U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to _________
Commission File Number 000-49908
CYTODYN, INC.
(Name of small business issuer in its charter)
Colorado 75-3056237
(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
227 E. Palace Avenue, Suite M Santa Fe, New Mexico 87501
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Telephone Number: 505-988-5520
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Check whether the issuer (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for which shorter
period that the was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Revenues for the most recent fiscal year $0
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes No X
Aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of common stock as of a specified
within the past 60 days. $4,071,830
Number of shares of common stock outstanding as of August 29, 2007: 11,297,264
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CYTODYN, INC
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 2007
TABLE OF CONTENTS
PART I
Item 1. Description of Business.......................................... 3
Item 2. Description of Property.......................................... 15
Item 3. Legal Proceedings................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......... 17
Item 6. Management's Discussion and Analysis or Plan of Operation........ 19
Item 7. Financial Statements............................................. 22
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 22
Item 8A. Controls and Procedures........................................... 23
Item 8B. Other Information................................................. 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 26
Item 10. Executive Compensation............................................ 28
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters................................. 31
Item 12. Certain Relationships and Related Transactions.................... 32
Item 13. Exhibits.......................................................... 34
Item 14. Principal Accountant Fees and Services............................ 34
2
Item 1. Description of Business
The Company
CytoDyn, Inc. is a Colorado corporation, with its principal business office at
227 E. Palace Avenue, Suite M, Santa Fe, New Mexico, 87501; telephone: (505)
988-5520, facsimile: (800) 417-7252, and website address: www.cytodyn.com.
Originally incorporated as Rexray Corporation on May 2, 2002, the Company was
renamed when Rexray acquired, in October 2003, all of the assets of CytoDyn of
New Mexico, Inc. in exchange for 5,362,640 shares of common stock. We develop
novel therapeutic agents for use against disease associated with Human
Immunodeficiency Virus and plasmid-DNA products to protect human subjects
against several strains of influenza (the flu). CytoDyn(R) and Cytolin(R) are
our registered trademarks. Our service trademark mark symbol is:
[GRAPHIC OMITTED]
In October 2003 we entered into an Acquisition Agreement with CytoDyn of New
Mexico, Inc., pursuant to which we affected a two for one reverse split of our
Common stock, and amended our articles of incorporation to change our name from
Rexray Corporation to CytoDyn, Inc. 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 and sell the HIV therapies from
the patents, technology and know- how invented by Mr. Allen. The term of the
agreement is for the life of the patents of which the first shall expire in
2013. 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
Management
Our Chairman of the Board and Chief Executive Officer, Allen D. Allen, is the
inventor and patent holder of the HIV/AIDS therapies licensed to us. He has over
30 years' experience in neuroimmunology, has published scores of scholarly
papers in peer review science and medical journals, and has served as an
investigator on clinical research sponsored by major pharmaceutical companies.
Our other directors are: Corinne E. Allen, CPA is the daughter of Allen D. Allen
the President and CEO, CPA Gregory A. Gould, CPA, Wellington Ewen, CPA MBA and
Ronald J. Tropp, Esq. Please see "Management" below for more detailed
information.
3
Employees
We have three full time employees, two part-time employees, and several
consultants engaged in management and product development. CytoDyn intends to
hire additional full time and part time employees if we raise additional working
capital. There can be no assurance we will be able to locate or secure suitable
employees upon acceptable terms in the future.
For period ended May 31, 2007 and 2006, and for the period October 28, 2003
(inception date) through May 31, 2007 we have spent $424,739, $0, and $787,081
on Research and Development expenditures respectively.
Business Overview
DNA-Based Pre-Flu Vaccine
In July 2006, we acquired the exclusive right to develop a unique DNA-based
pre-flu vaccine developed at the University of Massachusetts after completion of
seminal scientific research. Our wholly-owned subsidiary, Advanced Influenza
Technologies, Inc., acquired these rights from UTEK Corporation, a publicly
traded company that invests in promising technologies. UTEK also invested a
significant amount of cash, as well as the technology, in exchange for 2,000,000
shares of unregistered common stock in our company.
The Flu poses a serious, global, public-health problem. Unlike other viruses,
the influenza or flu virus changes every year causing an outbreak of seasonal
flu that usually peaks in January. Because the virus has changed, a new vaccine
must be manufactured and tested every year once the new strain of flu virus has
been isolated. The seasonal flu results in about 200,000 hospitalizations and
tens of thousands of deaths every year. Even in healthy young adults who do not
have a life-threatening infection, the seasonal flu epidemic results in lost
productivity and can make entire families feel miserable. Sometimes the flu
virus changes so much by combining with bird or avian flu virus that a lethal
pandemic sweeps the world causing tens of millions of deaths.
Although there are many flu vaccines in development, our product is designed for
a unique and profitable niche that uses a seminal technology developed at the
University of Massachusetts Medical School.
How it Works
Strains of the flu virus that the human immune system has not seen before are
the ones that cause a seasonal flu every year and, from time to time, cause a
lethal pandemic of the flu. Our DNA Plasmid vaccine works with an injection
containing viral DNA that will teach the immune system how to recognize various
strains of the flu that have not yet broken out to cause widespread illness. The
viral DNA by itself does not cause the flu. Therefore, the immune system can
recognize the flu virus before the virus itself is present. This will help the
immune system fight the virus if a patient becomes infected. The DNA Vaccine is
used in conjunction with the traditional viral based influenza vaccines as a
pre-flu vaccine for maximum protection against influenza viruses including the
avian or bird flu strains. By simply changing the DNA sequences that are
contained in a pre-flu shot, the DNA pre-flu vaccine can easily and quickly
adapt to new strains of a virus that threatens to break out and cause a
pandemic.
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The Advantages of Our DNA-Based Pre-Flu Vaccine
o Helps Protect against the seasonal flu.
o Helps protect against the bird flu.
o All in one series of flu shots.
o Easily adapted for new strains of the flu.
o You can get your pre-flu shots anytime before flu season. Convenient for
doctors and patients.
Advantages Over Antiviral Drugs
Antiviral drugs have to be taken soon after symptoms appear or they provide no
benefit. Our pre-flu injection can be given at any time during the year before
the flu season. The use of antiviral drugs causes the flu virus to mutate and
become resistant to those drugs. According to public health officials, and the
website http://www.cdc.gov/flu/avian/gen-info/facts.htm, the avian flu virus
that has crossed the species barrier, H5N1, has become resistant to amantadine
and Fluadime (rimantadine). Use of a pre-flu vaccine does not cause the virus to
mutate to a strain that is resistant to the pre-flu vaccine because it is the
immune system and not the pre-flu vaccine that suppresses the virus.
We hope to conduct the first clinical trial of our pre-flu vaccine by the
2007-2008 flu season, depending upon FDA protocol approvals, uneventful
manufacturing, adequate enrollment of human subjects, and our ability to raise
additional working capital.
Treatment for HIV/AIDS Cytolin(R)
The Company recently acquired the exclusive right to develop an improved version
of Cytolin(R) using two antibodies invented at Harvard University Medical
School's CBR Institute for Biomedical Research. Cytolin(R) treats HIV/AIDS by
preventing killer T cells from destroying the CD4 T cells in humans infected
with HIV which results in an impaired immune system. It is based upon a
discovery made and published independently in the 1990's by our CEO, Allen D.
Allen, et al.; Leonard Adelman; and Joyce Zarling, et al. Cytolin(R) is intended
as a "salvage therapy" for patients who have failed or are failing Highly Active
Antiretroviral Therapy (HAART). The Phase I(b)/II(a) study was completed with
encouraging results and the Company is in the process of setting up a meeting
with the FDA to gain approval to conduct further trials. There is no assurance
that Cytolin(R) or any other product will be successfully developed by the
Company. "Cytolin(R)" is the registered trademark of CytoDyn, Inc.
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Formaxycin
CytoDyn will be researching opportunities for the formulation of Formaxycin(TM),
a topical dermatological product to improve the appearance of human skin by
eliminating dysplastic and pre-cancerous conditions.
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.
Continuing Cytolin(R) Clinical Trials
Phase I(b)/II(a) clinical trials were conducted by Symbion Research
International under the sponsorship of Amerimmune, Inc. during 2002. We believe
that the data from these trials support approval by the FDA of Phase II(b)
trials. We are purchasing the data from these trials from Symbion and will use
the data to present to the FDA.
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Clinical Trials Influenza Pre-Flu Vaccine
No Investigational New Drug Application (IND) has yet been submitted to the FDA.
Once we have finalized our development plan we will request a pre-IND meeting
with the FDA.
Patent Portfolio
We have licensed the following patents from Mr. Allen D. Allen, the Inventor and
Registered Owner U.S. Patent Nos. 5,424,066 5,651,970 and 6,534,057, and foreign
counterpart patents.
We have also licensed the following foreign patents: Canada, Australia, United
Kingdom, Germany, Switzerland, France, Italy, Netherlands, Portugal, Spain and
Sweden. These patents are the equivalent of the U.S. Patent No. 5,424,066. There
is also a European patent pending which would be the equivalent of U.S. Patents
No. 5,651,970.
The patents are registered to Mr. Allen D. Allen, the inventor and are licensed
exclusively to us until they expire, the first of which is to occur in 2013. We
will develop, market and sell the technology contained in the patents in
accordance with the license agreement.
CytoDyn owns the registered trademarks, CytoDyn and Cytolin(R), and a related
trademark of our graphic logo.
Our wholly owned subsidiary AITI has a non-exclusive license to the following
patents from the University of Massachusetts
------------------ --------------- -------------- ------------- -----------
Serial Number Filing Date Issue Date Patent # Country
------------------ --------------- -------------- ------------- -----------
08/009,833 1/27/1993 7/1/1997 5,643,578 USA
------------------ --------------- -------------- ------------- -----------
08/187,879 1/27/1994 1/11/2005 6,841,381 USA
------------------ --------------- -------------- ------------- -----------
10/763,049 1/22/2004 NA Pending USA
------------------ --------------- -------------- ------------- -----------
PCT/US93/02394 3/17/1993 NA NA PCT
------------------ --------------- -------------- ------------- -----------
PCT/US95/00997 1/25/1995 NA NA PCT
------------------ --------------- -------------- ------------- -----------
93907536 3/17/1993 NA NA EP
------------------ --------------- -------------- ------------- -----------
01202355.2 6/18/2001 NA NA EP
------------------ --------------- -------------- ------------- -----------
2,132,836 9/23/1994 NA NA CA
------------------ --------------- -------------- ------------- -----------
2,181,832 1/25/1995 NA NA CA
------------------ --------------- -------------- ------------- -----------
07-520142 1/25/1995 NA NA JP
------------------ --------------- -------------- ------------- -----------
2003-28160 7/29/2003 NA NA JP
------------------ --------------- -------------- ------------- -----------
JP7507203
------------------ --------------- -------------- ------------- -----------
JP9508622T
------------------ --------------- -------------- ------------- -----------
AU3150295
------------------ --------------- -------------- ------------- -----------
7
Our wholly owned subsidiary AITI has an exclusive license to the following
patents(s) from the University of Massachusetts.
University invention disclosure UMMC04-96 entitled "Influenza Nucleic Acids,
Polypeptides, and Uses Thereof" as embodied in Patent Applications 60/655,979;
11,362,617; and PCT/US2006/006701 and naming Shan Lu and Shixia Wang as
inventors.
RISK FACTORS
------------
An investment in our shares is very risky. You should only invest if you can
afford to lose your entire investment. Before you invest, carefully consider the
risks we discuss in this section, as well as the information elsewhere in these
materials. You should also consider the information we incorporate by reference,
and information that we file with the Securities and Exchange Commission from
time to time, which you may find at www.sec.gov.
In addition to other information included in this report, the following factors
should be considered in evaluating our business and future prospects:
Risks Related to Our Financial Condition
Our Accountant Has Expressed a Substantial Doubt that We Can Continue As a Going
Concern. If We Do Not Continue As a Going Concern, Investors Could Lose Their
Entire Investment.
We have accumulated losses since our inception, and our independent accountant
has expressed that there is a substantial doubt that we may continue as a going
concern. If we do not continue as a going concern, there will be no way for
investors to recoup their investments.
We Are a Business With No Revenues to Date and Cannot Commence Clinical Trials
Unless We Can Overcome the Many Obstacles We Face.
We are a development-stage company with no prior business operations and no
revenues. We are presently engaged in the early stage development of certain
potential drugs. Unless we are able to secure adequate funding, we may not be
able to successfully develop and market our potential drugs and our business
will most likely fail. Because of our limited operating history, you may not
have adequate information on which you may base an evaluation of our business
and prospects. To date, our efforts have been allocated primarily to the
following: aggressively patenting our technology; organizational activities;
developing a business plan; obtaining interim funding; acquiring technology and
working toward the ultimate successful development of our potential drugs. In
order to establish ourselves in the bio-pharmaceutical market, we are dependent
upon funding by sales of our securities and the successful development and
marketing of our potential drugs. As a research and development company, we face
increased risks, uncertainties, difficulties and expenses such that an
investment in our common stock may be worthless if our business fails. We have a
history of losses and a large accumulated deficit and we expect future losses
that may cause our stock price to lose its value.
8
For the fiscal periods May 31, 2007 and May 31, 2006, we incurred net losses of
$2,610,070 and $2,053,944, respectively. The losses since our development stage
(October 23, 2003 through May 31, 2007) were $5,779,141. CytoDyn of New Mexico
incurred approximately $1.3 Million in net losses before it assigned its license
to us. We expect to lose more money as we spend additional capital to develop
and market our technologies and establish our infrastructure and organization to
support anticipated operations. We cannot be certain whether we will ever earn a
significant amount of revenues or profit, or, if we do, that we will be able to
continue earning such revenues or profit. Also, the current economic weakness
may limit our ability to develop and ultimately market our technologies. Any of
these factors could cause our stock price to decline and result in you losing a
portion or all of your investment.
Risks Related to Our Business
Our Inability to Retain and Attract Key Personnel Could Cause Our Business to
Fail.
We believe that our future success will depend on the abilities and continued
service of our senior management and executive officers, particularly our
president and CEO and those persons involved in the research and development of
our potential drugs. If we are unable to retain the services of these persons,
or if we are unable to attract additional qualified employees, researchers and
consultants, we may be unable to successfully finalize and eventually market our
drugs being developed, which would have a material adverse effect on our
business.
Our Research and Development Efforts May Not Result In Commercially Viable
Potential Drugs, Which Could Result in a Loss of Investment.
Our technologies are in the development stage. Further research and development
efforts will be required to develop these technologies to the point where they
can be incorporated into commercially viable or saleable potential drugs. We
cannot assure you, however, that this program will be accomplished in the order
or in the time frame set forth. We reserve the right to modify the research and
development program. We may not succeed in developing commercially viable
potential drugs from our technologies. If not, our ability to generate revenues
from our technologies will be severely limited. This would result in the loss of
all or part of your investment.
Our Potential Drugs Have Not Yet Been Extensively Tested On Humans, and Their
Efficacy Is Not Yet Known. If We Cannot Develop Effective Potential Drugs, Our
Business Will Fail.
There are numerous legal, scientific and regulatory risks that may prevent us
from carrying out our project to develop the drugs in our pipeline. Investment
in CytoDyn must be considered highly speculative because, among other reasons,
only limited testing on humans has been conducted. It is possible that our
proposed therapies will not be effective for treating the indications or
diseases or that they will have adverse side effects on human subjects which
will prohibit or undermine their intended use. Consequently, investment in our
securities involves a high degree of risk and only those persons of adequate
financial means, who have no need for liquidity with respect to the investment,
and can bear the risk of losing all or part of the investment, are suitable for
such investment.
9
We Are Dependent Upon Patents CytoDyn and AITI Have Licensed. The Failure to
Maintain These Licenses May Cause Our Business to Fail.
We currently have the right to use patent and proprietary rights which are
material to the development of our HIV treatments, by assignment of a license
from Allen D. Allen, the owner of the patents. The license requires us to defend
the licensed patents from infringement. If we were to fail to defend or maintain
patents or other protections of the licensed patents and proprietary technology,
it may have a materially adverse effect on our ability to develop our potential
drugs.
AITI currently has the right to develop and market the plasmid-DNA technology
developed at the University of Massachusetts to protect human subjects from the
flu.
If we fail to make progress payments or to defend our rights, it may have a
materially adverse effect on our ability to develop our potential drugs.
We May Not Have the Opportunity to Enter Into Strategic Partnerships For the
Commercialization of Our Technologies, Which Could Have a Severe Negative Impact
on Our Ability to Market Our Potential Drugs.
We intend to enter into strategic partnerships or other relationships with
established biomedical, pharmaceutical and biopharmaceutical companies to obtain
the necessary regulatory approvals and to undertake the manufacturing and
marketing efforts required for commercializing our potential drugs. However, we
do not have commitments at this time from any potential partners. If we are
unable to enter into any new partnerships, then we may be unable to commence the
commercialization of our potential drugs.
A Market For Our Potential Drugs May Not Develop, Causing a Failure of Our
Business.
Our future success will depend, in part, on the market acceptance, and the
timing of such acceptance, of new potential drugs or technologies that may be
developed or acquired. To achieve market acceptance, we must make substantial
marketing efforts and spend significant funds to inform potential customers and
the public of the perceived benefits of these potential drugs. We currently have
limited evidence on which to evaluate the market reaction to potential drugs
that may be developed, and there can be no assurance that any potential drugs
will obtain market acceptance and fill the market need that is perceived to
exist.
10
Our Business Depends on Our Ability to Protect Our Proprietary Technology. If We
Cannot Protect It, Our Business May Fail.
We have entered, and will continue to enter, into confidentiality agreements
with our employees, consultants, advisors and collaborators. Corinne Allen our
Vice President of Business Development and Wellington Ewen our Chief Financial
Officer, have entered into Proprietary Information and Inventions Agreements in
order to protect our proprietary information. Allen D. Allen as the Inventor of
the technology is bound under the Patent License Agreement licensed to CytoDyn.
However, these parties may not honor these agreements and we may not be able to
successfully protect our rights to unpatented trade secrets and know-how. Others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and know-how. Although
we encourage and expect all of our employees to abide by any confidentiality
agreement with a prior employer, competing companies may allege trade secret
violations and similar claims against us. We may collaborate with universities
and governmental research organizations which, as a result, may acquire part of
the rights to any inventions or technical information derived from collaboration
with them. To facilitate development and commercialization of a proprietary
technology base, we may need to obtain licenses to patents or other proprietary
rights from other parties. Obtaining and maintaining such licenses may require
the payment of substantial amounts. In addition, if we are unable to obtain
these types of licenses, our product development and commercialization efforts
may be delayed or precluded. We may incur substantial costs and be required to
expend substantial resources in asserting or protecting our intellectual
property rights, or in defending suits against us related to intellectual
property rights. Disputes regarding intellectual property rights could
substantially delay product development or commercialization activities.
Disputes regarding intellectual property rights might include state, federal or
foreign court litigation as well as patent interference, patent reexamination,
patent reissue, or trademark opposition proceedings in the United States Patent
and Trademark Office. Opposition or revocation proceedings could be instituted
in a foreign patent office. An adverse decision in any proceeding regarding
intellectual property rights could result in the loss or limitation of our
rights to a patent, an invention or trademark.
We Will Engage Contract Manufacturers to Produce Our Potential Drugs, Including
Our Potential HIV Drugs.
Our dependence on third party manufacturers creates a risk that the manufacturer
will become unable to perform work for us, or perform it properly, or the
manufacturer may go out of business. This would create a substantial delay in
the development of our products, which would have a materially adverse effect on
our business.
As a Producer of Potential Drugs, We May Be Exposed to Product Liability and
Recall Risks for Which Insurance Coverage Is Expensive, Limited and Potentially
Inadequate
We produce potential drugs, which, if approved for use by humans, subjects us to
risks of product liability claims or product recalls, particularly in the event
of false positive or false negative reports. The drug platform we are developing
is also subject to product liability claims with respect to safety of the
product, especially with regard to potential side effects. At the moment we have
11
no product liability insurance, but even if we are successful in obtaining
insurance for our potential drugs, a product recall or a successful product
liability claim or claims that exceed our insurance coverage could have a
material adverse effect on us. Product liability insurance is expensive. In the
future we may not be able to obtain coverage on acceptable terms, if at all.
Moreover, our insurance coverage may not adequately protect us from liability
that we incur in connection with clinical trials or sales of our potential
drugs.
Our Management Has Substantial Voting Control Over All Matters.
As of August, 2007, Allen D. Allen our president holds 1,881,415 and Corinne
Allen, our Vice President, holds 1,575,521 of our 11,297,264 shares of common
stock outstanding. This gives them significant influence and approximately 30.5%
voting control over all matters submitted to a vote of the shareholders.
Technological Changes May Render Our Potential Drugs Obsolete.
The biopharmaceutical industry is subject to rapid and significant technological
change, and our ability to compete is dependent in large part on our ability
continually to enhance and improve our potential drugs and technologies. In
order to do so, we must effectively utilize and expand our research and
development capabilities, and, once developed, expeditiously convert new
technology into potential drugs and processes which can be commercialized. Our
competitors may succeed in developing technologies, potential drugs and
processes that render our processes and potential drugs obsolete. Certain
companies have filed applications for, or have been issued patents and may
obtain additional patents and proprietary rights relating to, potential drugs or
processes competitive with or otherwise related to those of CytoDyn. The scope
and viability of these patents, the extent to which we may be required to obtain
licenses under these patents or under other proprietary rights and the cost and
availability of licenses are unknown, but these factors may limit our ability to
market potential drugs.
It Is Uncertain If Healthcare Facilities, Providers and Insurance Companies Will
Approve Benefits or Reimbursement for Their Members for Our Potential Drugs,
Thus Rendering Them More Expensive and More Difficult to Market.
The industry is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operations of
healthcare industry participants. During the past several years, state and
federal government regulation of reimbursement rates and capital expenditures in
the United States has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain programs to
increase governmental involvement in healthcare, lower Medicare and Medicaid
reimbursement rates or otherwise change the operating environment in the
healthcare industry. Healthcare industry participants may react to these
proposals by curtailing or deferring use of new treatments for disease,
including treatments utilizing the biologics that CytoDyn is developing.
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We Need to Raise $3,250,000. If less than the Minimum Amount of our Current
Offering is Raised, We May Not Be Able to Continue Our Business.
In order to fund the Phase I/II clinical trial of our pre-flu vaccine, we must
raise $3,250,000. We need to raise at least $250,000 in order to continue our
business. The amount needed to fund other clinical trials cannot be known at
this time, but substantial funds are needed to move drugs along the product
development track. CytoDyn does not necessarily intend to become the final
manufacturer of its products since, if and when it is in our shareholder's
interests, the Company may be sold to or merged with a larger company. If a
foreign or domestic governmental or other public entity funds some or all of our
clinical trials, the design and/or execution may be less than optimal and the
Company could wind up having to commit to manufacturing costs in the U.S. and
overseas which could adversely affect the cost of doing business.
We May Be Exposed to Liability Claims, and Insurance Against These Claims May
Not Be Sufficient to Cover All Claims.
The design, development, and testing of our products involve an inherent risk of
liability claims by third parties. We currently maintain general liability
insurance with per occurrence coverage of $2,000,000 and aggregate coverage of
$4,000,000. The coverage limits of our insurance policies, may be inadequate to
protect us from any liabilities we might incur in connection with design,
development, and testing of our products. A successful claim or claims brought
against us in excess of our insurance coverage could materially harm our
business and financial condition.
Risks Related to Legal Proceedings
Management's Responsibility Is to Protect Our Patents, Trademarks and
Technology. This Includes Legal Expenses to Oppose Attempts to Steal, Convert or
Misappropriate Our Property.
We have been targeted in the past and have had to spend significant legal fees
to recover our property. Please see disclosures under "Legal Proceedings" below.
If we are unsuccessful in opposing efforts to steal, convert or misappropriate
our property, this could have a materially adverse effect on our business.
Risks Related to Regulatory Approvals and Clearances
The Time Needed to Obtain Regulatory Approvals and Respond to Changes In
Regulatory Requirements Could Cause Our Business to Fail.
On October 1, 2003, the Food and Drug Administration (FDA) transferred certain
product oversight responsibilities from the Center for Biologics Evaluation and
Research (CBER) to the Center for Drug Evaluation and Research (CDER). The
review and approval of Cytolin(R) is now under the jurisdiction of the Division
of Monoclonal Antibodies in the CDER Office of Pharmaceutical Science: Office of
Biotechnology Products.
13
Under current law, all new drugs and biologic products need clinical proof that
they are safe and effective before they can be approved for marketing in the
United States. The approval of our drugs will be subject to submission of a
Licensing Application, submitted to the FDA. A license application is the
vehicle through which CytoDyn will formally propose that the FDA approve our
products for sale in the United States. To obtain this authorization, CytoDyn
will submit for review, as contained in the application, nonclinical (in vitro
and animal) and clinical (human) test data and analyses, drug information, and
descriptions of manufacturing procedures. The submission of a licensing
application to the FDA does not guarantee that an approval or clearance to
market a product will be received.
This process could be costly and lengthy. There may be delays that increase our
costs to develop new potential drugs as well as the risk that we will not
succeed in introducing or selling them in the United States or other countries.
Newly promulgated or changed regulations could also require us to undergo
additional trials or procedures, or could make it impractical or impossible for
us to market our potential drugs for certain uses, in certain markets, or at
all.
Failure to comply with FDA or similar international regulatory bodies or other
requirements may require us to suspend production of our potential drugs which
could result in further losses or inability to produce revenues.
Risks Related to Our Common Stock
Our stock is thinly traded and highly volatile, which may make it difficult or
impossible for investors to sell their shares, when and if a registration
statement covering the Shares to be issued in our Offering is approved by the
SEC or when and if an exemption from registration is available. Our common stock
is a "penny stock" as defined in the Exchange Act, which are traded in the
over-the-counter market on the pink sheets. As a result, investors may find it
more difficult to dispose of or obtain accurate quotations as to the price of
the shares of the common stock being issued hereby. In addition, the "penny
stock" rules adopted by the Securities Exchange Commission under the Exchange
Act subject the sale of the shares of our common stock to certain regulations
which impose sales practice requirements on broker/dealers. For example,
brokers/dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in these documents are the following:
o the bid and offer price quotes in and for the "penny stock", and the
number of shares to which the quoted prices apply;
o the brokerage firm's compensation for the trade;
14
o the compensation received by the brokerage firm's sales person for the
trade;
o the brokerage firm must send the investor a monthly account statement
that gives an estimate of the value of each "penny stock" in the
investor's account; and
o a written statement of the investor's financial situation and investment
goals.
Legal remedies that may be available to you as an investor in "penny stocks" are
as follows:
o if "penny stock" is sold to you in violation of your rights listed
above, or other federal or state securities laws, you may be able to
cancel your purchase and get your money back;
o if the stocks are sold in a fraudulent manner, you may be able to sue
the persons and firms that committed the fraud for damages; and
o if you have signed an arbitration agreement, however, you may have to
pursue your claim through arbitration.
Item 2. Description of Property
Our principal offices are located at 227 E. Palace Avenue, Suite M, Santa Fe,
New Mexico 87501. We lease this 750 square foot office space on a annual basis
with ability to renew for $940 per month.
Item 3. Legal Proceedings
Amerimmune Inc. vs. CytoDyn of New Mexico, Inc. - Cross Complaint
-----------------------------------------------------------------
In April 2004, CytoDyn filed an action in Los Angeles Superior Court against the
directors of Amerimmune Pharmaceuticals for failing to supervise management.
This action was mandated by federal case law in that CytoDyn owns the trademark
"Cytolin." When the CEO of Amerimmune attempted to throw Amerimmune into
bankruptcy, thereby ceasing its operations, Amerimmune was no longer operating
and the issue became moot. In the meantime, Amerimmune had moved to Ventura
County and CytoDyn recovered its property in the Ventura County court.
In connection with that action, some directors of Amerimmune were awarded
attorneys' fees in the amount of approximately $150,000. We have appealed the
Court's order. This judgment has been accrued on the financial statements. The
tentative ruling of the appellate court was to reverse the award of attorneys'
fees. The attorney for the insurance company has asked for, and was granted, the
right to be heard one more time.
Maya, LLC v. CytoDyn, et al
----------------------------
Superior Court of Los Angeles, Van Nuys Case # EC041590
Maya, LLC filed an action in Van Nuys, California alleging a number of
complaints against CytoDyn and two of its officers, many of which have been
dismissed on demurrer without leave to amend. The matter is under appeal and a
trial date has not been set. The Company's counsel cannot estimate the
probability or remoteness of a result adverse to the Company with respect to the
outcome of this case.
15
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
-------------------------------------------------------------------
Pharmaceuticvals Inc. v Biovest International Inc.
--------------------------------------------------
The Company and Allen filed a complaint against Amerimmune, Inc. and Amerimmune
Pharmaceuticals, Inc. (together, "Amerimmune") to domesticate an October 4, 2004
judgement that the Company and Allen obtained against Amerimmune in the Superior
Court of California for Ventura County, case No. SC-039250. Futher, the Company
and Allen named Biovest International Inc ("Biovest") as a trustee-defendant
because Biovest possesses a Cell-Bank, the rights to which the Company and Allen
own.
Maya LLC., ("Maya"), Amerimmune's purported successor-in-interest, successfully
moved to intervene. In its Complaint-in-Intervention, Maya asserted that it, and
not the Company and Allen, owns the Cell-Bank. The Company and Allen have denied
that Maya has a superior right to the Cell-Bank.
The Company, Allen and Maya are engaged in discovery as to who has a superior
right the Cell Bank. Recently, the Company and Allen deposed Maya and its
principal, Rex Lewis ("Lewis"). The depositions are not yet completed. Counsel
believes the Company's claim to the Cell-Bank is strong.
Other Patent/Legal Issues:
--------------------------
Symbion International Vs. Maya LLC et al.
-----------------------------------------
CytoDyn has recently discovered that former employees of ex-licensee, Amerimmune
Inc., are attempting to convert technology previously adjudicated by the
Superior Court of California, County of Ventura to belong to Symbion Research
International, LLC. The technology involves LFA-1 Alpha subunit antibodies and
the use of the antibodies to treat HIV-infected patients. Symbion Research
International is acting to remedy the situation having brought action in the
U.S. District Court in Nevada. A motion for summary judgement is pending on
patent ownership based on the perjured declarations Lewis, et al., and other
factors. A jury trial on inventorship is being prosecuted but has not been set.
Background - CytoDyn granted a license in its patented technology to Amerimmune
Inc., which represented that it would assist in obtaining FDA approval of
Cytolin(R). Amerimmune in turn contracted with Symbion Research International,
LLC to assist with the clinical trials of Cytolin(R). Symbion sued Amerimmune in
2003 in Superior Court of California, County of Ventura asserting breach for
non-payment of services performed. Symbion prevailed in that suit and the
Ventura Court awarded title to all data and additional intellectual property
developed by Symbion during its relationship with Amerimmune to Symbion. This
additional intellectual property is the subject matter of the patent
applications filed by the former employees of ex-licensee Amerimmune. Mr. Allen
and CytoDyn of New Mexico, Inc were awarded the license back from Amerimmune in
October 2004 by the Superior Court of California, County of Ventura.
16
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of CytoDyn, Inc., a Colorado Corporation. was
held on Sunday April 15, 2007 at 10:00 a.m., local time, at the Albuquerque
Marriott Pyramid North, 5151 San Francisco Road NE, Albuquerque, NM 87109 for
the following purposes:
1. To elect the five Board of Directors below to serve a one year term
until the next Annual Meeting.
The name of the directors elected to the Board of Directors at the Annual
Meeting, age as of the Record Date, and certain information are set forth below.
Name Age Principal Occupation
------------------ --- ------------------------------------
Allen D. Allen 70 Chief Executive Officer, CytoDyn
Corinne E. Allen 39 Vice President Business Development,
Treasurer, CytoDyn
Gregory A. Gould 41 CFO, SeraCare Life Sciences, Inc.
Ronald J. Tropp 63 Corporate Attorney
Wellington A. Ewen 66 Chief Financial Officer, CytoDyn
2. To ratify the appointment of Pender Newkirk & Company, LLP as auditors
for the year ending May 31, 2007.
3. To approve the terms of a private placement of $3.25 million for six
million five hundred thousand (6,500,000) shares of our common stock at
a price of $.50 per share and the terms of our agreement with placement
agent Capital Growth Resources for this private placement.
4. To Amend the 2005 Stock Incentive Plan by increasing the number of
shares of our common stock available for grant by one million
(1,000,000) in order to attract and retain key personnel.
The number of votes for the above proposals was 6,605,319 for the election of
the directors (58%), 6,562,749 for appointment of auditors and approving the
private placement or 58% of the total vote. 42,370 votes abstained from the
proposal for new auditors and for approval of the private placement . 6,356
votes against proposal for the private placement. Total shares outstanding at
February 15, 2007, the record date, was 11,297,264.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Trading Information
Because of a medical emergency and other unforeseen circumstances, CytoDyn, Inc.
(Pink Sheets: CYDY.PK) was late filing its 10-QSB for the first time. We expect
to be available for quotations again on the Over-The-Counter-Bulletin Board
(OTCCBB) in the next couple of months.
17
As of August 29, 2007 we had approximately 300 holders of our common stock, plus
what is held in street name which we cannot determine.
Dividends.
Holders of our common stock are entitled to receive dividends as may be declared
from time to time by our Board of Directors. We have not paid any cash dividends
on our common stock and do not anticipate paying any in the foreseeable future.
Management's current policy is to retain earnings, if any, for use in CytoDyn's
operations and for expansion of the business.
Price Range of Outstanding Common Stock
Year Ended May 31, 2007
-------------------------------------------------
High Low
-------- --------
First Quarter Ended August 31, 2006 2.78 1.75
------------------------------------------------- -------- --------
Second Quarter Ended November 30, 2006 1.65 .80
------------------------------------------------- -------- --------
Third Quarter Ended February 28, 2007 1.00 .51
------------------------------------------------- -------- --------
Fourth Quarter Ended May 31, 2007 .85 .51
------------------------------------------------- -------- --------
18
Recent Sales of Unregistered Securities
Unregistered Sales of Equity and Use of Proceeds
From January 2006 through May 31, 2007 we raised $602,000 through convertible
promissory notes at a conversion price of $1.25 with warrants attached and
exercisable at $2.50 per share. $587,000 of the notes were converted into
469,600 shares. The remaining notes payable amount is $15,000. To date, none of
the warrants have been exercised.
On July 18, 2006 the company issued 2,000,000 shares of unregistered restricted
common stock for 1,000 shares of AITI common stock (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.
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 of $52,500 and $15,000 in expense associated with
the license agreement.
Purchases of Equity Securities
None.
Item 6. Management's Discussion and Analysis or Plan of Operation
During the next 12 months, our objectives are
o to mount and, if possible, complete a Phase I study of our trivalent
DNA-based, pre-flu vaccine. This study will be designed to evaluate
safety as well as two potential indications: first, to help protect
those who are at high risk of life-threatening complications from the
seasonal flu, and second to provide a potential means of protecting
19
human populations from the bird flu should a pandemic occur, especially
if there is an insufficient supply of inactivated vaccine. The former
will be evaluated directly, while the latter would be implied, in both
cases, using the standard and accepted surrogate markers for humoral
immunity;
o to meet with the FDA and seek approval to continue clinical trials of
Cytolin(R);
o to continue our efforts to protect our technology by obtaining
additional patents in The United Kingdom, the European Union and Hong
Kong; and by aggressively opposing efforts to usurp or abscond with our
AIDS drug resulting from its large potential value.
o to raise approximately $2 to $8 million in additional funds needed to
support our research and development efforts, the clinical trials
relating to Cytolin(R)and our general and administrative expenses, while
keeping dilution to a minimum if possible; and
o to explore joint venture arrangements for, or in combination with, other
possible pharmaceutical products.
Cash Requirements
We need to raise additional working capital in order to obtain our objectives as
discussed above. If less than $250,000 is raised we may not be able to continue
our business. In order to fund the Phase I/II clinical trial of our pre-flu
vaccine, we must raise $3,250,000. The amount needed to fund other clinical
trials cannot be known at this time, but substantial funds are needed to move
drugs along the product development track. CytoDyn does not necessarily intend
to become the final manufacturer of its products since, if and when it is in our
shareholder's interests, we may be sold to or merged with a larger company. If a
foreign or domestic governmental or other public entity funds we could wind up
having to commit to manufacturing costs in the U.S. and overseas which could
adversely affect the cost of doing business.
Employees
We have three full time employees, two part-time employees, and several
consultants engaged in management and product development. CytoDyn intends to
hire additional full time and part time employees if raise additional working
capital. There can be no assurance we will be able to locate or secure suitable
employees upon acceptable terms in the future.
Plant and Equipment
We do not anticipate purchasing any significant property or equipment in the
next twelve months as we have a Contract Research Organization as well as other
consultants we use and outsource to conduct the clinical trials.
20
Competition
The pharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition. CytoDyn will compete with other more
established biotechnology companies with greater financial resources than us.
Our potential competitors include entities that develop and produce therapeutic
agents for treatment of human and animal disease. These include numerous public
and private academic and research organizations and pharmaceutical and
biotechnology companies pursuing production of, among other things, biologics
from cell cultures, genetically engineered drugs and natural and chemically
synthesized drugs. Almost all of these potential competitors have substantially
greater capital resources, research and development capabilities, manufacturing
and marketing resources and experience than CytoDyn. Our competitors may succeed
in developing potential drugs or processes that are more effective or less
costly than any that may be developed by CytoDyn, or that gain regulatory
approval prior to our potential drugs. Worldwide, there are many antiviral drugs
for treating HIV and AIDS. In seeking to manufacture, distribute and market the
various potential drugs we intend to develop, we face competition from
established pharmaceutical companies. All of our potential competitors in this
field have considerably greater financial and personnel resources than we
possess. Also, based on the premise that HIV patients lose their CD4 cells
because of the way some white blood cells stick together in people infected with
the virus, Johns Hopkins Medical School owns patents on specific antibodies
which were licensed or acquired by Genentech Corporation and are believed to
prevent the clumping of white blood cells, which is known as syncytia. It is
possible that these antibodies may be licensed by Genentech and marketed in
competition with Cytolin(R). CytoDyn also expects that the number of its
competitors and potential competitors will increase as more potential drugs
receive commercial marketing approvals from the FDA or analogous foreign
regulatory agencies. Any of these competitors may be more successful than
CytoDyn in manufacturing, marketing and distributing its potential drugs.
There are many other vaccine related products in development by the major
pharmaceutical companies. Although AITI has the patents for using its
DNA-plasmids to protect human subjects from influenza, other companies may
produce a superior product.
There can be no assurances that CytoDyn will be able to successfully
commercialize any of the products in its pipeline.
Off- Balance Sheet Arrangements - The Company does not have any off-Balance
sheet transactions for the periods ended May 31, 2007 and 2006.
21
Item 7. Financial Statements
The financial statements and supplementary data required by this item are
submitted in a separate section beginning on page F-1 of this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On October 3, 2006 our auditors, Cordovano and Honeck, LLP. were dismissed by
the our audit committee.
On August 29, 2006, Cordovano and Honeck, LLP. notified us that they believed a
commitment or contingency that was previously reported on our Form 10QSB for the
quarter ended February 29, 2006 should be recharacterized and reflected in the
our audited financial statements for the year ended May 31, 2006. We then
amended and filed our 10-KSB on September 1, 2006 to include a $150,000
contingency liability for a legal judgement that is on appeal. Included in the
amended Form 10-KSB was a signed audit letter from the auditors stating our
financial statements can now be relied upon for the fiscal year ended May 31,
2006.
In April 2004, CytoDyn filed an action in Los Angeles Superior Court against the
directors of Amerimmune Pharmaceuticals for failing to supervise management.
This action was mandated by federal case law in that CytoDyn owns the trademark
"Cytolin." When the CEO of Amerimmune attempted to throw Amerimmune into
bankruptcy, thereby ceasing its operations, Amerimmune was no longer operating
and the issue became moot. In the meantime, Amerimmune had moved to Ventura
County and CytoDyn recovered its property in the Ventura County court.
In connection with that action, some directors of Amerimmune were awarded by the
attorneys' fees in the amount of approximately $150,000. We have appealed the
Court's order. The matter has not yet been briefed. Management believes we have
a strong basis to appeal. In any event, this judgment has been accrued on the
financial statements accompanying the amended Form 10-KSB, which was filed on
September 1, 2006.
Our former auditors did provide a letter that was attached as an Exhibit
concurring with the disclosures filed on the amended form 10-KSB.
Our authorized officers did discuss the matters disclosed on an 8-K report and
amended Form 10-KSB that was filed September 1, 2006 with the independent
auditor from Cordovano & Honeck. The discussions led to the disclosures as filed
on the 8-K and amended Form 10-KSB. The authorized officers also communicated
the matters disclosed with the audit committee. The officers and audit committee
reviewed the disclosures as filed with the Commission and are fully aware of the
matters that were disclosed on the amended form 10-KSB. The officers, audit
committee members and independent auditor are all in agreement with the
disclosures filed regarding the recharacterization of a $150,000 contingency
liability.
22
This is the only difference that our management and Cordovano and Honeck, our
former auditors, had in the last two fiscal years. The auditor's reports issued
for the last two fiscal years were unqualified opinions with a going concern.
The decision to dismiss Cordovano & Honeck was recommended by our audit
committee. The only disagreements management had with our former auditors in
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure that if not resolved would have caused the
auditor to make reference to the subject matter of the disagreement with their
report was the situation described above.
We have authorized our former accountant to respond fully to the inquiries of
the successor accountant concerning the subject matter of the disagreement or
event without limitation.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of May 31, 2007, to ensure that information required to
be disclosed by us in the reports filed or submitted by us under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commission's rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that as of May 31,
2007, our disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weakness described below.
A material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. In connection with their audit of
our consolidated financial statements for the year ended May 31, 2007, Pender
Newkirk & Company LLP, our independent registered public accounting firm
("Pender"), advised management and our audit committee of the following matter
that Pender considered to be a material weakness: The organization of our
accounting department did not provide us with the appropriate resources and
adequate technical skills to accurately account for and disclose our activities.
Pender stated that this matter was evidenced by the following issues encountered
in connection with their audit of the consolidated financial statements for the
period ended May 31, 2007: (i) our closing procedures were not adequate and
resulted in significant accounting adjustments, and (ii) we were unable to
23
adequately perform the financial reporting process as evidenced by a significant
number of management comments related to our consolidated financial statements
and related disclosures for the period ended May 31, 2007. In addition to issues
(i) and (ii) above, which Pender restated as issues encountered in connection
with its audit of our consolidated financial statements for the year ended May
31, 2007, Pender stated that this matter was further evidenced by inadequate
supervision within our accounting department which contributed to our inability
to provide accurate accounting for and disclosure of certain transactions.
As a result of the identification of this matter by Pender, management
evaluated, with consultation from our audit committee, in the fourth quarter of
2007 and as of May 31, 2007, the impact of our lack of appropriate resources and
adequate technical skills in our accounting department and concluded, that the
control deficiency that resulted in our lack of appropriate resources and
adequate technical skills in our accounting department represented a material
weakness and concluded that, as of May 31, 2007, our disclosure controls and
procedures were not effective at the reasonable assurance level.
Historically, we have not had a formal system of controls and procedures due to
the fact that we were small in size and had no operations. Currently,
management, with the oversight of the Chief Executive Officer and Chief
Financial Officer, is devoting considerable effort to develop and implement a
formal system of disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
To initially address this material weakness, management performed additional
analyses and other procedures to ensure that the financial statements included
herein fairly present, in all material respects, our financial position, results
of operations and cash flows for the periods presented.
Remediation of Material Weakness
To remediate the material weakness in our disclosure controls and procedures
identified above, we have done or intend to do the following, in the periods
specified below:
In the next fiscal year, we will develop plans to alter the current organization
of our accounting department to hire additional consultant(s) to assist in our
financial reporting processes, with expertise in public company financial
reporting compliance.
In the next fiscal year 2008, we will seek guidance from financial consultants
who are certified public accountants with the requisite background and
experience to assist us in identifying and evaluating complex accounting and
reporting matters. In addition, during these periods, we are in the process of
implementing new internal processes for identifying and disclosing both routine
and non-routine transactions and for researching and determining proper
accounting treatment for those transactions. Management is unsure, at the time
24
of the filing of this report, when the actions described above will remediate
the material weakness also described above. Although management intends to hire
one or more additional accounting supervisory support staff members, future
additional funds will be necessary to support the staff. Until we hire the
necessary additional accounting supervisory support staff members, management
may hire outside consultants to assist us in satisfying our financial reporting
obligations.
Management is unable, however, to estimate our expenditures related to fees paid
or that may be paid in the future to financial consultants in connection with
their guidance in identifying and evaluating complex accounting and reporting
matters. Management is also unable to estimate our expenditures related to the
development of new internal processes for identifying and disclosing both
routine and non-routine transactions and for researching and determining proper
accounting treatment for those transactions. Management is also unable to
estimate our expenditures related to the hiring of other outside consultants to
assist us in satisfying our financial reporting obligations. In addition,
management is unable to estimate our expenditures related to higher fees to be
paid to our independent auditors in connection with their review of this
remediation. to materially affect, our internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Item 8B. Other Information
(b)
--------------------------------------------------------------------------------
Changes in Internal Control over Financial Reporting
The changes noted above, specifically, the changes relating to our (i) engaging
of financial consultants who are certified public accountants to assist us in
identifying and evaluating complex accounting and reporting matters, (ii) new
internal processes for identifying and disclosing both routine and non-routine
transactions and for researching and determining proper accounting treatment for
those transactions, and (iii) assignment of individuals to perform these
processes and provision to those individuals of technical and other resources to
help ensure the proper application of accounting principles and the timely and
appropriate disclosure of routine and non-routine transactions, are the only
changes during our most recently completed fiscal year that have materially
affected or are reasonably likely to effect the financial statements.
25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Allen D. Allen 70 Chairman of the Board,
President, Chief Executive
Officer
Corinne Allen, CPA 39 Director, Vice President
Ronald J. Tropp, Esq. 64 Director
Gregory Gould 41 Director
Wellington Ewen 68 Chief Financial Officer, Director
Stacia Andrews 31 Secretary
Allen D. Allen. Mr. Allen has been our Chairman of our Board and our President
and Chief Executive Officer since October, 2003. Before joining CytoDyn, he was
the Chairman of the Board of Directors and Chief Executive Officer of CytoDyn of
New Mexico, Inc., since its inception in 1994. From 1990 to 1994 he was a
research associate with Olive View-UCLA Medical Center, where he collaborated
and published with various medical professors original research on HIV,
dermatology and general immunology and was the co-investigator on an autologous
vaccine study. From 1986 to 1990 Mr. Allen was director of scientific affairs,
Center for Viral Diseases, Northridge, California, where he conducted and
published original research on a large cohort of patients with complex
constellations of neuroimmunologic complaints. From 1971 to 1986 he was
president of Algorithms, Incorporated where he conducted and published original
research in the areas of artificial intelligence, perception, man and machine
systems and societal engineering. Over the past thirty years, he has published
numerous papers in the peer review science and medical journals. He has also
served as an investigator on clinical research sponsored by major pharmaceutical
companies, such as Ortho Biotech, Johnson & Johnson, and Sanofi-Winthrop. Mr.
Allen invented and patented the family of HIV/AIDS therapies licensed to
CytoDyn. He is a member of the American Physical Society and the American
Federation of Scientists, a life member of the Institute of Electrical and
Electronics Engineers, and a founding member of the Editorial Board of Physics
Essays. Mr. Allen received an Associates of Arts degree from the University of
California at Berkeley in 1957 and attended the University of California at Los
Angeles from 1957 to 1959. In 1953 he received a national ARS Student Award in
aeronautics from the American Rocket Society (now the Institute of Aeronautics
and Astronautics). Mr. Allen is the father of Corinne E. Allen, our Vice
President of Business Development.
Wellington A. Ewen, CPA, MBA. Mr. Ewen, has been our Chief Financial Officer
since May 6, 2004 and our Director since January 31, 2006. He also serves on our
Audit Committee. From 1988 until 2000, Mr. Ewen was owner of Wellington Ewen &
Associates in Malibu, California, which represented many clients as financial
and accounting consultants. He also served as financial and accounting officer
for several development stage pharmaceutical companies, including Entropin, Inc.
from April 1998 to June, 2000. From February, 1999 until his resignation in
2000, he was the Chief Financial Officer of Amerimmune, Inc. From January, 2000
to July, 2000, he also served as a manager at PriceWaterHouseCoopers in Los
Angeles, California. Mr. Ewen is currently licensed as a CPA in Oregon. He
received his Bachelor of Science in 1963 and Master of Business Administration
from Cornell University in 1964.
26
Corinne Allen, CPA. Mrs. Pace has been a Director and Treasurer since October
2003, and was until May 2004, our Chief Financial Officer and until September
2006, our Secretary. In May 2004, Mrs. Pace became the Vice President of
Business Development. From April 1995 to October 2003, she served as Secretary
and Treasurer of CytoDyn of New Mexico, Inc. where she was also a Director from
June, 1994 to October 2003. Mrs. Pace is a licensed Certified Public Accountant.
From 1999 to 2003, Mrs. Pace was employed as a Senior Manager at Deloitte &
Touche, and, from 1992 to 1998 was a CPA at Hallquist Jones P.C. She has over 17
years experience in the accounting industry. Mrs. Pace received a B.S. in
Business Administration from California State University Northridge with a
specialty in Accounting Theory and Practice in 1992. She has been a Certified
Public Accountant since January 1997. Mrs. Pace is the daughter of Allen D.
Allen.
Gregory A. Gould, CPA. Mr. Gould has been a Director since March 20, 2006 and a
member of our Audit Committee and Compensation Committee since May 15, 2006. Mr.
Gould has worked in the life sciences industry for the past decade as a senior
executive. Until its acquisition by QLT, Inc. for approximately $850 million in
November of 2004, Mr. Gould served as Chief Financial Officer, Treasurer and
Secretary of Atrix Laboratories, Inc. Atrix was a Nasdaq company with over $60
million in annualized revenues and 160 employees in two countries. From February
of 1996 until its acquisition by KRG Capital Partners in October of 2003, Mr.
Gould was the Director of Finance, and then Chief Financial Officer and
Treasurer of Colorado MEDtech, a Nasdaq company with over $77 million in
annualized revenues and 500 employees located in four States. Mr. Gould received
his B.S. in Business Administration from the University of Colorado at Boulder
in 1989. He is a Certified Public Accountant in Colorado and a member of the
Colorado Society of Certified Public Accountants. Mr. Gould is currently the CFO
of Seracare Life Sciences Inc.
Ronald J. Tropp, Esq. Mr. Tropp was a Director of the Company from October, 2003
to January 31, 2006 and was reappointed in January 2007. He served as Director
for CytoDyn of New Mexico, Inc. Mr. Tropp received his Bachelor of Arts degree
from Swarthmore College 1965, and a Juris Doctorate from the University of
Wisconsin - Madison in 1968. He is admitted to the practice of law in New York
and California. He has practiced entertainment and transactional law for over 25
years and has been representing CytoDyn of New Mexico, Inc. since the Fall of
1999. Previously, he served as corporate counsel and director for Pacific Coast
Medical Enterprises, which owned five acute care hospitals in Southern
California.
Stacia Andrews. Mrs. Andrews has been with the Company since January of 2006.
She has been the Secretary since September 2006. Mrs. Andrews received her
Bachelor of Arts Degree from University of Washington.
The directors mentioned above were elected at our Annual Meeting in January 2007
to serve one year terms.
27
Director Compensation
Our Directors receive 25,000 stock options each year for their services as
Directors. The Shares vest 25% immediately and the remaining Shares vest monthly
over twelve months. The Directors receive no cash compensation. Mr. Tropp was
also granted 60,000 options for payment of legal services that he provided to
the company in prior years.
Audit Committee Expert
The Board of Directors has resolved to establish an audit committee composed of
our chief financial officer, Wellington Ewen, CPA, MBA Gregory A. Gould, CPA and
Corinne Allen Pace, CPA. All of the members of the audit committee are
"financial experts" as defined in Regulation S-B Item 401(e)(1)(ii)(2). Mr.
Gould is the only independent member of the Audit Committee at this time. We are
in the process of obtaining a additional independent members to serve on the
Board. The Company's Audit Committee Charter is attached hereto as an Exhibit.
Item 10. Executive Compensation
The following table provides an overview of compensation that CytoDyn, Inc. paid
to the Named Executive Officers for the fiscal years ended May 31, 2007 and
2006.
Summary Compensation Table
Annual
Compensation Long Term Compensation Awards
--------------------- ------ ------------ ----------------------- --------------
Name & Principal Year Salary Securities Underlying All Other
Position Options (# Shares) Compensation
--------------------- ------ ------------ ----------------------- --------------
Allen D. Allen, 2007 150,000(1) 50,000 0
President, Chief 2006 98,000(1) 25,000 0
Executive Officer
--------------------- ------ ------------ ----------------------- --------------
Wellington A. Ewen, 2007 0 50,000 0
Chief Financial 2006 0 50,000 0
Officer (3)
--------------------- ------ ------------ ----------------------- --------------
Corinne Allen, Vice 2007 100,000(2) 50,000 0
President Business 2006 60,000(2) 25,000 0
Development
--------------------- ------ ------------ ----------------------- --------------
1. As of February 2006, Mr. Allen's salary was approved by Board of
Directors for $150,000. He was paid a total of $90,333 as of the end of
the fiscal year 2006, and $ 104,167 for fiscal year 2007 and the
remainder of his salary was accrued.
2. Ms. Allen was approved for salary of $100,000 February 2006, she was
paid $55,833 for the fiscal year 2006 and $78,750 for fiscal year 2007
and the remainder was accrued. In prior years her salary was under
$100,000.
28
3. Mr. Wellington A. Ewen is eligible to receive an option for 50,000
shares that became exercisable at the end of his first year of
employment, exercisable at $0.50 a share, additional options for 50,000
shares that became exercisable at the end of his second year of
employment, exercisable at $1.00 a share, and options for 50,000 shares
that will become exercisable at the end of his third year of employment,
exercisable at $1.50 a share.
Compensation of Directors
Our Directors receive 25,000 stock options each year for their services as
Directors. The Shares vest 25% immediately and the remaining Shares vest monthly
over twelve months. The Directors receive no cash compensation.
Equity Compensation Plan Information
The following table sets forth information regarding outstanding options and
rights and shares reserved for future issuance under our existing equity
compensation plans as of November 30, 2006:
(a) (b) (c)
Weighted- Number of securities
average remaining available
Number of exercise for future issuance
securities to be price of under equity
issued upon exercise outstanding compensation plans
of outstanding options, (excluding securities
options, warrants warrants reflected in column
Plan category and rights and rights (a))
-------------------- ----------- ---------------------
Equity compensation plans
approved by security holders 1,234,122 $.61 - 2.95 1,565,878
Equity compensation plans not
approved by security holders(1) 813,100 $.61 0
Total(2) 2,047,222 $.61 - 2.95 1,565,878
_______________
(1) In May 2004 Mr. Ewen was granted 150,000 options as his only compensation
for being our Chief Financial Officer. The options vested 50,000 as of
May 2005 with exercise price of $.50 per share, 50,000 as of May 2006
with an exercise price of $1.00 per share and 50,000 May 2007 with
exercise price of $1.50 per share. To date no options have been
exercised. 426,000 warrants were issued to a prior financial
representative. 94,500 have been exercised 331,500 remain unexercised.
The exercise price is $.30 per share and the warrants expire in 2010.
481,600 warrants were issued to certain friends and family as part of an
incentive to participate in our bridge loan financing. The warrants
exercise price are $2.50 and they expire in 2010. To date none have been
exercised.
(2) As of May 31, 2007 we had: 11,297,264 shares of common stock issued and
outstanding
29
Option/SAR Grants in Last Fiscal Year
Individual Employee Grants
(a) (b) (c) (d) (e)
% of Total
Options/SARS
Number of Granted to Exercise
Underlying Employees in Price
Options/SARS Fiscal Year per Shares Expiration
Name Granted (#) 5/31/07 ($/Sh) Date
------------------ ------------ ------------ ----------- ----------
Allen D. Allen, CEO 75,000 4% 1.21 - 2.95 3/20/2016
Wellington Ewen, CFO,
Director 250,000 12% 1.00 - 2.68 3/20/2016
Corinne Allen Vice
President, Director 75,000 4% 1.21 - 2.95 3/20/2016
Gregory A Gould, Director 50,000 4% .94 - 2.28 3/20/2016
Ronald J. Tropp, Director 85,000 4.1% 2.28 3/20/2016
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
(a) (b) (c) (d) (e)
# of Securities Value of
Underlying Unexercised
Unexercised In-the-money
Shares Options at FYE Options at
Acquired Value May 31, 2007 (#) FYE ($)(1)
On Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
------------------- ----------- -------- --------------- -------------
Allen D. Allen,
CEO 0 0 49,219/25,781 0/0
Wellington Ewen,
CFO, Director 0 0 230,435/19,565 12,500/0
Corinne Allen, Vice
President, Director 0 0 49,219/25,781 0/0
Gregory A Gould,
Director 0 0 30,469/19,531 0/0
Ronald J. Tropp,
Director 0 0 85,000/0 0/0
_______________
(1) Represents the difference between the fair market value of common stock
underlying the option and the exercise price at FYE May 31, 2006. Fair
market value of the common stock on May 31, 2007 was $.75 per Share.
30
Item 11. Security Ownership of Certain Beneficial Owners and Management And
Related Stockholder Matters
The following table sets forth the beneficial ownership of our common stock as
of May 31, 2007, by (i) each person or entity who is known by us to own
beneficially more than 5% of the outstanding shares of common stock, (ii) each
of our Directors, (iii) each of the Executive Officers named in the Summary
Compensation Table, and (iv) all of our Directors and Executive Officers as a
group.
Amount And Nature Approximate
of Beneficial Percent
Name And Address of Beneficial Owner(1) Ownership(2)(3) Owned
--------------------------------------- ----------------- -----------
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Allen D. Allen 1,930,634 16.41%
Corinne E. Allen 1,624,740 13.81%
Wellington Ewen 230,435 1.96%
Gregory A. Gould 30,469 *
Ronald J. Tropp, Esq. 85,000 *
Stacia C. Andrews 23,594 *
UTEK Corp (not officers or directors) 2,040,000 17.34%
All Officers and Directors as a Group 5,964,872 49.52%
__________________________
* Less than 1%
(1) Unless otherwise indicated, the business address of each Shareholder is c/o
CytoDyn, Inc., 227 E. Palace Ave, Suite M, Santa Fe, New Mexico 87501.
(2) Each Shareholder has sole voting and investment power for the Shares they
beneficially own. This table is based upon information supplied by
Officers, Directors, Principal Shareholders, and Schedules 13D and 13G
filed with the SEC. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. Shares of common stock
subject to options and warrants currently exercisable, or exercisable
within 60 days of March 1, 2007, are deemed outstanding for computing the
ownership percentage of the person holding such options or warrants, but
are not deemed outstanding for computing the ownership percentage of any
other person. Except as otherwise noted, we believe that each of the
Shareholders named in the table have sole voting and investment power with
respect to all Shares of common stock shown as beneficially owned by them,
subject to applicable community property laws.
(3) Includes options that have been granted and vested:
Mr. Gould has options to purchase 50,000 Shares of common stock, 30,469
have vested. None have been exercised to date. 25,000 were Granted in FYE
2006 and 25,000 were Granted in FYE 2007.
31
Mrs. Andrews has options to purchase 35,000 Shares of common stock, 23,594
have vested. None have been exercised to date. 10,000 were Granted in FYE
2006 and 25,000 were Granted in FYE 2007.
Mr. Tropp has options to purchase 85,000 Shares for his prior service on
the Board. All 85,000 Shares have vested. None have been exercised to date.
Mr. Allen has options to purchase 75,000 Shares of common stock. 49,219
have vested. None have been exercised to date. 25,000 were Granted in FYE
2006 and 50,000 were Granted in FYE 2007.
Mr. Ewen has options to purchase 150,000 Shares of common stock in
connection with an employment agreement. Mr. Ewen also received another
75,000 options for his service on the Board of Directors. 230,435 Shares
have vested. None have been exercised to date.
Ms. Allen has options to purchase 75,000 Shares of common stock. 49,219
have vested. None have been exercised to date. 25,000 were Granted in FYE
2006 and 50,000 were Granted in FYE 2007.
We know of no arrangements concerning anyone's ownership of Stock, which
may, at a subsequent date, result in a change of control.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
Directors, Officers and beneficial owners of more than 10% of our common stock
to file reports of ownership and reports of changes in the ownership with the
Securities and Exchange Commission. Such persons are required by Securities and
Exchange Commission regulations to furnish us with copies of all Section 16(a)
forms they file.
Based solely on our review of the copies of such forms submitted to us during
the year ended May 31, 2007, we believe that all Section 16(a) filing
requirements applicable to our Officers and Directors were complied with.
Item 12. Certain Relationships and Related Transactions
Related Party Transactions, Actual or Proposed, In Last 2 Years. We
propose to be, or during the last two years were, party to certain transactions
involving amounts in excess of $120,000, in which our Directors, Executive
Officers, others hold more than 5% of any class of our securities, or their
immediate family members, had or will have a material interest. The interested
parties and transactions are described below.
Services Provided by Ronald J. Tropp. Director, Ronald J. Tropp, Esq.,
has provided legal services to us and to CytoDyn of New Mexico, Inc. for a
number of years. Currently, we owe him the sum of $46,985 for these services.
Mr. Tropp received 60,000 options as partial payment of his services. We
anticipate that Mr. Tropp will provide additional legal services to us in the
future.
Note Given and Debt Owed to Allen D. Allen. In January 2004 we issued
to Allen D. Allen, our President, Chief Executive Officer and the Chairman of
our Board of Directors, a non interest bearing promissory note, payable on
demand, in the original principal amount of $22,788 The note reflects advances
32
made to us by Mr. Allen during the years ending on May 31, 2003 and May 31,
2004. The sum owed does not bear interest and is payable on demand. As of May
31, 2006 debt owed to Allen D. Allen increased by an additional $9,681 The total
debt owed to Mr. Allen is $32,468.
Notes Given to Corinne Allen. In January 2004, we issued to Corinne E.
Allen, our Vice President of Business Development, Treasurer and Director, two
non interest bearing promissory notes, each payable on demand, in the original
principal amounts of $50,000 and $38,906. The notes reflected advances made to
us by Ms. Allen during the years ending on May 31, 2003 and May 31, 2004. The
$50,000 note was paid in full in February, 2004. The $38,906 note remains
outstanding and does not bear interest.
Code of Ethics.
We have adopted a Code of Ethics for our Chief Executive Officer, Vice President
of Business Development and our Chief Financial Officer. This Code of Ethics can
be found on our website at www.cytodyn.com.
33
Item 13. Exhibits
---------- ---------------------------------------------------------------------
Exhibit
Number Exhibit Description
---------- ---------------------------------------------------------------------
31.1 Section 302 Certification of Allen D. Allen
31.2 Section 302 Certification of Wellington A. Ewen
32.1 Section 906 Certification of Allen D. Allen
32.2 Section 906 Certification of Wellington A.Ewen
99.1 Charter of the Audit Committee of the Board of Directors
---------- ---------------------------------------------------------------------
Item 14. Principal Accountant Fees and Services
Approval of Services
The Board of Directors has resolved to establish an audit committee composed of
our chief financial officer, Wellington Ewen, Gregory A. Gould, CPA and another
independent member when that person is identified. The audit committee does not
yet have a charter. Pending proper establishment of the audit committee, the
Board of Directors pre-approves all engagements for audit and non-audit services
provided by the Company's principal accounting firm, Cordovano and Honeck, P.C.
Audit Fees
The aggregate fees billed during the fiscal years ended May 31, 2006 for
professional services rendered by our predecessor principal accounting firm,
Cordovano and Honeck, P.C., for the audit of the financial services included in
Form 10-KSB, and for the review of the interim condensed financial statements
included in Form 10-QSB, were approximately $5,900. Included here are fees
associated with the review by Cordovano and Honeck, P.C. of a registration
statement filed with the SEC and the related issuance of independent accountant
consent letters. The aggregate fees billed during the fiscal years ended May 31,
2007 for professional services rendered by our current principal accounting
firm, Pender Newkirk & Co.., for the audit of the financial services included in
Form 10-KSB, and for the review of the interim condensed financial statements
included in Form 10-QSB, were $28,000.
Audit Related Fees
The aggregate fees billed during the fiscal years ended May 31, 2006 for
assurance and related services rendered by our predecessor principal accounting
firm, Cordovano and Honeck, P.C., were approximately $10,000. Assurance and
related service fees include the audit of employee benefit plan financial
statements and audit-related due diligence assistance on potential acquisitions.
The aggregate fees billed during the fiscal years ended May 31, 2007 for
assurance and related services rendered by our current principal accounting
firm, Pender Newkirk & Co., were approximately $39,211.
Tax Compliance/Preparation Fees
The aggregate fees billed during the fiscal years ended May 31, 2007 and 2006
for professional services rendered by our predecessor principal accounting firm,
Cordovano and Honeck, P.C., and current principal accounting firm, Pender
Newkirk Co. for tax compliance, tax advice, and tax planning were approximately
$0 and $0, respectively. Tax compliance services include the preparation of
income tax returns filed with the Internal Revenue Service. Tax advice and
planning services included assistance with implementation of tax planning
strategies and consultation on other tax matters.
34
All Other Fees
The aggregate fees billed during the fiscal years ended May 31, 2007 and 2006
for all other professional services rendered by our principal accounting firms,
Cordovano and Honeck, P.C., and Pender Newkirk & Co. were approximately $0 and
$0, respectively. Other services consisted of assistance with the interpretation
of new accounting standards and other related services.
Chart of Fees Paid to Independent Auditing Firm For Past Two Fiscal Years
----------------------------- ----------------------------------------------
For fiscal years ended May 31,
----------------------------- ----------------------------------------------
Type of Service 2007 % not 2006 % not
pre- pre-
approved(1) approved(1)
----------------------------- -------- ------------- --------- -------------
Audit fees $ 28,000 0% $ 5,900 0%
----------------------------- -------- ------------- --------- -------------
Audit-related fees $ 39,211 0% $ 10,000 0%
----------------------------- -------- ------------- --------- -------------
Tax fees
----------------------------- -------- ------------- --------- -------------
Tax compliance
----------------------------- -------- ------------- --------- -------------
Tax advice & planning
----------------------------- -------- ------------- --------- -------------
Total tax fees
----------------------------- -------- ------------- --------- -------------
All other fees
----------------------------- -------- ------------- --------- -------------
Total fees $ 67,211 $ 15,900
----------------------------- -------- ------------- --------- -------------
1 These percentages reflect services for which the pre-approval
requirement is waived under applicable accounting rules.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CytoDyn, Inc.
By: /s/ Allen D. Allen
--------------------------------------------
Allen D. Allen, Chief Executive Officer
Date: August 29, 2007
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Allen D. Allen Date: August 29, 2007
--------------------------------------------
Allen D. Allen, President, Chief Executive
Officer, Director
/s/ Wellington A. Ewen Date: August 29, 2007
--------------------------------------------
Wellington A. Ewen, Chief Financial Officer,
Director
/s/ Corinne E. Allen Date: August 29, 2007
--------------------------------------------
Corinne E. Allen, Vice President of Business
Development, Secretary, Treasurer, Director
/s/ Ronald J. Tropp, Esq. Date: August 29, 2007
--------------------------------------------
Ronald J. Tropp, Esq., Director
/s/ Gregory A. Gould Date: August 29, 2007
--------------------------------------------
Gregory A. Gould, Director
36
Page
----
Report of Independent Registered Public Accounting Firm................... F-2
Consolidated Balance Sheet at May 31, 2007................................ F-4
Consolidated Statements of Operations for the years ended
May 31, 2007 and 2006 and the period from October 28, 2003
(inception) through May 31, 2007 ....................................... F-5
Consolidated Statement of changes in Shareholders' Deficit for the
period from October 28, 2003 (inception) through May 31, 2007.......... F-6
Consolidated Statements of Cash Flows for the years ended May, 2007 and
2006 and the period from October 28, 2003 (inception) through
May 31, 2007............................................................ F-8
Notes to Consolidated Financial Statements................................ F-10
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
CytoDyn, Inc. (A Development Stage Company)
Santa Fe, New Mexico
We have audited the accompanying consolidated balance sheet of CytoDyn, Inc. (a
development stage company) as of May 31, 2007 and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
the year then ended and the period from October 28, 2003 (date of inception)
through May 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements as of May 31, 2006 and for the year then ended
and for the period October 28, 2003 (date of inception) through May 31, 2006
were audited by other auditors whose report dated August 25, 2006 (except for
certain notes, as to which the date is November 1, 2006), as restated, included
an unqualified opinion with an explanatory paragraph regarding substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements for the period October 28, 2003 (date of inception) through
May 31, 2006 include a net loss of $3,169,071. Our opinion on the consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
the period October 28, 2003 (date of inception) through May 31, 2007, insofar as
it relates to amounts for the periods through May 31, 2006, is based solely on
the report of other auditors.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required at this time, to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
F-2
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CytoDyn, Inc. as of
May 31, 2007 and the results of its operations and its cash flows for the year
then ended and the period from October 28, 2003 (date of inception) through May
31, 2007 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company incurred a net loss of $2,610,070
and $5,779,141 for the year ended May 31, 2007 and the period October 28, 2003
(date of inception) through May 31, 2007, respectively. As of May 31, 2007, the
Company had $928,616 of negative working capital and $16,604 of cash with which
to satisfy any future cash requirements, which raises a substantial doubt about
its ability to continue as a going concern. Management's plans in regards to
this matter are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Pender Newkirk & Company LLP
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
August 21, 2007
F-3
Cytodyn, Inc.
(A Development Stage Company)
Balance Sheet
Assets May 31,
2007
Current Assets: -----------
Cash ........................................................ $ 16,604
Prepaid Insurance ........................................... 43,254
Prepaid license fees ........................................ 50,000
-----------
Total current assets ............................ 109,858
Furniture and equipment, net .................................... 2,611
Intangible asset, net ........................................... 1,294
Deposit ......................................................... 495
-----------
$ 114,258
===========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable ............................................ $ 239,572
Accrued liabilities to related parties ...................... 193,600
Accrued interest payable .................................... 10,216
Convertible notes payable, net .............................. 14,385
Notes payable ............................................... 125,000
Indebtedness to related parties ............................. 455,701
-----------
Total current liabilities ....................... 1,038,474
Commitments and contingencies ................................... 150,000
-----------
Total liabilities ............................... 1,188,474
-----------
Shareholders' deficit :
Preferred stock, no par value; 5,000,000 shares authorized,
100,000- shares issued and outstanding ..................... 167,500
Common stock, no par value; 20,000,000 shares authorized,
11,297,264 shares issued and outstanding, .................. 4,172,865
Stock for Prepaid Services .................................. (106,521)
Additional paid-in capital .................................. 2,072,993
Accumulated deficit prior to recapitalization ............... (1,601,912)
Deficit accumulated during development stage ................ (5,779,141)
-----------
Total shareholders' deficit ..................... (1,074,216)
-----------
$ 114,258
===========
The accompanying footnotes are an integral part of
the consolidated financial statements
F-4
Cytodyn, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
October 28,
For the year ended 2003
May 31, (Inception)
---------------------------- through
2007 2006 May 31, 2007
------------ ------------ ------------
Operating expenses:
General and administrative ................. $ 1,619,462 $ 1,412,266 $ 3,734,678
Amortization / Depreciation ................ 168,184 2,101 172,160
Research and Development ................... 424,739 -- 787,081
Legal Fees ................................. 252,745 170,800 469,495
------------ ------------ ------------
Total operating expenses ......... 2,465,130 1,585,167 5,163,414
------------ ------------ ------------
Operating loss ................... (2,465,130) (1,585,167) (5,163,414)
Interest income ............................... (949) (101) (1,627)
Interest expense:
Interest on convertible debt and other notes 145,889 468,878 617,354
------------ ------------ ------------
Loss before income taxes ......... (2,610,070) (2,053,944) (5,779,141)
Income tax provision .......................... -- -- --
------------ ------------ ------------
Net loss ......................... $ (2,610,070) $ (2,053,944) $ (5,779,141)
============ ============ ============
Basic and diluted loss per share .............. $ (0.24) $ (0.24) $ (0.65)
============ ============ ============
Basic and diluted weighted average
common shares outstanding .................. 10,997,063 8,639,483 8,833,306
============ ============ ============
The accompanying footnotes are an integral part of
the consolidated financial statements
F-5
CYTODYN, INC.
(A Development Stage Company)
Statements of Changes in Shareholders' Deficit
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
The accompanying footnotes are an integral part of
the consolidated financial statements
F-6
CYTODYN, INC.
(A Development Stage Company)
Statements of Changes in Shareholders' Deficit
Deficit
Stock Accumulated
Preferred Stock Common Stock For Additional During
---------------------- ---------------------- Prepaid Paid-in Accumulated Development
Shares Amount Shares Amount Services Capital Deficit Stage Total
---------- ---------- ---------- ---------- --------- ---------- ----------- ----------- -----------
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
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)
========== ========== ========== ========== ========= ========== =========== =========== ===========
The accompanying footnotes are an integral part of
the consolidated financial statements
F-7
Cytodyn, Inc.
(A Development Stage Company)
Statements of Cash Flows
October 28,
Years Ended 2003
-------------------------- (Inception)
2007 2006 May 31, 2007
----------- ----------- ------------
Cash flows from operating activities:
Net loss ...................................... $(2,610,070) $(2,053,944) $(5,779,141)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization /Depreciation ................ 168,184 2,101 172,160
Amortization of original issue discount ... 140,020 461,364 601,384
Stock issued for in-process
Research & Development 274,399 -- 274,399
Stock-based compensation .................. 905,264 687,370 1,647,553
Changes in current assets and liabilities:
Prepaid expenses .................. 30,022 (4,759) (6,079)
Deposits .......................... -- -- (495)
Accounts payable and accrued
liabilities ..................... 157,091 305,794 556,212
----------- ----------- -----------
Net cash used in
operating activities .............. (935,090) (602,074) (2,534,007)
----------- ----------- -----------
Cash flows from investing activities:
Furniture and equipment purchases ............. (3,326) (936) (10,764)
----------- ----------- -----------
Net cash used in
investing activities ...................... (3,326) (936) (10,764)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants ............ -- 28,350 28,350
Capital contributions by president ............ -- -- 5,512
Proceeds of notes payable to related parties .. -- -- 547,849
Proceeds from notes payable ................... 125,000 -- 125,000
Payments of related party notes ............... -- -- (38,324)
Proceeds from convertible notes ............... 92,500 509,500 602,000
Proceeds from the sale of common stock ........ -- 217,417 757,417
Payments for offering costs ................... -- (27,867) (81,867)
Proceeds from acquisition of AITI ............. 512,200 -- 512,200
Proceeds from acquisition of AIGI ............. 100,000 -- 100,000
----------- ----------- -----------
Net cash provided by
financing activities ...................... 829,700 727,400 2,558,137
----------- ----------- -----------
Net change in cash ........................ (108,716) 124,390 13,366
Cash, beginning of period .......................... 125,320 930 3,238
----------- ----------- -----------
Cash, end of period ................................ $ 16,604 $ 125,320 $ 16,604
=========== =========== ===========
The accompanying footnotes are an integral part of
the consolidated financial statements
F-8
Cytodyn, Inc.
(A Development Stage Company)
Statements of Cash Flows
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes .............................. $ -- $ -- $ --
=========== =========== ===========
Interest .................................. $ -- 138 1,126
=========== =========== ===========
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 .. $ 149,500 $ 437,500 $ 587,000
=========== =========== ===========
Note payable issued to related party for
research and development services . 62,341 -- 62,341
=========== =========== ===========
Common stock issued for debt .............. $ -- $ 120,082 $ 120,082
=========== =========== ===========
Options to purchase common stock issued
to extinguish debt ................ $ 62,341 $ -- $ 62,341
=========== =========== ===========
Original issue discount and intrinsic value
of beneficial conversion feature related
to debt issued with warrants ........... $ 92,500 $ 509,500 $ 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 (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.
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 of $52,500 and
$15,000 in expense associated with the license agreement.
The accompanying footnotes are an integral part of
the consolidated financial statements
F-9
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
1 - Organization:
The Company was incorporated under the laws of Colorado on May 2, 2002 under the
name Rexray Corporation ("Rexray"). On October 27, 2003, Rexray changed its name
to CytoDyn, Inc. On October 28, 2003, Rexray, the former Securities and Exchange
Commission ("SEC") Registrant, entered into an Acquisition Agreement (the
"Agreement") with CytoDyn of New Mexico, Inc. ("CytoDyn NM"), a company
incorporated under the laws of New Mexico on June 4, 1994. Under the terms of
the Agreement, Rexray agreed to acquire some of the assets of CytoDyn NM in
exchange for 5,362,640 shares of its common stock. Following the acquisition,
the former shareholders of CytoDyn NM held approximately 85.8 percent of the
Company's outstanding common stock, resulting in a change in control. For
accounting purposes, the acquisition has been treated as a recapitalization of
CytoDyn NM, with Rexray the legal surviving entity. Since Rexray had minimal
assets and no operations, the recapitalization has been accounted for as the
sale of 890,000 shares of CytoDyn NM common stock for the net assets of Rexray.
Therefore, the historical financial information prior to the date of the reverse
business acquisition is the financial information of CytoDyn NM.
Prior to the Agreement, both Rexray and CytoDyn NM had insignificant operations
and were not devoting efforts to establishing a business. Following the
Agreement, the Company began devoting substantially all efforts to establishing
a new business, but planned principal operations have not yet commenced. As a
result, the Company's inception into the development stage has been established
at October 28, 2003 and, in accordance with SFAS No. 7, the accompanying
financial statements report cumulative financial information from the date of
its inception into the development stage.
The company plans to develop their primary product DNA vaccines for influenza.
The Company plans to outsource the manufacturing within a few months and will
seek approval from the FDA for a Phase 1 clinical trial of the DNA vaccines
shortly thereafter. This technology was licensed from the University of
Massachusetts Medical School through a strategic alliance with a technology
transfer company.
F-10
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
2 - Summary of Significant Accounting Policies:
Principles of Consolidation. - The consolidated financials statements include
the accounts of CytoDyn Inc and its wholly owned subsidiaries; Advanced
Influenza Technologies, Inc. and Advanced Genetic Technologies, Inc. All
intercompany transactions and balances are eliminated in consolidation.
Advanced Influenza Technologies, Inc. was incorporated under the laws of Florida
on June 9, 2006.
Advanced Genetic Technologies, Inc was incorporated under the laws of Florida on
December 18, 2006.
Reclassification - Certain reclassifications have been made to the 2007 and 2006
balances to conform to the 2007 financial statement presentation.
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. The Company incurred a net loss of
$2,610,070 and $5,779,141 for the periods ended May 31, 2007, and for the period
October 28, 2003 (inception date) through May 31, 2007. As of May 31, 2007, the
Company had negative working capital of $928,616, and cash of $16,604 with which
to satisfy future cash requirements. 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 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. Additionally, the Company estimates that it
will need to raise approximately $3,250,000 to fund the Phase 1 clinical trials
of our pre-flu vaccine. 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.
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 all periods presented, 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 options and warrants to purchase 2,047,222 and
F-11
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
1,532,222 shares of common stock were not included in the computation of diluted
weighted average common shares outstanding for the year ended May 31, 2007 and
2006, respectively because the effect of such options would be anti-dilutive.
Additionally convertible preferred stock, which could potentially convert into
4,333,333 shares of common stock were not included because the effect of these
shares would be antidilutive as of May 31, 2007.
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 May 31, 2007 or
May 31, 2006. 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 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 years ended
May 31, 2007 and 2006, and for the period October 28, 2003 (inception date)
through May 31, 2007.
Research and Development - Research and development costs are expensed as
incurred.
Financial Instruments - At May 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.
Employee Share-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 annual reporting period that begins after December 15,
2005 and accordingly the Company adopted this standard on June 1, 2006.
F-12
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
SFAS No. 123R provides for two transition methods. The "modified prospective"
method requires that share-based compensation expense be recorded based on fair
value for any employee options granted, modified, purchased, or cancelled after
the adoption date and for the unvested portion of any employee options
outstanding as of the adoption date. The "modified retrospective" method
requires that, beginning June 1, 2006, all prior periods presented be restated
to reflect the impact of share-based compensation expense consistent with the
proforma disclosures previously required under SFAS No. 123. The Company adopted
the modified prospective application of SFAS No.123(R) effective June 1, 2006,
and as a result, has not restated its financial results for prior periods.
For all awards granted prior to June 1, 2006, the Company accounted for the
grants using the intrinsic value method prescribed in APB No. 25 "Accounting for
Stock Issued to Employees". No compensation expense was recognized for grants
prior to June 1, 2006, as all option grants had a market value equal to the
exercise price at the date of grant. For equity awards granted after the date
of adoption, the Company amortizes the share based compensation on a straight
line basis over the requisite service period. The Company estimates forfeitures,
both at the date of grant as well as throughout the vesting period, based upon
the Company's historical experience and future expectations.
Prior to June 1, 2006, had compensation cost for the Company's employee stock
options been determined on the fair value at the grant dates for the share-based
payments consistent with the method required by SFAS 123R, the Company's net
loss and net loss per common share would have been pro forma amounts indicated
below for the year ended May 31, 2006 and October 28, 2003 (inception date)
through May 31, 2007:
May 31, Since
2006 Inception
----------- -----------
Net loss, as reported $(2,053,944) $(5,779,141)
Add: stock-based employee compensation expense
Included in reported income - -
Deduct: total stock-based employee compensation
Expense determined under fair value method for
All awards (107,775) (107,775)
----------- -----------
Pro forma net loss $(2,161,719) $(5,886,916)
=========== ===========
Basic and diluted loss per share
As reported $ (.24) $ (.65)
Basic and diluted loss per share proforma $ (.25) $ (.67)
3 - Recent Accounting Pronouncements:
In September 2006, Statement 157, Fair Value Measurements, was issued by the
FASB and is effective for financial statements for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Statement 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
F-13
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
Statement will change current practice. We anticipate that SFAS 157 will not
have a material impact on our financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Current Year Misstatements." SAB No. 108 requires
analysis of misstatements using both an income statement (rollover) approach and
a balance sheet (iron curtain) approach in assessing materiality and provides a
one-time cumulative effect transition adjustment. SAB No. 108 was effective for
our 2006 annual financial statements. The adoption of SAB No. 108 did not
materially impact the consolidated financial statements.
In July 2006, the Financial Accounting Standards Board issued Interpretation No.
48("FIN 48"), Accounting for Uncertainty in Income Taxes, which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 provides guidance on the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on the derecognition, classification, interest,
penalties, accounting in interim periods, disclosures and transition. FIN 48 was
effective for fiscal years beginning after December 15, 2006. The adoption is
not expected to impact the Company's financial position or results of
operations.
In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No 115. SFAS No. 159 permits an entity to chose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company does not anticipate that any adoption of SFAS No.
159 will have significant impact, if any, on its results of operations or
financial position.
The Company reviewed all other recently issued, but not yet effective,
accounting pronouncements and do not believe any such pronouncements will have a
material impact on our financial statements.
4. Acquisitions
On July 18, 2006 CytoDyn, Inc. entered into an acquisition agreement with a
technology transfer company, to purchase all 1,000 issued and outstanding
shares of Advanced Influenza Technologies, Inc. (AITI), a Florida Corporation in
exchange for 2,000,000 unregistered restricted common shares of CytoDyn, Inc
stock.
The transaction was 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 this 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 their fair market value rather that 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
F-14
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
license agreements from the University of Massachusetts for certain
technologies. The license agreements were recorded as research and development
expense, as the patent rights or license agreements are being used in a
particular research project, and have no alternative future use outside of this
project. Including the license agreements, a total of $259,399 of in-process
research and development was acquired related to the acquisition, which is
included as a component of research and development expense for the period ended
May 31, 2007. The license agreement grants the Company the exclusive right to
develop and commercialize the licensed products associated with certain existing
patents.
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 has funded $162,800 of a two-year $325,600 unrestricted project under the
Sponsored Research Agreement with the primary objective during the first year to
conduct lab work to provide well documented research studies. 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 first year of the
project were completed. Subsequent to May 31, 2007, the Company made a "good
faith" payment of $14,000 towards the second year of the prepaid sponsored
research agreement. Based on the terms of the agreement, at May 31, 2007, the
Company was not obligated to fund the second year of the project.
On January 30, 2007 CytoDyn, Inc. entered into an Acquisition agreement with a
technology transfer company , 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 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 this 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 their fair market value rather than
F-15
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
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.
5. Stock Option and Warrant Activity. The Company has one stock based equity
compensation plan at May 31, 2007. The 2005 Stock Incentive Plan, as Amended
("the Plan"), was authorized to issue options and warrants to purchase up to
2,800,000 shares of the Company's common stock. As of May 31, 2007, the Company
had 1,565,878 shares available for future stock option and warrant grants under
the plan. Since inception date, the Company has granted 813,100 options and
warrants outside of the Company's stock option plan.
The estimated fair value of options and warrants granted is determined using the
Black-Scholes option valuation model with the following weighted-average
assumptions.
2007 2006
Risk Free rate 4.56 - 5.2% 4.61 - 5.15%
Dividend yield - -
Volatility 153 - 161% 146 - 150%
Expected life 5 years 5 - 10 years
The risk-free interest rate assumption is based upon observed interest rates
appropriate for the expected term of the stock options. The expected volatility
is based on the historical volatility of the Company's common stock. The Company
has not paid any dividends on its common stock since its inception and does not
anticipate paying dividends on its common stock in the foreseeable future. The
computation of the expected option term is based on the "simplified method", as
the Company's stock options are "plain vanilla" options, and the Company has a
limited history of exercise data. For common stock options and warrants with
graded vesting, the Company recognizes the related compensation costs associated
with these options and warrants on a straight line basis over the requisite
service period.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Based on limited historical experience of forfeitures, the
Company estimated future unvested option forfeitures at 0% for the period ended
May 31, 2007 and incorporated this rate in the estimated fair value of employee
option grants during 2007.
As a result of adopting SFAS No. 123R, the Company's operating loss, loss before
income taxes, and net loss was approximately $535,000 lower for the period ended
May 31, 2007, and for the period October 28, 2003 (inception date) through May
31, 2007 than if the Company had continued to account for stock based
compensation under APB Opinion No. 25. The impact to basic and diluted weighted
averages was approximately $(.05), and $(.06 ) per share, for the above periods,
respectively. There was no impact on cash flow from investing and financing
activities for 2006 and 2007.
Net cash proceeds from the exercise of stock options and warrants were $0,
$28,350 and $28,350 for the periods ended May 31, 2007 and 2006 and for the
period October 28, 2003 (inception date) through May 31, 2007. At May 31, 2007,
there was approximately $708,000 of unrecognized compensation cost related to
F-16
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
share-based payments for unvested options, which is expected to be recognized
over a weighted average period of 2.45 years.
The following table represents stock option and warrant activity as of and for
the periods ended May 31, 2007 and 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic
of shares Price Life Value
--------- -------- ----------- ----------
Options and warrants
outstanding - May 31, 2005 576,000 $.48 -
Granted 1,050,722 2.28 -
Exercised (94,500) .30 -
Forfeited/expired/cancelled
Options and warrants
Outstanding - May 31, 2006 1,532,222 $1.71 $1,212,260
--------- -------- ----------- ----------
Granted 515,000 1.25 -
Exercised
Forfeited/expired/cancelled
Options and warrants
Outstanding - May 31, 2007 2,047,222 $1.61 6.69 years $ 204,200
========= ======== =========== ==========
Outstanding Exercisable -
May 31, 2007 1,701,821 $1.55 6.21 years $ 204,200
========= ======== =========== ==========
The following table summarizes information about outstanding and exercisable
stock options and warrants at May 31, 2007:
Outstanding Exercisable
Options and warrants Options and Warrants
-------------------- --------------------
Range of Weighted Remaining Weighted
Exercise Number Average contractual Number Average
Prices of options Price life in years of Options Price
--------- ---------- ----- ------------- ---------- -----
$.50-$1.00 755,622 $ .61 6.27 686,214 $ .58
$1.10 - $2.28 725,000 1.90 8.83 483,564 1.90
$2.50 - $2.95 566,600 2.55 4.53 532,043 2.53
---------- ----- ---- ---------- -----
2,047,222 $1.61 6.69 1,701,821 $1.55
========= ===== ==== ========== =====
The total grant date fair value of options and warrants vested during the year
ended May 31, 2007 was approximately $638,000. The grant date fair value of
options and warrants granted for the period ended May 31, 2007 and 2006 was
$1.21 and $2.64 respectively.
6. Common Stock Issued for Services
During the year ended May 31, 2006, the Company issued 1,000 restricted common
shares to an individual for services performed in September 2005. The Company
valued the stock at the price it sold its shares at its public offering and
recognized $750 as stock-based compensation.
During the year ended May 31, 2006, the Company issued 142,857 restricted shares
to a public relations company in accordance with an agreement to perform
services over the following year. The company valued the shares at the market
price of the Company's common stock on the date the agreement was executed in
the amount of $250,000.
F-17
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
During the year ended May 31, 2006, the Company issued 40,000 restricted common
shares to a consulting company in accordance with an agreement to perform
services over the following year. The Company valued the shares at the market
price of the Company's common stock on the date the agreement was executed in
the amount of $120,000.
During the year ended May 31, 2007, the Company committed to issue 150,000
shares of common stock to a consulting company to perform services over a 12
month period. The Company valued the shares at $120,000 based on the market
price of the company's common stock at the date of the agreement. As of May 31,
2007, the transaction was recorded as common stock payable for the prepaid
services as the shares were not issued as of May 31, 2007.
For the periods May 31, 2007 and 2006 and for the period October 28, 2003
(inception date) through May 31, 2007, the Company recognized approximately
$280,000, $104,000, and $384,000, respectively, in compensation expense, related
to the above prepaid services. The unamortized services are recorded as a
contra-equity, and as of May 31, 2007 was approximately $107,000.
7. Stock Options and Common Stock - Consultants
On March 20, 2006, the Company issued non-qualifying options to purchase 50,000
shares of its common stock at $2.28 per share to consultants. The options vested
immediately and expire in ten years. The Company valued the options at $2.64 per
share using the Black-Scholes option pricing model and recognized $131,953 as
stock-based compensation. The Company also issued non-qualifying options to
purchase 60,000 shares of common stock at $2.28 per share to extinguish $24,000
in debt to a related party, and recognized an additional $134,344 as stock based
compensation.
On March 20, 2006, the Company issued non-qualifying options to purchase 340,000
shares of its common stock at $2.28 per share to its Directors and consultants.
Twenty five percent of the options vest immediately and the balance vest 1/48
per month over four years. The Company valued the options at $2.64 per share
using the Black-Scholes option pricing model and recognized $252,363 as
stock-based compensation.
On March 20, 2006, the Company issued non-qualifying options to purchase 83,122
shares of the Company's stock at $.75 per share to a related party. The options
vested immediately. The Company valued the options at $212,721 and recognized
$150,380 as stock-based compensation and $62,341 as debt reduction.
On May 15, 2006, the Company issued non-qualifying stock options to purchase
25,000 shares of its common stock at $1.96 per share. Twenty-five percent of the
options vest immediately and the balance vest 1/48 over four years. The Company
valued its options at $2.27 per share using the Black-Scholes options pricing
model and recognized $18,686 as stock-based compensation.
On January 16, 2007, the Company issued 30,000 shares of common stock to a
consultant, and recognized $26,400 in compensation expense for the period ended
May 31, 2007, based on the market value of the stock.
F-18
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
8 - Convertible Notes Payable- 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
May 31, 2006, $437,500 of the convertible notes were converted into common
stock. The original issue discount and beneficial conversion feature associated
with the warrants and conversion option were recorded as a discount to the
convertible notes, and an increase to additional paid in capital, respectively.
For the period ended May 31, 2006, the Company amortized approximately $461,000
of the discounts, which was included as a component of interest expense for the
period ended May 31, 2006.
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. Accrued interest
related to the notes was $10,216 as of May 31, 2007. As of May 31, 2007, $77,500
of the $92,500 in convertible notes were converted into common stock.
Additionally, $72,000 of the remaining $509,500 in convertible notes were
converted to common stock as of May 31, 2007. 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 period ended May 31, 2007, the Company
amortized approximately $140,000 of this discount, which is included as a
component of interest expense. From October 28, 2003 (inception date) to May 31,
2007, the Company amortized approximately $601,000 of discounts related to
convertible notes payable. As of May 31, 2007, the face amount and unamortized
discount related to convertible notes was $15,000 and $615 respectively.
9 - 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.
As of May 31, 2007, approximately $1,200 of interest has been accrued. In July
2007, the company issued an additional $170,000 in promissory notes to third
parties. The new notes are due in six months and pay interest of 14% per annum.
10. Income Taxes - Deferred taxes are recorded for all existing temporary
differences in the Company's assets and liabilities for income tax and financial
reporting purposes. Due to the valuation allowance for deferred tax assets, as
noted below, there was no net deferred tax benefit or expense for the periods
ended May 31, 2007 and 2006, and for the period ended October 28, 2003 (
inception date ) through May 31, 2007.
Reconciliation of the federal statutory income tax rate of 34 percent to the
effective income tax rate is as follows for all periods presented:
Income tax provision at statutory rate 34%
State income taxes, net 3.5
Valuation allowance (37.5)
-----
0%
=====
F-19
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
Net deferred tax assets and liabilities are comprised of the following:
Deferred tax asset (liability) current:
Accrued salary $ 72,000
Valuation allowance (72,000)
-----------
$ 0
===========
Deferred tax asset (liability) non-current
Net operating loss $ 1,423,000
Expense on non-qualified stock options
And OID amortization $ 130,000
-----------
Valuation allowance $(1,553,000)
-----------
$ 0
===========
The tax benefit for the period presented is offset by a valuation allowance
established against deferred tax assets arising from operating losses and other
temporary differences, the realization of which could not be considered more
likely than not. In future periods, tax benefits and related tax deferred assets
will be recognized when management considers realization of such amounts to be
more likely than not.
At May 31, 2007, the Company had available net operating loss carryforwards of
approximately $3,800,000, which expire beginning in 2023.
11 - Commitments and Contingencies
Amerimmune Inc. vs. CytoDyn of New Mexico, Inc. - Cross Complaint
-----------------------------------------------------------------
In April 2004, CytoDyn filed an action in Los Angeles Superior Court against the
directors of Amerimmune Pharmaceuticals for failing to supervise management.
This action was mandated by federal case law in that CytoDyn owns the trademark
"Cytolin." When the CEO of Amerimmune attempted to throw Amerimmune into
bankruptcy, thereby ceasing its operations, Amerimmune was no longer operating
and the issue became moot. In the meantime, Amerimmune had moved to Ventura
County and CytoDyn recovered its property in the Ventura County court.
In connection with that action, some directors of Amerimmune were awarded
attorneys' fees in the amount of approximately $150,000. We have appealed the
Court's order. This judgment has been accrued on the financial statements. The
tentative ruling of the appellate court was to reverse the award of attorneys'
fees. The attorney for the insurance company has asked for, and was granted, the
right to be heard one more time.
Maya, LLC v. CytoDyn, et al
----------------------------
Superior Court of Los Angeles, Van Nuys Case # EC041590
Maya, LLC filed an action in Van Nuys, California alleging a number of
complaints against CytoDyn and two of its officers, many of which have been
dismissed on demurrer without leave to amend. The matter is under appeal and a
trial date has not been set. The Company's counsel cannot estimate the
probability or remoteness of a result adverse to the Company with respect to the
outcome of this case.
F-20
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
-------------------------------------------------------------------
Pharmaceuticals Inc. v Biovest International Inc.
-------------------------------------------------
The Company and Allen filed a complaint against Amerimmune, Inc. and Amerimmune
Pharmaceuticals, Inc. (together, "Amerimmune") to domesticate an October 4, 2004
judgement that the Company and Allen obtained against Amerimmune in the Superior
Court of California for Ventura County, case No. SC-039250. Future, the Company
and Allen named Biovest International Inc ("Biovest") as a trustee-defendant
because Biovest possesses a Cell-Bank, the rights to which the Company and Allen
own.
Maya LLC., ("Maya"), Amerimmune's purported successor-in-interest, successfully
moved to intervene. In its Complaint-in-Intervention, Maya asserted that it, and
not the Company and Allen, owns the Cell-Bank. The Company and Allen have denied
that Maya has a superior right to the Cell-Bank.
The Company, Allen and Maya are engaged in discovery as to who has a superior
right the Cell Bank. Recently, the Company and Allen deposed Maya and its
principal, Rex Lewis ("Lewis"). The depositions are not yet completed. Counsel
believes the Company's claim to the Cell-Bank is strong.
Other Patent/Legal Issues:
--------------------------
Symbion International Vs. Maya LLC et al.
-----------------------------------------
CytoDyn has recently discovered that former employees of ex-licensee, Amerimmune
Inc., are attempting to convert technology previously adjudicated by the
Superior Court of California, County of Ventura to belong to Symbion Research
International, LLC. The technology involves LFA-1 Alpha subunit antibodies and
the use of the antibodies to treat HIV-infected patients. Symbion Research
International is acting to remedy the situation having brought action in the
U.S. District Court in Nevada. A motion for summary judgement is pending on
patent ownership based on the perjured declarations Lewis, et al., and other
factors. A jury trial on inventorship is being prosecuted but has not been set.
Background - CytoDyn granted a license in its patented technology to Amerimmune
Inc., which represented that it would assist in obtaining FDA approval of
Cytolin(R). Amerimmune in turn contracted with Symbion Research International,
LLC to assist with the clinical trials of Cytolin(R). Symbion sued Amerimmune in
2003 in Superior Court of California, County of Ventura asserting breach for
non-payment of services performed. Symbion prevailed in that suit and the
Ventura Court awarded title to all data and additional intellectual property
developed by Symbion during its relationship with Amerimmune to Symbion. This
additional intellectual property is the subject matter of the patent
applications filed by the former employees of ex-licensee Amerimmune. Mr. Allen
and CytoDyn of New Mexico, Inc were awarded the license back from Amerimmune in
October 2004 by the Superior Court of California, County of Ventura.
12 - Related Party Transactions - As of May 31, 2007, the Company owed two
officers promissory notes totaling of $71,375. 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 $71,375 is included in the accompanying financial statements as
"Indebtedness to related parties".
A director provided legal services to the Company over the past several years.
As of May 31, 2007, the Company owed the director $46,985 and it is included in
the accompanying financial statements as "Indebtedness to related parties" as of
May 31, 2007. As of May 31, 2007, no arrangements had been made for the Company
to repay the balance of this obligation.
F-21
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of May 31, 2007
and for the period ended May 31, 2007 and 2006
and for the period October 28, 2003 (inception date) through May 31, 2007
A former director of the Company is the President and Chief Executive Officer of
Symbion Research International, Inc. ("Symbion"). On January 5, 2005, the
Company entered into a buy-sell agreement to purchase certain intellectual
property owned by Symbion. The agreement describes the intellectual property in
detail which summarized, is the Phase I clinical data and the protocol for the
Phase II study. This intellectual property is necessary to obtain approval for,
and to conduct, further FDA clinical tests of Cytolin. Cytolin is a potential
new drug being developed by the company for the treatment of Human
Immunodeficiency Virus ("HIV").
Under the terms of this agreement:
- The Company may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
studies for Cytolin.
- The Company granted 83,122 non-qualified stock options with an exercise
price of $.75 per share that vested immediately and are exercisable
over 5 years.
- The Company will pay $25,000 to Symbion by February 10, 2005, 30 days
after execution of the agreement.
- The Company will pay $275,000 to Symbion once the Company's secondary
financing is received.
The Company paid Symbion $25,000 out of loan proceeds received in March 2005.
Although the payment was late, Symbion accepted it and the contract is in force.
The Company issued the above-referenced 83,122 non-qualified stock options on
March 20, 2006. Additionally, during 2006 the Company agreed to pay Symbion an
additional $62,341, which is included in the "Indebtedness to Related Parties"
and is included as a component of research and development expense for the
period ended May 31, 2007.
The results of the Phase II/III studies for Cytolin shall be the sole property
of the Company upon Symbion's receipt of the final payment called for by this
agreement. If all remaining payments are not made, the property shall revert to
Symbion. The balance due of $337,341 is included in the accompanying financial
statements as "Indebtedness to related parties".
Accrued liabilities consist primarily of approximately $193,000 in accrued
salaries and payroll taxes due to two executives of the Company as of May 31,
2007.
The amounts and terms of the above transactions are not necessarily indicative
of the amounts and terms that may have been incurred had comparable transactions
been entered into with an independent third party.
F-22