UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
--- OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1933
For Quarter Ended: August 31, 2007 Commission File Number 000-49908
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CYTODYN, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 75-3056237
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(I.R.S. Employer Identification No.) State or other jurisdiction of
incorporation or organization)
1511 Third Street, Santa Fe, NM 87505
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(Address of principal executive offices) (Zip code)
(505)988-5520
(Registrant's telephone number, including area code)
227 E. Palace Avenue, Suite M, Santa Fe, New Mexico
(Former address, changed sine last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No X
--- ---
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See Definition of "accelerated filer, large accelerated filer, and smaller
reporting company" in Rule 12(b)-2 of the Exchange Act (check one)
Large Accelerated Filer _____ Accelerated Filer _____
Non-accelerated Filer _____ Smaller Reporting Company __X__
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes No X
--- ---
On September 25, 2009, there were 18,802,857 shares outstanding of the
registrant's no par common stock.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
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Item 1 Financial Statements 2
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Item 2 Management's discussion and analysis of financial condition
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and results of operations. 16
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Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
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Item 4T Controls and Procedures 19
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PART II OTHER INFORMATION
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Item 1 Legal Proceedings 19
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20
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Item 3 Defaults Upon Senior Securities 20
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Item 4 Submission of Matters to a Vote of Security Holders 20
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Item 5 Other Information 20
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Item 6 Exhibits 20
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1
CytoDyn, Inc.
(A Development Stage Company)
Condensed Balance Sheet
Assets
August 31, May 31,
2007 2007
(unaudited) (audited)
----------- -----------
Current Assets:
Cash ................................................. $ 10,378 $ 16,604
Prepaid Insurance .................................... 30,474 43,254
Prepaid license fees ................................. 50,000 50,000
----------- -----------
Total current assets ..................... 90,852 109,858
Furniture and equipment, Net ............................ 2,308 2,611
Intangible asset, Net ................................... 1,011 1,294
Deposit ................................................. 495 495
----------- -----------
$ 94,666 $ 114,258
=========== ===========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable ..................................... $ 249,068 $ 239,572
Accrued liabilities .................................. 242,350 193,600
Accrued interest payable ............................. 11,888 10,216
Convertible notes payable, net ....................... 15,000 14,385
Notes payable ........................................ 295,000 125,000
Indebtedness to related parties ...................... 454,702 455,701
----------- -----------
Total current liabilities ................ 1,268,008 1,038,474
Accrued legal costs ..................................... 75,000 0
Commitments and contingencies ........................... 0 150,000
----------- -----------
Total liabilities ........................ 1,343,008 1,188,474
----------- -----------
Shareholders' deficit :
Preferred stock, no par value; 5,000,000 shares
authorized, 100,000 shares issued and outstanding ... 167,500 167,500
Common stock, no par value; 25,000,000 shares
authorized, 11,154,407 and 11,297,264 shares issued
and outstanding at August 31, 2007 and May 31, 2007,
respectively ....................................... 4,072,865 4,172,865
Stock for Services ................................... (76,521) (106,521)
Additional paid-in capital ........................... 2,195,554 2,072,993
Accumulated deficit or unrelated dormant operations .. (1,601,912) (1,601,912)
Deficit accumulated during development stage ......... (6,005,828) (5,779,141)
----------- -----------
Total shareholders' deficit .............. (1,248,342) (1,074,216)
----------- -----------
$ 94,666 $ 114,258
=========== ===========
The accompanying notes are an integral part of the financial statements
2
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Operations
Unaudited
October 28,
Three Months Ended 2003
August 31, through
---------------------------- August 31,
2007 2006 2007
------------ ------------ ------------
Operating expenses:
General and administrative ....... $ 193,764 $ 347,442 $ 3,928,442
Amortization / Depreciation ...... 585 620 172,745
Research and Development ......... 9,978 321,743 797,059
Legal Fees ....................... 170,071 31,989 489,566
Commitments and Contingencies .... (150,000) -- --
------------ ------------ ------------
Total operating expenses ... 224,398 701,794 5,387,812
------------ ------------ ------------
Operating loss ............. (224,398) (701,794) (5,387,812)
Interest income ..................... -- 439 1,627
Interest expense:
Interest on convertible debt ..... (617) (86,579) (617,971)
Other ............................ (1,672) -- (1,672)
------------ ------------ ------------
Loss before income taxes ... (226,687) (787,934) (6,005,828)
Income tax provision ................ -- -- --
------------ ------------ ------------
Net loss ................... $ (226,687) $ (787,934) $ (6,005,828)
============ ============ ============
Basic and diluted loss per share .... $ (0.02) $ (0.08) $ 0.67
============ ============ ============
Basic and diluted weighted average
common shares outstanding ........ 11,225,836 10,156,751 8,990,193
============ ============ ============
The accompanying notes are an integral part of the financial statements
3
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Change in Shareholders' Deficit
October 28, 2003 through August 31, 2007
Deficit
Stock Accumulated
Preferred Stock Common Stock For Additional During
------------------ ----------------------- Prepaid Paid-in Accumulated Development
Shares Amount Shares Amount Services Capital Deficit Stage Total
-------- -------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Balance at October
28, 2003, following
recapitalization ... $ -- $ -- 6,252,640 $1,425,334 $ -- $ 23,502 $(1,594,042) $ -- $ (145,206)
February through
April 2004, sale of
common stock less
offering costs of
$54,000 ($.30/share) -- -- 1,800,000 486,000 -- -- -- -- 486,000
February 2004, shares
issued to former
officer as payment
for working capital
advance ($.30/share) -- -- 16,667 5,000 -- -- -- -- 5,000
Net loss, year ended
May 31, 2004 ........ -- -- -- -- -- -- (7,870) (338,044) (345,914)
-------- -------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Balance at
May 31, 2004 ........ -- -- 8,069,307 1,916,334 -- 23,502 (1,601,912) (338,044) (120)
July 2004, capital
contribution by an
officer ............. -- -- -- -- -- 512 -- -- 512
November 2004, common
stock warrants
granted ............. -- -- -- -- -- 11,928 -- -- 11,928
February 2005,
capital contribution
by an officer ....... -- -- -- -- -- 5,000 -- -- 5,000
Net loss, year ended
May 31, 2005 ........ -- -- -- -- -- -- -- (777,083) (777,083)
-------- -------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Balance at
May 31, 2005 ........ -- -- 8,069,307 1,916,334 -- 40,942 (1,601,912) (1,115,127) (759,763)
June through July
2005, sale of
common stock less
offering costs of
$27,867 ($0.75/share) -- -- 289,890 189,550 -- -- -- -- 189,550
August 2005, common
shares issued to
extinguish
promissory notes
payable and related
interest
($0.75/share) ....... -- -- 160,110 120,082 -- -- -- -- 120,082
May 2006, common
shares issued to
extinguish
convertible debt .... -- -- 350,000 437,500 -- -- -- -- 437,500
November 2005, 94,500
warrants exercised
($0.30/share) ....... -- -- 94,500 28,350 -- -- -- -- 28,350
January through April
2006, common shares
issued for prepaid
services ............ -- -- 183,857 370,750 (370,750) -- -- -- --
Amortization of
Prepaid Stock
Services ............ -- -- -- -- 103,690 -- -- -- 103,690
January through June
2006, warrants
issued with
convertible debt .... -- -- -- -- -- 274,950 -- -- 274,950
January through May
2006, beneficial
conversion feature of
convertible debt .... -- -- -- -- -- 234,550 -- -- 234,550
The accompanying notes are an integral part of the financial statements
4
CytoDyn, Inc.
(A Development Stage Company)
Consolidated Statements of Change in Shareholders' Deficit
October 28, 2003 through August 31, 2007 - Continued
March through May
2006, stock options
granted to
consultants ......... -- -- -- -- -- 687,726 -- -- 687,726
March 2006, stock
options issued to
extinguish debt ..... -- -- -- -- -- 86,341 -- -- 86,341
Net loss year
May 31, 2006 ........ -- -- -- -- -- -- -- (2,053,944) (2,053,944)
-------- -------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Balance at
May 31, 2006 ........ -- $ -- 9,147,664 $3,062,566 $(267,060) $1,324,509 $(1,601,912) $(3,169,071) $ (650,968)
======== ======== ========== ========== ========= ========== =========== =========== ===========
Common stock issued
to extinguish ....... -- -- 119,600 149,500 -- -- -- -- 149,500
Convertible debt
Stock issued for
AITI acquisition .... -- -- 2,000,000 934,399 -- -- -- -- 934,399
Amortization of
Prepaid Stock
Services ............ -- -- -- -- 267,060 -- -- -- 267,060
Common stock payable
for prepaid
services ............ -- -- -- -- (106,521) 120,000 -- -- 13,479
Stock-Based
Compensation ........ -- -- -- -- -- 535,984 -- -- 535,984
Warrants issued with
Convertible Debt .... -- -- -- -- -- 92,500 -- -- 92,500
Common stock issued
for Services ........ -- -- 30,000 26,400 -- -- -- -- 26,400
Preferred Shares
Issued AGTI ......... 100,000 167,500 -- -- -- -- -- -- 167,500
Net Loss
May 31, 2007 ........ -- -- -- -- -- -- -- (2,610,070) (2,610,070)
-------- -------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Balance at
May 31, 2007 ........ 100,000 $167,500 11,297,264 $4,172,865 $(106,521) $2,072,993 $(1,601,912) $(5,779,141) $(1,074,216)
======== ======== ========== ========== ========= ========== =========== =========== ===========
Amortization of
prepaid stock
services (unaudited) -- -- -- -- 30,000 -- -- -- 30,000
Stock-Based
compensation
(unaudited) ......... -- -- -- -- -- 122,561 -- -- 122,561
Rescission of common
stock issued for
service ............. -- -- (142,857) (100,000) -- -- -- -- (100,000)
Net loss
August 31, 2007
(unaudited) ......... -- -- -- -- -- -- -- (226,687) (226,687)
-------- -------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Balance at
August 31, 2007
(unaudited) ......... 100,000 $167,500 11,154,407 $4,072,865 $ (76,521) $2,195,554 $(1,601,912) $(6,005,828) $(1,248,342)
======== ======== ========== ========== ========= ========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements
5
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Cash Flows
Unaudited
October 28,
Three Months Ended 2003
August 31, through
-------------------------- August 31,
2007 2006 2007
----------- ----------- -----------
Cash flows from operating activities:
Net loss .......................................... $ (226,687) $ (787,934) $(6,005,828)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization /Depreciation ..................... 585 620 172,745
Amortization of Original Issue Discount ........ 617 84,473 602,000
Reversal of contingent liability ............... (150,000) -- --
Purchased in process research & development .... -- 259,399 274,399
Stock-based compensation ....................... 52,561 149,950 1,700,114
Changes in current assets and liabilities:
Decrease in prepaid expenses .......... 12,780 9,936 (30,474)
Increase in deposits .................. -- -- (495)
Increase in accounts payable
and accrued liabilities ........... 134,918 (4,973) 578,306
----------- ----------- -----------
Net cash used in operating activities .......... (175,226) (288,529) (2,709,233)
----------- ----------- -----------
Cash flows from investing activities:
Furniture and equipment purchases ................. -- (992) (10,764)
----------- ----------- -----------
Net cash used in investing activities .......... -- (992) (10,764)
----------- ----------- -----------
Cash flows from financing activities:
Capital contributions by president ................ -- -- 5,512
Proceeds from notes payable to related parties .... -- -- 549,849
Payments on notes payable to related parties ...... (3,000) 62,341 (41,324)
Proceeds from notes payable issued to individuals . 170,000 92,500 295,000
Proceeds from Notes Payable Related Party ......... 2,000 -- 602,000
Proceeds from the sale of common stock ............ -- -- 757,417
Payments for offering costs ....................... -- -- (81,867)
Proceeds from issuance of stock of AITI acquisition -- 512,200 512,200
Proceeds from issuance of stock of AGTI acquisition -- -- 100,000
Proceeds from exercise of warrants ................ -- -- 28,350
----------- ----------- -----------
Net cash provided by financing activities ...... 169,000 667,041 2,727,137
----------- ----------- -----------
Net change in cash ............................. (6,226) 377,520 7,140
Cash, beginning of period .............................. 16,604 125,320 3,238
----------- ----------- -----------
Cash, end of period .................................... 10,378 $ 502,840 $ 10,378
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ................................... $ -- $ -- $ --
=========== =========== ===========
Interest ....................................... $ -- $ 439 1,126
=========== =========== ===========
The accompanying notes are an integral part of the financial statements
6
CytoDyn, Inc.
(A Development Stage Company)
Condensed Statement of Cash Flows
Unaudited
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 ...... $ -- $ 97,200 $ 587,000
=========== =========== ===========
Common stock issued for debt .................. $ -- $ -- $ 120,082
=========== =========== ===========
Options to purchase common stock issued
for debt .................................... $ -- $ -- $ 62,341
=========== =========== ===========
Original issue discount and intrinsic value
of beneficial conversion feature related
to debt issued with warrants ................ $ -- $ 92,500 $ 602,000
=========== =========== ===========
On July 18, 2006 the company issued 2,000,000 shares of unregistered
restricted common stock for 1,000 shares of AITI common stock. The
acquisition was accounted for as an asset purchase (See Note 4). The
company acquired a prepaid sponsored research project for $162,800, a
license agreement for $150,000, and acquired $109,399 in expenses
associated with the license agreement and cash of $512,200. The license
agreement and associated expenses have been recorded as in process
research and development expenses on the accompanying financial
statements.
On July 16, 2007, the Company cancelled the issuance of 142,857 shares
of restricted common stock previously issued to a consultation firm. In
conjunction with the cancellation, the Company reduced stock
compensation expense by $100,000, which was the value of the shares on
the date of cancellation.
On January 30, 2007, the company issued 100,000 preferred shares of
unregistered stock for 1,000 shares of AGTI common stock. The company
acquired a prepaid license fee for seven years for $52,500 and $15,000
in expense associated with the license agreement
The accompanying notes are an integral part of the financial statements
7
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of August 31, 2007 (unaudited) and May 31, 2007 (audited)
and for the three months ended August 31, 2007 and 2006 (unaudited)
and for the period October 28, 2003 through August 31, 2007 (unaudited)
1 - Organization:
CytoDyn, Inc (the Company) was incorporated under the laws of Colorado on May 2,
2002 under the name Rexray Corporation ("Rexray"). The Company entered the
development stage effective October 28, 2003 upon a reverse merger and a
recapitalization of the Company and follows Statements of Financial Accounting
Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage
Enterprises". On October 27, 2003, Rexray changed its name to CytoDyn, Inc.
Advanced Influenza Technologies Inc (AITI) was incorporated under the laws of
Florida on June 9, 2006. Advanced Genetic Technologies Inc (AGTI)was
incorporated under the laws of Florida on December 18, 2006.
CytoDyn, Inc. discovered and is developing a class of therapeutic monoclonal
antibodies to address significant unmet medical needs in the areas of HIV &
AIDS.
2 - Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and reflect all adjustments, consisting solely of
normal recurring adjustments, needed to fairly present the financial results for
these periods. The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q. Accordingly, certain information and note
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. The accompanying consolidated financial statements should be
read in conjunction with the financial statements for the years ended May 31,
2007 and 2006 and notes thereto in the Company's annual report on Form 10-K for
the year ended May 31,2007, filed with the Securities and Exchange Commission on
August 30, 2007. Operating results for the three months ended August 31, 2007
and 2006 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 month period ended August 31, 2007 and 2006
and the Period October 28, 2003 through August 31, 2007,(b) the financial
position at August 31, 2008, and (c) cash flows for the three month period ended
August 31, 2007 and 2006, and the Period October 28, 2003 through August 31,
2007, have been made.
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 financial statements, the Company is currently in the development
stage with losses for all periods presented. As of September 25, 2009, these
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
8
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional operating capital, complete development of its medical
treatment, obtain FDA approval, outsource manufacturing of the treatment, and
ultimately to attain profitability. The Company intends to seek additional
funding through equity offerings to fund its business plan. There is no
assurance that the Company will be successful in these endeavors.
Use of Estimates - The preparation of the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less when acquired, to
be cash equivalents. The Company had no cash equivalents as of August 31, 2007
or May 31, 2007. The Company maintains its cash in bank deposit accounts, which
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts. As of August 31, 2007 the Company had no cash
equivalents.
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 statement of operations in the year of disposition.
Impairment of Long-Lived Assets - The Company evaluates the carrying value of
any long-lived assets under the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell. There were no impairment charges for the three months
ended August 31, 2007 and 2006, and for the period October 28, 2003 through
August 31, 2007.
Research and Development - Research and development costs are expensed as
incurred.
Financial Instruments - At August 31, 2007, and May 31, 2006, the carrying value
of the Company's financial instruments approximate fair value due to the
short-term maturity of the instruments.
Stock-based compensation - In December 2004, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123 (Revised 2004), Share-Based Payments ("SFAS
No. 123R"). SFAS No. 123R requires companies to measure the cost of employee
services received in exchange for the award of equity instruments based on the
fair value of the award at the date of grant. The expense is to be recognized
over the period during which an employee is required to provide services in
exchange for the award. SFAS No. 123R is effective as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005 and
accordingly the Company adopted this standard on June 1, 2006. SFAS No. 123R
provides for two transition methods. The "modified prospective" method requires
that share-based compensation expense be recorded for any employee options
granted after the adoption date and for the unvested portion of any employee
options outstanding as of the adoption date. The "modified retrospective" method
requires that, beginning June 1, 2006, all prior periods
9
presented be restated to reflect the impact of share-based compensation expense
consistent with the pro forma disclosures previously required under SFAS No.
123. The Company adopted the modified prospective application of SFAS No. 123R
effective June 1, 2006, and as a result, was not required to restate its
financial results for prior periods. Prior to June 1, 2006, the Company had
adopted SFAS No. 123, Accounting for Stock-Based Compensation. As provided for
by SFAS No. 123, the Company had elected to continue to account for its
stock-based compensation programs according to the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation expense had been recognized to the extent
of employee or director services rendered based on the intrinsic value of stock
options granted under the plan. The Company accounted for common stock, stock
options, and warrants granted to non-employees based on the fair market value of
the instrument, using the Black-Scholes option pricing model based on
assumptions for expected stock price volatility, term of the option, risk-free
interest rate and expected dividend yield at the grant date. For all awards
granted prior to June 1, 2006, the unearned deferred fair value of stock-based
compensation was recognized as an expense on a straight-line basis over the
remaining requisite service period, ranging from three months to four years.
There was no impact on operating results and per share information had the
Company accounted for stock based compensation in accordance with SFAS No. 123R
for the three months ended August 31, 2007. Effective June 1, 2006, the
estimated fair value of options and warrants granted is determined in accordance
with SFAS No. 123R on the date of grant using the Black-Scholes option valuation
model with the following weighted-average assumptions. Risk free interest rate
of 4.25% dividend yield 0%; volatility of approximately 71% and expected life
5.5 years. The risk-free interest rate assumption is based upon observed
interest rates appropriate for the expected term of the stock options. The
expected volatility is based on the historical market price at consistent points
in a period equal to the expected term of the options. The Company has not paid
any dividends on its common stock since its inception and does not anticipate
paying dividends on its common stock in the foreseeable future. The computation
of the expected option term is based on the "simplified method" as the Company's
stock options are "plain vanilla" options, and the Company has a limited history
of exercise data. For common stock options and warrants with graded vesting, the
Company recognizes the related compensation costs associated with these options
and warrants on a straight line basis over the requisite service period.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Based on limited historical experience of forfeitures, the
Company estimated future unvested option forfeitures at 0% as of August 31, 2007
and 2006. Net cash proceeds from the exercise of stock options and warrants were
$0 for the three months ended August 31, 2007 and 2006. Compensation expense
related to stock options was approximately $123,000 and $50,000 for the
three-month periods ended August 31, 2007 and 2006, respectively. At August 31,
2007, there was approximately $941,000 of unrecognized compensation cost related
to share-based payments for unvested options, which is expected to be recognized
over a weighted average period of 2.37 years.
The following table represents stock option and warrants activity as of and for
the three months ended August 31, 2007.
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic
of shares Price Life Value
--------- -------- ----------- ----------
Options and warrants outstanding
- May 31, 2007 2,047,222 $1.61
Granted 850,000 $ .68
Exercised -- --
Forfeited/expired/cancelled -- --
Options and warrants Outstanding -
August 31, 2007 2,897,222 1.34 7.48 years $ 171,600
Outstanding Exercisable
- August 31, 2007 1,791,017 1.54 6.12 years $ 156,600
========= ======== =========== ==========
10
The total average grant date fair value of options and warrants during the three
months ended August 31, 2007 and 2006 was $.42 and $2.29, respectively. The fair
value of options vested during the period ended August 31, 2007 and 2006 was
approximately $121,000 and $47,000, respectively.
Stock Issued for Services
-------------------------
During the year ended May 31, 2006, the Company issued common stock for certain
services to a public relations company and a technology company. The Company
recorded into additional paid in capital, the fair value of the common stock
issued based on the quoted market price of the Company's common stock at the
date of the respective agreements with the above parties. A contra-equity was
recorded for the above services, which is being amortized into compensation
expense and additional paid in capital over the requisite service period of the
agreements. During the three months ended August 31, 2007 and 2006,
approximately $30,000 and $99,000 was recognized as compensation expense related
to these agreements, respectively. As of August 31, 2007, the unamortized
portion of the stock for services was approximately $ 77,000.
On July 16, 2007, the Company cancelled 142,857 shares of restricted common
stock, which had previously been issued for services to be rendered by a
consultation company. The expense associated with the original issuance had
previously been amortized as compensation expense over the requisite life of the
agreement. In conjunction with the cancellation, the Company has reduced
compensation expense by $100,000 for the period for non-performance under the
contract, which represented the fair market value of the common stock on the
date of cancellation.
Earnings (Loss) per Common Share -
Basic earnings (loss) per share is computed by dividing the net income or loss
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the weighted average common shares and potentially dilutive common share
equivalents. The effects of potential common stock equivalents are not included
in computations when their effect is antidilutive. Because of the net loss for
the three month period ended August 31, 2007 and 2006, 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 of 2,897,222 and 1,606,222 to purchase shares
of common stock were not included in the computation of basic and diluted
weighted average common shares outstanding for the three months ended August 31,
2007 and 2006, respectively. Additionally, convertible preferred stock that
could convert into 4,333,333 shares of common stock were not included in the
computation of basic and dilutive weighted average common shares for the above
periods as the effect would be anti-dilutive.
Reclassification - Certain prior period amounts have been reclassified to comply
with current period presentation.
3 - Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS
No. 157 Fair Value Measurements, which defines fair value, establishes framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of
the information. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and all interim periods within those fiscal years. In
February 2008, the FASB release FASB Staff Position (FSP FAS 157-2- Effective
Date of FASB Statement No. 157) which delays the effective date of SFAS No, 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2007 and
interim periods within those financial years. The implementation of SFAS No. 157
for financial assets and liabilities, effective January 1, 2008 did not have an
impact on the Company's financial position and results of operations.
11
In February 2007, the FASB issued SFAS No. 159. "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure on an item by item basis, specified
financial instruments and certain other items at fair value, Unrealized gains
and losses on items for which the fair value option has been elected are
required to reported in earnings at each reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007, the provisions of
which are required to be applied prospectively. The Company adopted this
Statement as of January 1, 2008 and has elected not to apply the fair value
option to any of its financial instruments.
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement if Financial Accounting Standards ("SFAS") No. 141 (revised 2007),
Business Combinations, which replaces SFAS No. 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way the assets and liabilities are recognized
in the purchase accounting. It also changes the recognition of assets acquired
and liabilities assuming arising from contingencies, requires the capitalization
of in-process research and development at fair value, and requires the expensing
of acquisition related costs as incurred. SFAS No. 141R is effective for
business combinations on or after December 15, 2008. The adoption of SFAS No.
141R is not expected to have a material effect on the Company's financial
position results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160. "Noncontrolling Interests in
Consolidated Financial Statements and Amendment of ARB No. 51". SFAS 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the controlling interest, changes in a
parent's ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The adoption of SFAS No. 160 is not currently expected to
have a material effect on the Company's financial position, results of
operations, or cash flows.
In March 2008, the FASB issued FASB No. 161 , Disclosures about Derivative
Instruments and Hedging Activities. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
required enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The company is currently evaluating the impact of adoptions SAFAS
No. 161 on its financial statements.
Other recent accounting pronouncements issued by FASB (including EITF) the
AICPA, and the SEC did not or are not believed by management to have a material
impact on the Company's present or future financial statements.
4 - Acquisitions - On July 18, 2006 CytoDyn, Inc. entered into an acquisition
agreement with UTEK Corporation, to purchased all 1,000 issued and outstanding
shares of Advanced Influenza Technologies, Inc. (AITI), a Florida Corporation in
exchange for 2,000,000 unregistered restricted common shares of CytoDyn, Inc
stock.
The transaction was accounted for as an asset purchase, and not an acquisition
of a business, as AITI had no employees, operations, or customers, and was
essentially a shell corporation that was incorporated to consummate the
purchase. Pursuant to the agreement, the Company acquired $512,200 in cash, and
a prepaid sponsored research project of $162,800 from the University of
Massachusetts to further the technology associated with certain acquired
licenses. The $162,800 is being amortized into research and development expense
as the services are provided. The company valued the assets acquired based on
the consideration received rather than the fair market value of the shares
issued, as the company believed this was more indicative of the value of the
assets acquired. In addition to the cash, and the prepaid sponsored research
project, the Company acquired the worldwide nonexclusive and exclusive license
12
agreements from the University of Massachusetts for certain technologies. The
license agreements were recorded as research and development expense, as the
patent rights or license agreements are being used in a particular research
project, and have no alternative future use outside of this project. Including
the license agreements, a total of $259,399 of in-process research and
development was acquired related to the acquisition, which is included as a
component of research and development expense for the period ended May 31, 2007.
The license agreement grants the Company the exclusive right to develop and
commercialize the licensed products associated with certain existing patents.
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 4% royalties on net sales of the license
products.
AITI agreed to fund a two-year ($325,600) unrestricted project for ($162,800 per
year) under the Sponsored Research Agreement with the primary objective during
the first year to conduct lab work to provide well documented research studies.
If after one year the desired outcome is not achieved the agreement can be
cancelled and the second year's payment is not required. Included in the
consolidated statement of operations is $162,800 of amortization expense for the
period ended May 31, 2007 as all services related to the initial project were
completed. The Company did not make the second payment and consequently as of
August 31, 2007, the Company has no right to the above license agreement.
Additionally, the milestone fee payable and royalties discussed above are no
longer in force as of August 31, 2007.
On January 30, 2007 CytoDyn, Inc. entered into an Acquisition agreement with
UTEK Corporation, to acquire 100% of the outstanding stock of Advanced Genetic
Technologies, Inc. (AGTI), a Florida Corporation in exchange for 100,000
preferred no par value stock convertible into $1,300,000 worth of common
unregistered restricted shares of CytoDyn, Inc stock. The option to convert is
any time after twelve (12) months and before thirty six (36) months from the
date of closing of the agreement. The conversion option has a floor price of
$.30 per share, which limits the maximum number of shares that the company may
issue upon conversion to 4,333,333 shares of common stock. There was no
derivative liability or beneficial conversion feature associated with the
conversion option.
AGTI holds the worldwide exclusive and nonexclusive license agreements from the
CBR Institute for Biomedical Research affiliated with Harvard Medical School for
certain biological materials.
The term of the licensing agreement is until the later of 20 years or the date
the last patent expires that is owned or controlled by the Licensee.
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 2% royalties of net sales of the licensed
products up to $200 million and 3% royalties of net sales in excess of $200
million. In the case of a sublicense the University would get 25% of non-royalty
sublicense income.
The transaction was accounted for as an asset purchase, and not an acquisition
of a business, as AGTI had no employees, operations, or customers, and was
essentially a shell corporation that was incorporated to consummate the
purchase. Pursuant to the agreement, the Company acquired $100,000 in cash, and
seven years of prepaid license fees to the Center for Biological Research at
Harvard Medical School. $52,500 was recorded as prepaid license fees and $15,000
was expensed as Research and Development. The company valued the assets acquired
based on the consideration received rather than the fair market value of the
shares issued, as the company believed this was more indicative of the value of
the assets acquired. In addition to the cash, and the prepaid license fees, the
Company acquired the worldwide nonexclusive and exclusive license agreements
from the Center for Biological Research at Harvard Medical School for certain
biological materials. The license agreement grants the Company the exclusive
right to develop and commercialize the licensed products associated with certain
biological materials.
13
5 - Convertible Notes - During the year ended May 31, 2006, the Company issued
convertible promissory notes with 407,600 detachable warrants to purchase common
stock to individuals in exchange for proceeds totaling $509,500. As of August
31, 2007 all of the convertible notes were converted into common stock. The
original issue discount and beneficial conversion option were recorded as a
discount to the convertible notes, and an increase in additional paid in
capital, respectively. For the three month periods August 31, 2007 and 2006, the
Company amortized approximately $0 and $48,000 of the discounts, which was
included as a component of interest expense for the periods ended August 31,
2007 and 2006, respectively.
During the year ended May 31, 2007, the Company issued convertible notes with
$74,000 detachable common stock warrants to purchase common stock in exchange
for proceeds of $92,500. The notes bear interest at 5 percent per annum.
Principal and accrued interest are payable in any combination of cash and common
stock at the option of the Company. The Company can repay principal and accrued
interest with common stock at the conversion price of $1.25. As of August 31,
2007, $77,500 of the $92,500 in convertible notes were converted into common
stock. The warrants to purchase common stock which accompanied the convertible
promissory notes are exercisable at $2.50 per share, vest immediately, and
expire in October 2010. Additionally, the Company recorded an original issue
discount based on the fair value of the warrants. To recognize the original
issue discount, the Company discounted the notes and increased additional
paid-in capital by $92,500. The Company did not record the intrinsic value for
conversion into the Company's common stock, as the discount was limited to the
debt proceeds of $92,500, which was fully discounted by the fair value of the
warrants. The discount was amortized over the life of the debt. During the three
month periods period ended August 31, 2007 and 2006, the Company amortized
approximately $617 and $36,000 of this discount, which is included as a
component of interest expense. From October 28, 2003 (inception date) to August
31, 2007, the Company amortized approximately $602,000 of discounts related to
convertible notes payable. As of August 31, 2007, the face amount related to
convertible notes was $15,000.
6 - Promissory Notes - During the year ended May 31, 2007, the company issued
$125,000 in unsecured promissory notes to third parties. The principal and
interest on the notes are due in six months and pay interest at 14% per annum.
During the three months ended August 31, 2007, the company issued an additional
$170,000 in promissory notes to third parties. The notes are all due in six
months and pay interest of 14% per annum. The parties have agreed to extend the
due date of the notes for another six months while continuing to accrue
interest. As of August 31, 2007, approximately $8,000 of interest has been
accrued.
7 - Commitments and Contingencies -
In 2001, The Company sued its previous licensee Amerimmune Pharmaceuticals, Inc.
(API) and its directors. The Company was ordered by the court to pay $150,000 in
attorney fees to the insurance company of API and recorded a contingent
liability for the amount. Prior to issuance of the August 31, 2007 financial
statements, the Company appealed the Court's decision and, in December 2007, the
Court's decision was reversed based on the appeal. Based on these facts and
circumstances, the Company has reversed the recording of the contingent
liability as of August 31, 2007.
Related to certain litigation whereby the Company was both a defendant and a
plaintiff, the company entered into a settlement agreement in December 2008. As
part of the Settlement Agreement, the Company agreed to pay $50,000 in January
2009 and $25,000 on or before December 31, 2009 to the plaintiff. The company
paid the $50,000 in January 2009. The remaining $25,000 is unsecured and accrues
interest at 10 percent per annum. The Company accrued $75,000 related to this
settlement agreement as of August 31, 2007 for the past litigation. The
associated expense for the three month period ended August 31, 2007 is included
in legal fees in the condensed statement of operations.
14
8 - Related Party Transactions - As of August 31, 2007, the Company owed two
officers promissory notes totaling of $73,375. The notes are due on demand and
carry no interest rate. Management plans to repay the notes through cash
payments, issuance of the Company's common stock, or a combination thereof. The
balance due of $73,375 remained unpaid at August 31, 2007 and is included in the
accompanying condensed financial statements as "Indebtedness to related
parties".
A director provided legal services to the Company over the past several years.
As of August 31, 2007, the Company owed the director $43,985 and it is included
in the accompanying financial statements as "Indebtedness to related parties" as
of August 31, 2007. As of August 31, 2007, no arrangements had been made for the
Company to repay the balance of this obligation. The Company anticipates that
the director will continue to provide legal services in the future.
A former director of the company is owed $337,342 related to certain clinical
research data that was obtained by the former director and later purchased by
the Company. As of August 31, 2007, the liability has no payment terms and no
stated interest rate, and is included in the accompanying condensed financial
statements as "indebtedness to related parties".
9. Subsequent Events
In April 2008 our Board of Directors approved a Private Placement Memorandum to
sell up to 6 million shares of common stock, no par value, a company offering.
This offering was only available to accredited investors as defined under the
1933 Securities Act ("The Act"). The offering commenced on or about May 1, 2008
and ended June 15, 2009, the company has sold 3,876,508 restricted common shares
and 1,938,254 warrants for proceeds totaling $1,938,254. These securities were
sold pursuant to an exemption from registration under Regulation D under "The
Act" and will not be registered with the Securities and Exchange Commission. The
warrants have an exercise price of $1.00 per share, and expire in April 2013.
Subsequent to August 31, 2007 the Company granted common stock options to
employees, directors, and consultants at exercise prices ranging from $.34 to
$.72. The options vest between one and three years and expire in 2015.
Subsequent to August 31, 2007, the Company paid approximately $600,000 in cash
for the manufacturing of our product, Cytolin(R) to be used in human clinical
trials.
15
Part I. Item 2. Management's discussion and analysis of financial condition
and results of operations.
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the related notes thereto
included in this Quarterly Report on Form 10-Q. The discussion and analysis
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (Exchange Act). These forward-looking statements are
based on our current expectations and entail various risks and uncertainties.
Our actual results could differ materially from those projected in the
forward-looking statements as a result of various factors, including those set
forth in, "Risk Factors" of the Company's May 31, 2007 Form 10-K.
Plan of Operations
CytoDyn, Inc. discovered and is developing a class of therapeutic monoclonal
antibodies to address significant unmet medical needs in the areas of HIV &
AIDS.
We intend to conduct, or may provide product for others to conduct, a clinical
trial of Cytolin(R) for treating HIV/AIDS.
Projected costs to complete our research and development as a pre-requisite for
co development and/or out-licensing.
We have negotiated with contract manufacturer Vista Biologicals Inc. to
manufacture product for our clinical trials for $565,000. If the next clinical
trial is not conducted by the public sector, we will need to engage a Contract
Research Organization to oversee the study, and anticipate costs of
approximately $300,000. Other costs such as labeling, vialing, Independent
Review Board, Principal Investigator costs and lab costs are expected to be
approximately $439,000.
Timing and anticipated completion dates for research and development.
---------------------------------------------------------------------
There are many factors that can delay clinical trial benchmarks (see Table
below). However, the Company hopes to receive the results and analysis of the
upcoming clinical trial during 2010.
====================================== =========================================
Benchmark Some Factors That Can Cause Delays+
====================================== =========================================
Manufacturing Delays
Documentation Delays
Patient Outreach IRB Delays
Delays in Regulatory Review or Approval
Force Majeure
====================================== =========================================
Fill and Finish Delays
Dose First Patient Slower Than Expected Patient Enrollment
Force Majeure
====================================== =========================================
Slower Than Expected Patient Enrollment
Clinical Hold
Lock Database - Begin Statistical Laboratory Error
Analysis 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.
================================================================================
16
Clinical Trials Process
Phase I
Phase I includes the initial introduction of an investigational new drug or
biologic into humans. These studies are closely monitored and may be conducted
in patients, but are usually conducted in a small number of healthy volunteer
subjects. These studies are designed to determine the metabolic and
pharmacologic actions of the investigational product in humans, the side effects
associated with increasing doses, and, if possible, to gain early evidence on
effectiveness. During Phase I, sufficient information about the investigational
product's pharmacokinetics and pharmacological effects are obtained to permit
the design of well-controlled, scientifically valid, Phase II studies.
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.
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.
Risks and uncertainties associated with completing development within reasonable
period of time and if products are not completed on a timely basis:
If we are unable to complete clinical trials on a timely basis, with favorable
results, our costs will increase significantly and we may not have enough
capital to support further research and development and continue in business.
Also, if we incur significant delays in being able to develop our product, even
if we are ultimately able to do so, we will be delayed in earning revenues and
probably will require additional financing to continue in business.
Patents
We have a License Agreement with Allen D. Allen, our president that gives us the
exclusive right to develop his technology worldwide. This includes issued U.S.
patents 5,424,066; 5,651,970 and 6,534,057, foreign counterparts, as well as
European Patent No. 94 912826.8, for the United Kingdom, Germany, France,
Switzerland, Italy, the Netherlands, Portugal, Spain, and Sweden. Other Patents
are pending in those same countries as well as Hon Kong. We estimate the costs
associated with these pending patents to be approximately $65,000 per year. We
may file additional patents during the current fiscal year if our research and
development efforts warrant them, but we do not have any such potential patents
identified at this time. The license acquired gives us the right to develop Mr.
Allen's patents worldwide.
Going Concern
We will require additional funding in order to continue with research and
development efforts.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company is currently in the development stage with
losses for all periods presented. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern.
17
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. As of September 25,
2009, there is no assurance that the Company will be successful in these
endeavors.
Results of Operations
---------------------
Results of Operations for the Three Months ended August 31, 2007 and 2006
For the three Months Ended August 31, 2007 and 2006 the Company had no
activities that produced revenues from operations.
For the Three Months Ended August 31, 2007, the Company had a net loss of
($226,687) compared to a net loss of $(787,934) for the corresponding period in
2006. For the Three months ended August 31, 2007, the Company incurred operating
expenses of $224,398 consisting primarily of stock-based compensation, legal
fees, salaries and accounting fees.
For the three months ended August 31, 2006, the Company had a net loss of
$(787,934). In the same period, the Company incurred operating expenses of
$701,794 consisting primarily of research and development expense, stock-based
compensation, legal fees and salaries.
The decrease in operating expenses of $477,396 from the three month period
August 31, 2007 compared to the corresponding period related to a decrease in
research and development expense of approximately $227,000, cancellation of
stock previously issued for services of approximately $100,000, and reversal of
a commitment of contingency of approximately $150,000.
Liquidity and Capital Resources
As shown in the accompanying Financial Statements, for the three months ended
August 31, 2007 and 2006, and since October 28, 2003 through August 31, 2007 the
Company has had net losses of $226,687 and $6,005,828, respectively. As of
August 31, 2007, 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 August 31, 2007, we raised cash of $675,550 net of issuance
costs through private placements of common stock financings and $1,446,848
through the issuance of notes payable.
Since October 28, 2003 through August 31, 2007, we have incurred $797,059 of
research and development costs and $5,537,812 in operating expenses.
We have incurred significant net losses and negative cash flows from operations
since our inception. As of August 31, 2007, we had a total accumulated deficit
of $7,607,740 and a working capital deficit of $1,252,156.
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.
18
Part 1 Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
Item 4T Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d015(e) under the Exchange Act) as of the three
month period ending August 31, 2007 covered by this quarterly report on Form
10Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures were not effective as required under Rules
13a015(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company's
Chief Executive Officer and Chief Financial Officer does not relate to reporting
periods after August 31, 2007.
Changes in Control Over Financial Reporting
-------------------------------------------
No change in the Company's internal control over financial reporting occurred
during the quarter ended August 31, 2007, that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II Item 1 Legal Proceedings
--------------------------------
Attorneys Award Reversed in Appellate Court:
--------------------------------------------
In 2001, CytoDyn of New Mexico, Inc. (the previous company holding Cytolin) as a
shareholder, sued its licensee Amerimmune Pharmaceuticals, Inc. (API) and its
directors in order to prevent the destruction of API. The Los Angeles Superior
Court awarded attorneys' fees in the amount of approximately $150,000 to the
insurance company of API. We appealed the Court's order and prevailed. The Los
Angeles Court decision was reversed in December 2007 by the appellate court.
Patent Issues:
Previously, the CEO and a vice-president of ex-licensee Amerimmune, Inc.
obtained a patent claiming that they had invented a method of using Cytolin at a
higher dose than was used for embodiment of the original invention. Further,
despite contractual and fiduciary duties to Amerimmune, Inc., they assigned this
patent to a company owned by the CEO. Dr. Peggy Pence, owner of Symbion
Research, who was shown by the evidence to have been the one to propose a higher
dose escalation litigated in Las Vegas, NV. Rather than go to trial, the
employees of Amerimmune, Inc. agreed to a stipulated Court order under which
Symbion was awarded full rights to the patent and Dr. Pence was named as an
inventor in the patent. The Amerimmune employees may have been influenced by the
controlling case law, which arises from a U.S. Supreme Court decision, and
holds, in effect, that simply increasing the dose of a drug does not constitute
a novel invention and is not a patentable invention. For this reason, the
Company has declined to meet what it deems unreasonable terms proposed by Dr.
Pence for licensing the patent. The Company's decision was also influenced by
the fact that Amerimmune's dose escalation was based on a misconception about
the mechanism of action of Cytolin and enrolled patients for its clinical trial
that were not ideal candidates for the drug. This mistake could have impacted
dose ranging, which the Company will repeat in its own upcoming study.
19
Maya LLC v. CytoDyn, et al Superior Court of Los Angeles Glendale Case# EC041590
--------------------------------------------------------------------------------
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
-------------------------------------------------------------------
Pharmaceuticals, Inc. v. Biovest International, Inc., Commonwealth of
---------------------------------------------------------------------
Massachusetts, Superior Court, Worcester County, Civil Action No. 05-0452-C.
----------------------------------------------------------------------------
The company and some of its officers and directors have entered into a
Settlement Agreement with the all parties involved in the above legal matters
including CytoDyn, Inc. Allen D. Allen, Corinne Allen, Maya LLC, AIDS Research
LLC and Rex Lewis. All of the cases have been settled pursuant to this
agreement.
The liability incurred by the company is $50,000 payment to Rex Lewis by January
14, 2009 and an additional $25,000 by January 14, 2010. We have Dismissed all
claims to the old FDA IND and the old cell bank as defined in the agreement and
Rex Lewis and his parties agree to dismiss all claims against the company, any
of its predecessors and any of its officers and directors. Related to the above
settlement the Company accrued $75,000 as of August 31, 2007.
Part II Item 2 Unregistered Sales of Equity and Use of Proceeds
No unregistered sales of equity securities of the company occurred during the
period covered by this quarterly report on Form 10Q.
Item 3 Defaults Upon Seniors
None
Item 4 Submission of Matter to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
1. 31.1: Certification by the CEO
2. 31.2: Certification by the CFO
3. 32.1: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO
4. 32.2: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO
20
SIGNATURES
CYTODYN, INC.
(Registrant)
DATE: September 25, 2009 BY: /s/ Allen D. Allen
----------------------- -----------------------------
Allen D. Allen
President and CEO
21