividend yield at the grant
date. The risk-free interest rate assumption is based upon observed interest
rates appropriate for the expected term of the stock options. The expected
volatility is based on the historical volatility of the Company's common stock
at consistent intervals. The Company has not paid any dividends on its common
stock since its inception and does not anticipate paying dividends on its common
stock in the foreseeable future. The computation of the expected option term is
based on the "simplified method" as the Company's stock options are "plain
vanilla" options and the Company has a limited history of exercise data. For
common stock options and warrants with graded vesting, the Company recognizes
the related compensation costs associated with these options and warrants on the
straight-line basis over the requisite service period.
U.S GAAP requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those
estimates. Based on limited historical experience of forfeitures, the Company
estimated future unvested option forfeitures at 0% as of November 30, 2010 and
2009.
Stock for Services
The Company issues common stock and common stock options to consultants for
various services. Costs for these transactions are measured at the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The value of the common stock is measured
at the earlier of (i) the date at which a firm commitment for performance by the
counterparty to earn the equity instruments is reached or (ii) the date at which
the counterparty's performance is complete.
Earnings (Loss) per Common Share
Basic earnings (loss) per share is computed by dividing the net income or loss
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the weighted average common shares and potentially dilutive common share
equivalents. The effects of potential common stock equivalents are not included
in computations when their effect is antidilutive. Because of the net loss for
the three and six month periods ended November 30, 2010 and 2009, the basic and
diluted weighted average shares outstanding are the same since including the
additional shares would have an antidilutive effect on the loss per share
calculation. Common stock option and warrants to purchase 7,374,176 and
5,094,176 shares of common stock were not included in the computation of basic
and diluted weighted average common shares outstanding for the three and six
months ended November 30, 2010 and 2009, respectively. Additionally, 342,000
shares of Series B convertible stock can potentially convert into 3,420,000
shares of restricted common stock.
14
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2010
(UNAUDITED)
Reclassification
Certain prior period amounts have been reclassified to comply with current
period presentation.
3 - Recent Accounting Pronouncements:
Other recent accounting pronouncements issued by the FASB (including its EITF),
the AICPA, and the SEC did not or are not believed by management to have a
material impact on the Company's present or future consolidated financial
statements.
4 - Convertible instruments:
In July 2009, the Company amended certain promissory notes into convertible
notes that can be converted into shares of common stock. The notes had a fixed
conversion price of $.45 per share. During the six months ended November 30,
2009, $146,456 in notes and accrued interest converted into 325,458 shares of
common stock. At the commitment date, the conversion option associated with the
notes was deemed to have a beneficial conversion feature (BCF), and the Company
recorded a BCF of $38,604 as a debt discount and corresponding increase to
additional paid-in capital. For the three and six months ended November 30,
2009, the Company recorded $-0- and $38,604 in interest expense as the debt
discount was fully amortized upon the conversion of the notes into common stock.
During fiscal year 2010 the Company issued 400,000 shares of Series B
Convertible Preferred Stock (Series B) at approximately $5.00 per share for cash
proceeds totaling $2,009,000. The Series B holders have no voting rights.
Dividends are payable to the Series B holders when declared by the board of
directors at $.25 per share per annum. The Series B is convertible into ten
shares of the Company's common stock. At the time of conversion of the Series B,
at the option of the Company, the dividend is to be paid in cash or in shares of
common stock. If the dividend is to be paid in shares of common stock, the
shares of common stock will be valued at $0.50 per share. The holders of the
Series B can only convert their shares to common shares provided the Company has
sufficient authorized common shares at the time of conversion. Accordingly, the
conversion option is contingent upon the Company increasing their authorized
common shares, which occurred April 2010 when the Company's shareholders voted
at a special meeting to increase the authorized shares. At the commitment date,
which occurred upon the shareholders approving the increase in the authorized
shares, the conversion option related to the Series B was beneficial. The
intrinsic value of the conversion option at the commitment date resulted in a a
constructive dividend to the Series B holders of approximately $6,000,000. The
series B has no mandatory conversion feature or any net cash settlement
features, and accordingly, was deemed to be a component of equity. The
constructive dividend increased and decreased additional paid-in capital by the
same amount. The Series B has liquidation preferences over the common share
holders at $5.00 per share plus any accrued dividends.
5 - Equity:
The Company has one stock-based equity plan at November 30, 2010. The 2005 Stock
Incentive Plan as amended (the "Plan") was authorized to issue options and
warrants to purchase up to 5,000,000 shares of the Company's common stock. As of
November 30, 2010 the Company had 3,373,878 shares available for future stock
option grants under the plan.
The estimated fair value of options and warrants is determined using the
Black-Scholes option valuation model with the following weighted-average
assumption for the periods ended November 30, 2010 and 2009:
2010 2009
------------------- -------------------
Risk free rate .74% --
Dividend Yield -- --
Volatility 131.0% --
Expected term 3 years --
15
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2010
(UNAUDITED)
Net cash proceeds from the exercise of stock options and warrants were $0 for
the three and six months ending November 30, 2010 and 2009, respectively.
Compensation expense related to stock options and warrants was approximately
$218,000, and $68,000 for the three months ended November 30, 2010 and 2009,
respectively, and $451,000 and $146,000 for the six months ended November 30,
2010 and 2009, respectively.
The grant date fair value of options vested during the six month periods ended
November 30, 2010 and 2009 was approximately $451,000 and $140,000,
respectively. The weighted average grant date fair value of options and warrants
granted during the six month periods ended November 30, 2010 and 2009 was $.90
and $-0-, respectively. As of November 30, 2010 there was approximately
$1,805,000 of unrecognized compensation costs related to share-based payments
for unvested options, which is expected to be recognized over a weighted average
period of 2.33 years.
The following table represents stock option and warrant activity as of and for
the six months ended November 30, 2010:
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Life Value
--------- -------- ----------- ----------
Options and warrants
outstanding - May 31, 2010 7,660,176 $1.42 5.41 $2,761,129
Granted 25,000 $1.20
Exercised --
Forfeited/expired/cancelled (311,000) $1.64
Options and warrants
outstanding - November 30 2010 7,374,176 $1.41 3.71 $1,197,327
Outstanding exercisable
- November 30, 2010 6,095,287 $1.30 3.76 $1,197,327
During the three months ended November 30, 2009, the Company reissued 81,500
shares of treasury stock for certain consulting services at $1.45 per share,
which represented the fair market value of the Company's common stock at the
commitment date. The prepaid stock services are amortized over the life of the
consulting agreement, and during three months ended November 30, 2010 and 2009,
the Company recognized approximately $30,000 and $10,000 in consulting expense
related to this consulting agreement. For the six months ended November 30, 2010
and 2009, the Company recognized approximately $50,000 and $10,000 in consulting
expense related to the agreement.
During the three months ended November 30, 2010, the Company issued 150,000
shares of common at $1.23 per share to an executive of the Company for past
services. The Company recognized approximately $184,000 in compensation expense
based on the fair market value of the Company's common stock at the issuance
date, which was November 16, 2010.
16
CYTODYN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2010
(UNAUDITED)
6 - Related Party Transactions:
A director provided legal services to the Company over the past several years.
As of November 30, 2010, the Company owed the director $38,985 and it is
included in the accompanying consolidated financial statements as "indebtedness
to related parties" as of November 30, 2010. As of November 30, 2010 no
arrangements had been made for the Company to repay the balance of this
obligation. The amount has been classified as short-term, as the amount is
payable on demand. The Company anticipates that the director will continue to
provide legal services in the future.
In May and July 2007, the Company issued $150,000 in promissory notes with a
stated interest rate of 14% to a director of the Company, and a maturity date of
six months from the issuance date. The notes have no stated maturity, and are
essentially payable upon demand. Accordingly, the Company has classified the
balance of $110,000 at November 30, 2010 as short-term obligation.
7 - Commitments and Contingencies
Pursuant to that certain amendment, dated April 27, 2009, to the second amended
cross-complaint, the Company was added as a defendant to the lawsuit, styled
Barry v. CytoDyn of New Mexico, Inc. (Case No. BC 362909), filed in the Superior
Court of the State of California, Los Angeles County. The cross-complaint
alleges that the Company breached an agreement for legal services and that the
Company is indebted to its attorney in connection with such legal services. The
cross-complaint seeks monetary damages in the amount of $16,318.63 or
$21,318.63. The Company believes these claims are without merit and is
responding appropriately to these claims and will continue to vigorously protect
its interests.
8 - Subsequent Events:
In September 2009, the Company entered into an agreement with Massachusetts
General Hospital (MGH) to provide financial support for the purpose of
conducting an ex-vivo study of the Company's lead drug, Cytolin(R). This study
is intended as a prelude to an in-vivo study. Costs are estimated at
approximately $550,000 of which 75%, or $412,000, was paid to MGH by November
2010. During 2009 the Company agreed to provide an additional $204,000 to MGH
for the current clinical trial of Cytolin(R) Additionally, per the agreement
with MGH, the Company is obligated to pay an additional $137,000. This amount is
included in the cost above. This will enable the Principal Investigator to hire
additional personnel in order to ensure that key data from the study will be
available by December 31, 2010. The balance of $137,500 is due by January 21,
2011. On December 7, 2010 the agreement with MGH was amended to increase the
cost of the study by $24,000. The original agreement had a miscalculated
overhead cost that MGH later discovered was in their error. The Company as a
courtesy elected to execute the amendment to correct the error.
In February 2010, the Company negotiated a contract with Vista Biologicals
Corporation to manufacture a humanized version of the Company's lead product,
Cytolin(R) at a cost of $229,500, which will be paid over twelve (12) months
beginning in March 2010.
In August 2010 the Company's Board of Directors approved a private placement
offering to sell 2,000,000 shares of the Company's no par common stock to
accredited investors at $1.00 per share. The Company has raised approximately
$720,500 in cash related to this private placement.
On December 6, 2010 the Company issued 500,000 stock options to the newly
elected Chief Executive Officer at an exercise price of $1.19. The options vest
25% upon first year anniversary and 6.25% vest each following quarter.
17
References in this report to "the Company," "CytoDyn," "we," "our," or "us" mean
CytoDyn, Inc. together with its subsidiaries, except where the context otherwise
requires. This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") which are made in reliance upon the protections provided by such acts for
forward-looking statements. These forward-looking statements (such as when we
describe what "will," "may," or "should" occur, what we "plan," "intend,"
"estimate," "believe," "expect" or "anticipate" will occur, and other similar
statements) are based on our current expectations and entail various risks and
uncertainties. We make certain assumptions when making forward-looking
statements, any of which could prove inaccurate, including, but not limited to,
statements about our future operating results and business plans. Therefore, we
can give no assurance that the results implied by these forward-looking
statements will be realized. Furthermore, the inclusion of forward-looking
information should not be regarded as a representation by the Company or any
other person that future events, plans or expectations contemplated by the
Company will be achieved. The ultimate correctness of these forward-looking
statements is dependent upon a number of known and unknown risks and events, and
is subject to various uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any future results,
performance or achievements expressed or implied by these statements.
For a list and description of various risks, relevant factors and uncertainties
that could cause future results or events to differ materially from those
expressed or implied in our forward-looking statements, see the "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections contained in our Annual Report on Form 10-K for the fiscal
year ended May 31, 2010, as well as the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section contained in this
Quarterly Report on Form 10-Q, any subsequent reports on Form 10-Q and Form 8-K
and other filings with the Securities and Exchange Commission. Given these risks
and uncertainties, the reader should not place undue reliance on these
forward-looking statements.
All forward-looking statements included in this Quarterly Report on Form 10-Q
are made only as of the date of this Quarterly Report on Form 10-Q, and we do
not undertake any obligation to publicly update or correct any forward-looking
statements to reflect events or circumstances that subsequently occur, or of
which we hereafter become aware. You should read this Quarterly Report on Form
10-Q and the documents that we incorporate by reference into this Quarterly
Report on Form 10-Q completely and with the understanding that our actual future
results may be materially different from what we expect. We may not update these
forward-looking statements, even if our situation changes in the future. All
forward-looking statements attributable to us are expressly qualified by these
cautionary statements.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Background of our Company
CytoDyn discovered and is developing a class of therapeutic monoclonal
antibodies to address significant unmet medical needs in the area of HIV/AIDS.
CytoDyn has sponsored a research grant to Massachusetts General Hospital in
Boston, Massachusetts, to design and sponsor clinical trials, in addition to
conducting those trials on our lead product, Cytolin(R), an immune therapy
intended to treat early HIV infection. Although CytoDyn will retain all of its
intellectual property rights and will have access to the study data, the data
will be owned by Massachusetts General Hospital ("MGH"). A chief benefit for
CytoDyn is that the Company will not have to deal directly with the Food and
Drug Administration (the "FDA"). Moreover, the high costs and long delays
associated with the FDA's oversight of clinical trials may be significantly
reduced in the case of clinical trials designed and sponsored by a leading
teaching hospital such as MGH.
The FDA licenses medicinal products for sale in interstate commerce under a
particular label only if it receives data supporting that label and only when
asked by a company to do so. CytoDyn may or may not be the company that requests
a license to market Cytolin(R) under a label. We currently hope to enter into a
strategic alliance after the next two studies under which a larger
pharmaceutical marketing company will seek a license from the FDA to market
Cytolin(R) and under a license from us to use our intellectual property in that
manner. However, there is no guarantee that we will wind up pursuing this
strategy.
We negotiated with a contract manufacturer, Vista Biologicals Corporation, to
manufacture Good Manufacturing Practices,(GMP) product for the our current
clinical trial of Cytolin(R) at a cost of $565,000, which we paid in full by
September 2008. The initial clinical trial to be conducted by MGH will cost the
Company approximately $574,000, of which $412,000 was paid by us by November 30,
2010. The balance of $162,000 is due in January 2011. In December 2010, the
Company amended the agreement with Massachusetts General Hospital to increase
the cost of the study by $24,000 due to additional overhead costs that MGH
inadvertently omitted from the original agreement. That amount is included in
the costs above. The Company has secured the funds needed for this payment.
We negotiated a contract with Vista Biologicals Corporation to manufacture a
humanized version of Cytolin(R) at a cost of $229,500, which will be paid over
12 months beginning in March 2010. We paid $163,265 of that amount by November
2010. Although a murine (mouse) version of Cytolin(R) was used for previous
human experience that included some 200 patients successfully treated for up to
two years, as well as an encouraging Phase I(b)/II(a) study, the Company
believes that a fully humanized version is necessary for the clinical trial that
is expected to follow the current one.
The Company expects to have its proprietary, fully humanized version of
Cytolin(R) ready for bulk manufacturing in early 2011.
Human subjects have been recruited for the initial study conducted by MGH from
the clinic of the principal investigator, Dr. Eric Rosenberg. The study protocol
calls for 10 adults with early HIV infection and 10 healthy control subjects.
The enrollment was closed as of July 23, 2010. We expect the study to be
completed by January 2011 with the results to be published sometime thereafter
at the discretion of Dr. Rosenberg.
We registered a clinical trial of Cytolin(R) with the U.S. government's website
at www.clinicaltrials.gov, ID NCT01048372. The public has online access to this
federal database, which describes the key elements of clinical trials and their
status. To peruse public record for the study of Cytolin(R) on the government's
website, visit www.clinicaltrials.gov and enter "Cytolin" as a search term.
19
CytoDyn may fund a follow-up clinical trial using venture capital or may enter
into a strategic alliance for completion of research and the subsequent
marketing of Cytolin(R) if approved. In the former case, CytoDyn, Inc. will need
to provide a new batch of humanized product, which we estimate will cost
approximately $500,000. The Company is conducting a private placement of common
shares to secure the capital needed for the follow-up study. We cannot yet
estimate the cost of a follow up study at this time.
There are many factors that can delay clinical trial benchmarks. However, the
Company hopes to receive the results and analysis of the upcoming clinical trial
during 2011.
=============================================================================
Benchmark Some Factors That Can Cause Delays+
=============================================================================
Manufacturing Delays
Documentation Delays
Patient Outreach IRB Delays
Delays in Regulatory Review or Approval
Force Majeure
=============================================================================
Fill and Finish Delays
Dose First Patient Slower Than Expected Patient Enrollment
Force Majeure
=============================================================================
Slower Than Expected Patient Enrollment
Lock Database - Begin Clinical Hold
Statistical Analysis Laboratory Error
Protocol Deviation
Force Majeure
=============================================================================
Additional Stratification Required
Release Final Report Computer Hardware or Software
Malfunction
Force Majeure
=============================================================================
+There are other factors, known and unknown, such as unexpected financial
hardships, that can cause delays.
Clinical Trials Process - Described below is the traditional drug development
track. Under the Company's current business plan, much of this initial work will
be sponsored and conducted by MGH, eliminating the need for CytoDyn to deal
directly with the FDA.
Phase I
-------
Phase I includes the initial introduction of an investigational new drug or
biologic into humans. These studies are closely monitored and may be conducted
in patients, but are usually conducted in a small number of healthy volunteer
subjects. These studies are designed to determine the metabolic and
pharmacologic actions of the investigational product in humans, the side effects
associated with increasing doses, and, if possible, to gain early evidence on
effectiveness. During Phase I, sufficient information about the investigational
product's pharmacokinetics and pharmacological effects are obtained to permit
the design of well-controlled, scientifically valid, Phase II studies.
20
Phase II
--------
Phase II includes the early controlled clinical studies conducted to obtain some
preliminary data on the effectiveness of the drug for a particular indication or
indications in patients with the disease or condition. This phase of testing
also helps determine the common short-term side effects and risks associated
with the drug. Phase II studies are typically well-controlled, closely
monitored, and conducted in a relatively small number of patients, usually
involving several hundred people. Depending upon need, a new drug may be
licensed for interstate marketing after Phase II if it is a "pivotal" study.
Phase III
---------
Phase III studies are expanded controlled clinical studies. They are performed
after preliminary evidence suggesting effectiveness of the drug has been
obtained in Phase II, and are intended to gather the additional information
about effectiveness and safety that is needed to evaluate the overall
benefit/risk relationship of the drug. Phase III studies also provide an
adequate basis for extrapolating the results to the general population and
transmitting that information in the physician labeling. Phase III studies
usually include several hundred to several thousand people.
Patents
-------
We have a License Agreement with Allen D. Allen, our former President and CEO
that gives us the exclusive right to develop, market, sell and profit from his
technology worldwide. This includes issued U.S. patents 5,424,066; 5,651,970 and
6,534,057, foreign counterparts, as well as European Patents No. 94 912826.8 and
04101437.4. Hong Kong, Australian and Canadian patents have been obtained as
well. The original expiration dates of the U.S. patents are 2013 to 2016. There
is an automatic extension of the expiration date on U.S. patents equal to the
number of years the drug under the patent is being studied in clinical trials.
Typically this provides another four to five years on the earliest claims.
CytoDyn's counsel expects its patents to be extended until 2017 to 2020
depending upon the original date of the issued patents. We estimate the costs
associated with these issued patents to be approximately $100,000 per year. We
intend to file for an additional patent during the next fiscal year covering our
humanized version of Cytolin(R) if our research and development efforts warrant
it.
Going Concern
We will require additional funding in order to continue with research and
development efforts.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company is currently in the development stage with
losses for all periods presented. As of January 14, 2011, these factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to obtain additional operating
capital, complete development of its medical treatments, obtain FDA approval,
outsource manufacturing of the treatments, and ultimately to attain
profitability. The Company intends to seek additional funding through equity
offerings or licensing agreements to fund its business plan. There is no
assurance that the Company will be successful in these endeavors.
21
Results of Operations
---------------------
Results of Operations for the three months ended November 30, 2010 and 2009 are
as follows:
For the three months ended November 30, 2010 and 2009 we had no activities that
produced revenues from operations.
For the three months ended November 30, 2010, we had a net loss of $(1,056,887)
compared to a net loss of $(694,612) for the corresponding period in 2009. For
the three months ended November 30, 2010 and 2009, we incurred operating
expenses of $(1,052,406) and $(688,521) consisting primarily of consulting
expense, stock-based compensation, professional fees, research and development
and salaries.
The increase in operating expenses of $363,885 from the three-month period ended
November 30, 2009 compared to the three months ended November 30, 2010 related
primarily to increases in stock-based compensation, salaries, research and
development expenses, and accounting fees, offset by decreases in consulting
expenses. Stock-based compensation increased during the current period with the
significant grant of stock options in the fourth quarter of fiscal year 2010,
coupled with the stock issued to an executive of the Company during the second
quarter of 2011. We expect the trend in stock-based compensation to increase
during fiscal year 2011. Research and development expenses are associated with
the development of our lead product, Cytolin(R). As discussed above, we are
currently in clinical trials with our product. We expect the trend in research
and development expenses to increase as our product progresses through clinical
trials. Accounting fees have increased during the current quarter compared to
previous quarter as a result of the increase in our external filings. We expect
the trend to stabilize, as our filings become more consistent. Salaries
increased with the hiring of our Chief Operating Officer, and migration from
part-time employees to full-time employees. This directly impacted the decrease
in consulting expense, as we have utilized salaried employees in-lieu of
consultants. The trend in all of our expenses will depend on our ability to
raise additional funds.
Results of Operations for the six months ended November 30, 2010 and 2009 are as
follows:
For the six months ended November 30, 2010 and 2009 we had no activities that
produced revenues from operations.
For the six months ended November 30, 2010, we had a net loss of $(1,650,637)
compared to a net loss of $(1,017,841) for the corresponding period in 2009. For
the six months ended November 30, 2010 and 2009, we incurred operating expenses
of $(1,642,071) and $(964,060), respectively, consisting primarily of
stock-based compensation, research and development, salaries, and accounting
fees. The increase in operating expenses of $678,011 from the six month period
November 30, 2009 compared to six months ended November 30, 2010 related
primarily to increases in stock-based compensation, research and development,
salaries, and accounting fees, offset by decreases in consulting expenses. The
increases and decrease in these accounts were impacted by the factors discussed
above. We expect the trends to continue, but the ability to fund our operations
will depend on our ability to raise additional funds.
Liquidity and Capital Resources
On November 30, 2010 we had working capital deficit of approximately $(303,000)
as compared to approximately $346,000 of working capital on May 31, 2010. The
Company does not expect, in the next 12 months, to make any significant
expenditures for equipment or other fixed assets. On January 21, 2011 the
Company will pay the final payment of $161,500 to MGH for the completion of the
current study. The Company has secured the funds for this payment. Our product
is currently in clinical trials and we expect to incur significant expenditures
as the product progresses through clinical trials. At this time we cannot
estimate what we will incur going forward. Our ability to progress through the
clinical trials will depend on our ability to raise the necessary capital to
fund the trials.
22
Cash Flows
Cash used in operating activities of approximately $(909,000) during the six
months ended November 30, 2010 increased approximately $88,000 from
approximately $(821,000) for the six months ended November 2009. The increase in
the cash used in operating activities for the above periods was primarily
attributable to the following:
o Net loss increased approximately $633,000.
The above increases were partially offset by the following:
o Stock-based compensation increased approximately $529,000 from 2009 to
2010.
o Accounts payable, accrued interest payable, and accrued liabilities
increased approximately $52,000.
There were no material changes in cash flows from investing activities from 2009
To the comparable period in 2010.
Cash flows provided by financing activities of approximately $311,000 during the
six months ended November 30, 2010 decreased approximately $373,000 from
approximately $684,000 during 2009. The decrease in cash provided by financing
activities for the above periods was attributable to the decrease in proceeds
from preferred stock issuances and treasury stock proceeds, offset by increases
in common stock issuances.
As shown in the accompanying Financial Statements, for the six months ended
November 30, 2010 and 2009, and since October 28, 2003 through November 30, 2010
the Company has had net losses of $(1,650,637) and $(1,017,841) and
$(13,933,210), respectively. As of November 30, 2010, the Company has not
emerged from the development stage. In view of these matters, the Company's
ability to continue as a going concern is dependent upon the Company's ability
to begin operations and to achieve a level of profitability. Since inception,
the Company has financed its activities principally from the sale of public
equity securities and proceeds from notes payable. The Company intends on
financing its future development activities and its working capital needs
largely from the sale of public equity securities with some additional funding
from other traditional financing sources.
As previously mentioned, since October 28, 2003, we have financed our operations
largely from the sale of common stock and proceeds from notes payable. From
inception through November 30, 2010 we raised cash of approximately $5,351,000
from (net of offering costs) common stock and preferred stock financings and
approximately $1,537,000 through the issuance notes payable.
Since October 28, 2003 through November 30, 2010, we have incurred $2,002,000 of
research and development costs and approximately $13,427,000 in operating
expenses.
We have incurred significant net losses and negative cash flows from operations
since our inception. As of November 30, 2010, we had an accumulated deficit of
approximately $(15,535,000) and working capital deficit of approximately
$(303,000).
We anticipate that cash used in product development and operations, especially
in the marketing, production and sale of our products will increase
significantly in the future.
Off-Balance Sheet Arrangements
None.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of November
30, 2010. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures were not effective as required
under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management
concluded that we have several material weaknesses in our internal controls 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. Management has begun to develop a plan to
mitigate the above material weaknesses. Despite the existence of these material
weaknesses, we believe the financial information presented herein is materially
correct and in accordance with generally accepted accounting principles.
Changes in Control Over Financial Reporting
No change in the Company's internal control over financial reporting occurred
during the quarter ended November 30, 2010, that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Limitations on the Effectiveness of Controls and Other Matters
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures and
internal control over financial reporting will prevent all error and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls may be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, a control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Notwithstanding the foregoing limitations on the effectiveness of controls, we
have nonetheless reached the conclusions set forth above on our disclosure
controls and procedures and our internal control over financial reporting.
CEO and CFO Certifications
Exhibits 31.1 and 31.2 are the Certifications of the Chief Executive Officer and
Chief Financial Officer, respectively. The Certifications are required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302
Certifications"). This Item of this report, which you are currently reading is
the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
24
Part II-OTHER INFORMATION
Item 1. Legal Proceedings
Pursuant to that certain amendment, dated April 27, 2009, to the second amended
cross-complaint, the Company was added as a defendant to the lawsuit, styled
Barry v. CytoDyn of New Mexico, Inc. (Case No. BC 362909), filed in the Superior
Court of the State of California, Los Angeles County. The cross-complaint
alleges that the Company breached an agreement for legal services and that the
Company is indebted to its attorney in connection with such legal services. The
cross-complaint seeks monetary damages in the amount of $16,318.63 or
$21,318.63. The Company believes these claims are without merit and is
responding appropriately to these claims and will continue to vigorously protect
its interests.
Item 1A. Risk Factors
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended November 30, 2010, the Company sold 250,000 shares
of restricted common stock at $1.00 per share. Additionally, the Company issued
150,000 shares at $1.23 per share. In connection with the sales and issuance,
the Company relied on the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended and Rule 506 under the Act. The investors were all
"accredited investors" as such term is defined in Rule 501 of Regulation D.
During fiscal year 2010 the Company issued 400,000 shares of Series B
Convertible Preferred Stock (Series B) at approximately $5.00 per share for cash
proceeds totaling $2,009,000. The Series B holders have no voting rights.
Dividends are payable to the Series B holders when declared by the board of
directors at $.25 per share per annum. The Series B is convertible into ten
shares of the Company's common stock. At the time of conversion of the Series B,
at the option of the Company, the dividend is to be paid in cash or in shares of
common stock. If the dividend is to be paid in shares of common stock, the
shares of common stock will be valued at $0.50 per share. During the three
months ended August 31, 2010, 26,000 shares of Series B converted into 260,000
shares of common stock. No dividends had accrued with respect to the Series B
that were converted during such period, so none were paid. During the three
months ended November 30, 2010, 32,000 shares of Series B converted into 320,000
shares of common stock. Dividends in the amount of $2,750 in the aggregate had
accrued with respect to the Series B that were converted during such period. The
Company issued an additional 5,500 shares of common stock valued at $0.50 per
share for these purposes to satisfy its obligations with respect to these
accrued dividends.
Item 3. Defaults Upon Senior Securities
None
Item 4. (Removed and Reserved)
Item 5. Other Information
None
25
Item 6. Exhibits
3.1 Articles of Incorporation (incorporated herein by reference to
Exhibit 3.1 on Form 10SB12G Registration of Securities for Small
Business Issuers filed July 11, 2002)
3.2 Bylaws (incorporated by reference herein to Exhibit 3.2 filed with
Form 10SB12G, Registration of Securities for Small Business Issuer
filed July 11, 2002)
3.3 Amendment to the Articles of Incorporation dated October 28, 2003
(incorporated herein by reference to filed Exhibit 3.3 on Form 8-K
filed November 12, 2003).
3.4 Amendment to Articles of Incorporation dated September 2009
(Incorporated by reference to Exhibit 3.4 to Form 10-K filed March
12, 2010).
3.5 Amendment to Articles of Incorporation dated April 29, 2010
(incorporated herein by reference to Exhibit 3.5 On Form 8-K filed
April 29, 2010).
31.1. Rule 13a-14(a)/15d-14(a) Certification by the CEO of the
Registrant
31.2. Rule 13a-14(a)/15d-14(a) Certification by the CFO of the
Registrant
32.1. Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the CEO of the Registrant
32.2. Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
the CFO of the Registrant
SIGNATURES
Pursuant to the requirements 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.
CYTODYN, INC.
(Registrant)
DATE: January 14, 2011 BY: /s/ Kenneth J. Van Ness
----------------------- -----------------------------
Kenneth J. Van Ness
President and CEO
26
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation (incorporated herein by reference to
Exhibit 3.1 on Form 10SB12G Registration of Securities for
Small Business Issuers filed July 11, 2002)
3.2 Bylaws (incorporated by reference herein to Exhibit 3.2 filed
with Form 10SB12G, Registration of Securities for Small
Business Issuer filed July 11, 2002)
3.3 Amendment to the Articles of Incorporation dated October 28,
2003 (incorporated herein by reference to filed Exhibit 3.3 on
Form 8-K filed November 12, 2003).
3.4 Amendment to Articles of Incorporation dated September 2009
(Incorporated by reference to Exhibit 3.4 to Form 10-K filed
March 12, 2010).
3.5 Amendment to Articles of Incorporation dated April 29, 2010
(incorporated herein by reference to Exhibit 3.5 On Form 8-K
filed April 29, 2010).
31.1. Rule 13a-14(a)/15d-14(a) Certification by the CEO of the
Registrant
31.2. Rule 13a-14(a)/15d-14(a) Certification by the CFO of the
Registrant
32.1. Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the CEO of the Registrant
32.2. Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
the CFO of the Registrant
27