NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2012
(UNAUDITED)
Note 1 - Organization
CytoDyn Inc. (the Company) was incorporated under the laws of Colorado on May 2, 2002 under the name Rexray
Corporation (Rexray). In October 2003, the Company (under its previous name RexRay Corporation) entered into an Acquisition Agreement with CytoDyn of New Mexico, Inc. Pursuant to the acquisition agreement, the Company acquired assets
related to one of the Companys drug candidates, Cytolin, including the assignment of the patent license agreement dated July 1, 1994 between CytoDyn of New Mexico, Inc. and Allen D. Allen covering three United States patents, along with
foreign counterpart patents, which describe a method for treating Human Immunodeficiency Virus (HIV) disease with the use of monoclonal antibodies.
The Company entered the development stage effective October 28, 2003 upon the reverse merger and recapitalization of the Company and follows Financial Accounting Standard Codification No. 915,
Development Stage Entities.
CytoDyn Inc. discovered and is developing a class of therapeutic monoclonal antibodies to address significant
unmet medical needs in the areas of HIV and Acquired Immune Deficiency Syndrome (AIDS).
Advanced Genetic Technologies, Inc.
(AGTI) was incorporated under the laws of Florida on December 18, 2006 pursuant to an acquisition during 2006.
On
May 16, 2011, the Company formed a wholly owned subsidiary, CytoDyn Veterinary Medicine LLC (CVM), which explores the possible application of the Companys existing proprietary monoclonal antibody technology to the treatment of
Feline Immunodeficiency Virus (FIV). The Company views the formation of CVM and the exploration of the application of its existing proprietary monoclonal antibody technology to FIV as an effort to strategically diversify the use of its
proprietary monoclonal antibody technology.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP) and reflect all adjustments, consisting solely of normal recurring adjustments, needed to fairly present the financial results for these periods. The consolidated financial statements and notes are presented as
permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The
accompanying consolidated financial statements should be read in conjunction with the financial statements for the fiscal years ended May 31, 2012 and 2011 and notes thereto in the Companys Annual Report on Form 10-K for the fiscal year
ended May 31, 2012, filed with the Securities and Exchange Commission on August 21, 2012. Operating results for the three and six months ended November 30, 2012 and 2011 are not necessarily indicative of the results that may be
expected for the entire year. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and six month periods ended
November 30, 2012 and 2011 and the period October 28, 2003 through November 30, 2012, (b) the financial position at November 30, 2012, and (c) cash flows for the six month periods ended November 30, 2012 and 2011
and the period October 28, 2003 through November 30, 2012 have been made.
Principles of Consolidation
The consolidated financial statements include the accounts of CytoDyn Inc. and its wholly owned subsidiaries, AGTI and CVM. All intercompany transactions
and balances are eliminated in consolidation.
7
Reclassifications
Certain prior year amounts shown in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2012 presentation. These reclassifications did not have any effect on
total current assets, total assets, total current liabilities, total liabilities, total shareholders equity (deficit), or net loss.
Going Concern
The accompanying
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the
Company is currently in the development stage with losses for all periods presented. The Company incurred a net loss of $4,723,652 for the six months ended November 30, 2012, has an accumulated deficit of $29,158,170, and a working capital
deficit of $3,055,255 as of November 30, 2012. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to obtain additional operating capital, complete development of one or more of its drug therapies, obtain U.S. Food & Drug
Administration (FDA) approval, outsource manufacturing of each such approved drug therapy, and ultimately to attain profitability. The Company intends to seek additional funding through debt and equity offerings to fund its business
plan. There can be no assurance, however, that the Company will be successful in these endeavors.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash
equivalents. The Company had no cash equivalents as of November 30, 2012 or May 31, 2012. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never
experienced any losses related to these balances. All of the Companys non-interest bearing cash balances were fully insured at November 30, 2012 due to a temporary federal program in effect from December 31, 2010 through
December 31, 2012. Under the program, there is no limit on the amount of insurance for eligible accounts. Beginning January 1, 2013, insurance coverage reverts to $250,000 per depositor at each financial institution, and our non-interest
bearing cash balances may again exceed federally insured limits.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets under U.S. GAAP, which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets carrying amount. If such assets are impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying value or fair value, less costs to sell. There were no impairment charges for
the three and six months ended November 30, 2012 and 2011, and for the period October 28, 2003 through November 30, 2012.
Research and Development
Research and
development costs are expensed as incurred.
8
Financial Instruments
At November 30, 2012 and May 31, 2012, the carrying value of the Companys financial instruments approximates fair value due to the short-term maturity of the instruments. The
Companys notes payable have market rates of interest, and accordingly, the carrying values of the notes approximate the fair value.
Stock-Based Compensation
U.S. GAAP
requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee
is required to provide services in exchange for the award (requisite service period).
The Company accounts for common stock options and
common stock warrants based on the fair market value of the instrument using the Black-Scholes option pricing model utilizing certain weighted average assumptions such as expected stock price volatility, term of the options and warrants, risk-free
interest rates, and expected dividend yield at the grant date. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the stock options. The expected volatility is based on the historical
volatility of the Companys common stock at consistent intervals. The Company has not paid any dividends on its common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. The
computation of the expected option term is based on the simplified method, as the Companys stock options are plain vanilla options and the Company has a limited history of exercise data. For common stock options and
warrants with periodic vesting, the Company recognizes the related compensation costs associated with these options and warrants on a straight-line basis over the requisite service period.
U.S. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on limited historical
experience of forfeitures, the Company estimated future unvested option forfeitures at 0% for all periods presented.
Deferred Offering
Costs
In connection with a stock rescission liability as discussed at Note 3, the Company has recorded approximately $559,000 and $677,000
in deferred offering costs as of November 30, 2012 and May 31, 2012, respectively. These deferred offering costs have been recorded as a current asset for the respective periods. The asset will be offset against equity and reduce equity at
the end of the applicable period the investors described in Note 3 do not pursue their rescission rights and retain their shares. Conversely, if the investors pursue their rescission rights and forfeit their shares, the deferred offering costs will
be expensed at that time.
Stock for Services
The Company periodically issues common stock, warrants and common stock options to consultants for various services. Costs for these transactions are measured at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn
the equity instruments is reached or (ii) the date at which the counterpartys performance is complete.
Loss Per Common Share
Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Diluted loss per share is computed by dividing net loss by the weighted average common shares and potentially dilutive common share equivalents. The effects of potential common stock equivalents are not included in computations when their effect is
anti-dilutive. Because of the net losses for all periods presented, the basic and diluted weighted average shares outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share calculation.
Common stock options and warrants to purchase 17,968,340 and 7,948,076 shares of common stock were not included in the computation of basic and diluted weighted average common shares outstanding for the three and six months ended November 30,
2012 and 2011, respectively, as inclusion would be anti-dilutive for these periods. Additionally as of November 30, 2012, 96,100 shares of Series B convertible preferred stock can potentially convert into 961,000 shares of common stock, and
$5,648,250 of convertible debt can potentially convert into 7,531,000 shares of common stock.
9
Income Taxes
Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating loss carryforwards are
recognized to the extent that realization of these benefits is considered more likely than not. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
The Company follows the provisions of FASB ASC 740-10 Uncertainty in Income Taxes (ASC
740-10). A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there are no unrecognized benefits at May 31, 2012 or 2011 and since the date of adoption. The Company has not recognized
interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefit in interest expense and penalties in operating
expenses. The Company is subject to examination by the Internal Revenue Service and state tax authorities for tax years ending after 2008.
Note 3 - Rescission Liabilities
The Companys board of directors (the Board) was advised by outside legal counsel that compensation the Company
previously paid to an employee and certain other non-employees who were acting as unlicensed, non-exempt broker-dealers soliciting investors on behalf of the Company from April 15, 2008 to February 18, 2011 was a violation of certain state
and possibly federal securities laws. As a result, such investors and potentially others have rescission or monetary claims (Claims) against the Company, and the Companys liability for these potential Claims is now being properly
reflected in the Companys financial statements. On March 16, 2011, the Company filed a Current Report on Form 8-K disclosing the potential rescission liability (the Liability Disclosure). On July 21, 2011, the Company
filed a Current Report on Form 8-K disclosing its receipt of an SEC letter of inquiry and request for voluntary assistance in discovering information related to the Liability Disclosure. By letter dated January 3, 2012, the Division of
Enforcement of the Securities and Exchange Commission notified the Company that the SEC had completed its informal investigation of the Company and had recommended no enforcement action be taken against the Company, or its officers, directors, or
employees.
Rescission rights for individual investors and subscribers vary, based upon the laws of the states in which the investors or
subscribers reside. Investments and subscriptions that are subject to rescission are recorded separately in our financial statements from shareholders deficiency in the Companys balance sheet. As the statutory periods for pursuing such
rights expire in the respective states, such amounts for those shares are reclassified to shareholders deficiency. Investors who have sold their shares of capital stock of the Company do not have rescission rights, but instead have claims for
damages, to the extent their shares were sold at a net loss, which is determined by subtracting the purchase price plus statutory interest and costs, if any, from the sale price.
Based on the Companys ongoing investigation, assuming there are no affirmative defenses or exemptions available to the Company, investors may have up to approximately $6.4 million of federal and
state Claims against the Company, as of the date of filing this Form 10-Q. These investor Claims could include approximately $3.1 million of potential state or foreign jurisdiction Claims involving approximately 17 states and five foreign
jurisdictions that may not be currently barred by the applicable statute of limitations or state law exemptions from broker-dealer registration requirements and these investors may also have overlapping federal Claims; the remainder could involve
investors who do not have state law Claims, but who may have federal rescission or damages rights, if such rights can be proven to exist because of the Companys failure to disclose contingent liabilities related to the state and foreign
jurisdiction Claims. The Company is continuing with its scientific and business plans in the ordinary course of business.
The Company
estimates an amount that is a probable indicator of the rescission liability and recorded rescission liabilities for November 30, 2012 and May 31, 2012 of $3,096,500 and $3,749,000, respectively. These amounts represent the believed
potential rescission liability as of the dates presented, including any contingent interest payable to investors who pursue their rescission rights, and forfeit their shares. For the purpose of calculating and disclosing rescission liability, the
Company has assumed that portions of the state Claims are barred by the statutes of limitations of certain states based upon a literal interpretation of the applicable statute. Although the Company has assumed that affirmative defenses based upon
the expiration of the statutes of limitations in these states may be generally available to bar these state Claims, it has not had legal counsel undertake a detailed analysis of case law that might apply to defer or avoid application of a bar to
such claims; thus, if rescission claims are made for those assumed to be barred by a statute of limitations and such claims are contested by the Company, until such affirmative defenses are ruled upon in a proceeding adjudicating the rights at
issue, no assurances can be made that, if asserted, such defenses would actually bar the rescission claims in these states.
10
The Company has considered methods to offer to rescind the previous investment purchase or subscription by
persons who acquired or subscribed for such investments during the period April 15, 2008 to February 18, 2011, but is not actually pursuing any such methods. If circumstances warrant, the Company may commence a rescission offer to give
each investor the opportunity to rescind or not rescind their investment (if not already sold) or subscription agreements or by certain shareholders between April 15, 2008 to February 18, 2011. Any rescission offer could address all or
part of the Companys rescission liability relating to its federal and state securities laws compliance issues by allowing the investors covered by the rescission offer to rescind the underlying securities transactions and sell those back to
the Company or recover funding provided with subscription agreements, as the case may be.
The Company entered into a seven-year Personal
Services Agreement on August 4, 2008 (the Contract) with Nader Pourhassan. It was subsequently determined that the compensation provided for under the Contract violated applicable securities laws. Such violations gave rise to the
Companys rescission liability described above. It was unclear whether the Company had any defenses to payment, whether the Company had any rights to recover payments made to Dr. Pourhassan or others at his direction or as contemplated in
the Contract (including payments in the form of securities), or whether, even if the Company does have such rights, Dr. Pourhassan (and perhaps others) would have certain equitable remedies that would entitle Dr. Pourhassan (and perhaps
others) to set off against the Companys rights or would obligate the Company to make compensatory payments for services performed by Dr. Pourhassan (and others under his direction).
The Contract provided for compensation to Dr. Pourhassan at an annual salary of $200,000. Additionally, as incentive compensation,
Dr. Pourhassans personal assistant and one additional person were each to receive 50,000 common shares for every $500,000 in capital received by the Company through Dr. Pourhassans efforts. On October 11, 2011,
Dr. Pourhassan and the Company entered into a Mutual Release and Personal Services Termination Agreement (the MRPSTA) which relieved the Company of liability for any claims of compensation under the Contract. Simultaneously with the
signing of the MRPSTA, Dr. Pourhassan and the Company entered into a new Employment and Non-Compete Agreement whereby Dr. Pourhassan was appointed Managing Director of Business Development with an annual salary of $200,000. Upon the
signing of the MRPSTA, the Company at May 31, 2011 reversed all accrued stock compensation and deferred offering costs, as the Company had no further obligations under the Contract.
Note 4 - Convertible Instruments
During fiscal year 2010 the Company issued 400,000 shares of Series B Convertible Preferred Stock (Series B) at $5.00 per
share for cash proceeds totaling $2,009,000, of which 96,100 shares remain outstanding at November 30, 2012. Each share of the Series B is convertible into ten shares of the Companys common stock including any accrued dividend, with an
effective fixed conversion price of $.50 per share. The holders of the Series B can only convert their shares to common shares provided the Company has sufficient authorized common shares at the time of conversion. Accordingly, the conversion option
was contingent upon the Company increasing its authorized common shares, which occurred in April 2010, when the Companys shareholders approved an increase to the authorized shares of common stock to 100,000,000. At the commitment date, which
occurred upon such shareholder approval, the conversion option related to the Series B was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive dividend to the Series B holders of approximately
$6,000,000. The constructive dividend increased and decreased additional paid-in capital by identical amounts. The Series B has liquidation preferences over the common shares at $5.00 per share plus any accrued dividends. Dividends are payable to
the Series B holders when declared by the board of directors at the rate of $.25 per share per annum. Such dividends are cumulative and accrue whether or not declared and whether or not there are any profits, surplus or other funds or assets of the
Company legally available. The Series B holders have no voting rights.
11
During the three months ended November 30, 2012, the Company issued $5,648,250 in unsecured convertible
notes (the Notes) to investors for cash. Each Note is convertible at the election of the holder into common shares at a fixed conversion price of $.75 per share. The principal on the Notes is payable in full between October 1, 2015
and November 30, 2015. The Notes bear interest at rates that range from 5% to 10% per year, payable in cash semi-annually in arrears beginning on April 1, 2013. In connection with the sale of the Notes, warrants to purchase a total of
7,530,676 common shares with exercise prices ranging from $1.50 to $2.00 per share were issued to the investors, which are currently exercisable in full and will expire between October 1, 2014 and November 30, 2014. The Company determined
the fair value of the warrants using the Black-Scholes option pricing model utilizing certain weighted average assumptions such as expected stock price volatility, term of the warrants, risk-free interest rates, and expected dividend yield at the
grant date. Additionally, at the commitment date, the Company determined that the conversion option related to the Notes was beneficial to the investors. As a result, the Company determined the intrinsic value of the conversion option utilizing the
fair value of the common stock at the commitment date and the effective conversion price after discounting the Notes for the fair value of the warrants. The fair value of the warrants and the intrinsic value of the conversion option were recorded as
a debt discount to the Notes, and a corresponding increase to additional paid-in capital. The respective debt discounts at the commitment dates exceeded the face amount of the Notes, and accordingly, the discounts were limited to the cash proceeds
received from the Notes. The debt discounts are being amortized over the life of the Notes. During the three months ended November 30, 2012, activity related to the Notes were as follows:
|
|
|
|
|
|
|
Face amount of notes
|
|
$
|
(5,648,250
|
)
|
|
|
Debt discounts
|
|
|
5,648,250
|
|
|
|
Amortization of debt discount
|
|
|
(257,303
|
)
|
|
|
Carrying value of the notes
|
|
|
(257,303
|
)
|
Note 5 - Stock Options and Warrants
The Company has one stock-based equity plan at November 30, 2012. Pursuant to the 2004 Stock Incentive Plan, as amended (the
Plan), which was originally adopted by the Companys shareholders in 2005, the Company was authorized to issue options to purchase up to 7,600,000 shares of the Companys common stock. As of November 30, 2012, the Company
had 3,658,500 shares available for future stock option grants under the Plan. See Note 11 for information regarding the Companys 2012 Equity Incentive Plan, which was approved by the Companys shareholders on December 12, 2012.
During the six months ended November 30, 2012, the Company granted a total of 125,000 common stock options to directors with an exercise
price of $1.55 per share, which vest in quarterly increments over one year and have an expiration date of five years from the date of grant. The average grant date fair value related to these options was $.92 per share.
During the six months ended November 30, 2012, the Company granted a total of 225,000 common stock options to employees with an exercise price of
$1.80 per share. Fifty percent of the options vested immediately, and 50% vest in October 2013. The options have an expiration date of three years from the date of grant. The average grant date fair value related to these options was $.89 per share.
During the six months ended November 30, 2012, the Company granted a total of 515,000 common stock warrants to consultants with exercise
prices ranging from $1.00 to $5.00 per share. The warrants have varying vesting terms, but will all be fully vested by April 2013. The expiration dates for the warrants range from September 2014 to October 2015. The average grant date fair value
related to these warrants was $.56 per share.
Related to certain settled litigation, as disclosed in the Companys Annual Report on Form
10-K for the fiscal year ended May 31, 2012, the Company granted warrants for 750,000 common shares to consultants at an exercise price of $.25 per share. All compensation expense associated with the warrants was recognized at May 31,
2012. The consultants exercised all the warrants during the six months ended November 30, 2012.
As discussed in Note 4, the Company
issued warrants to purchase 7,530,676 common shares to investors. The grant date fair value of the warrants was $.77 per share.
Net cash
proceeds from the exercise of common stock warrants were $192,500 for the six months ended November 30, 2012.
Compensation expense
related to stock options and warrants was approximately $742,000 and $2,354,000, and $550,000 and $791,000 for the three and six months ended November 30, 2012 and 2011, respectively. The grant date fair value of options and warrants vested
during the three and six month periods ended November 30, 2012 and 2011 was $6,433,000 and $8,525,000, and $245,000 and $456,000, respectively. As of November 30, 2012, there was approximately $2,402,000 of unrecognized compensation costs
related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 1.76 years.
12
The following table represents stock option and warrant activity as of and for the six months ended
November 30, 2012:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options and warrants outstanding May 31, 2012
|
|
|
10,327,664
|
|
|
$
|
1.60
|
|
|
|
3.20
|
|
|
$
|
2,308,279
|
|
Granted
|
|
|
9,145,676
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(755,000
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(750,000
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding November 30, 2012
|
|
|
17,968,340
|
|
|
$
|
1.69
|
|
|
|
2.17
|
|
|
$
|
3,106,186
|
|
Outstanding exercisable November 30, 2012
|
|
|
16,376,596
|
|
|
$
|
1.65
|
|
|
|
2.12
|
|
|
$
|
3,101,499
|
|
Note 6 - Common Stock Issued for Services
During the three and six months ended November 30, 2012, the Company issued 7,810 and 24,040 fully vested shares of common stock
at $.77 and $1.60 per share to directors for past services, and recognized approximately $12,500 and $25,000 in stock-based compensation, respectively.
During the six months ended November 30, 2012, the Company issued 60,000 shares of common stock to a consultant at $2.68 per share, which was the fair value at the commitment date, and is being
amortized over the requisite service period. During the three and six months ended November 30, 2012, the Company recognized $8,000 and $161,000 in stock-based compensation related to this grant.
Note 7 - Recent Accounting Pronouncements
Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Companys present or future financial statements.
Note 8 - Related Party Transactions
In May, July and September of 2007, the Company issued a total of $150,000 in promissory notes with a stated interest rate of 14% to a
director of the Company. As of November 30, 2012, the balance payable on the notes is $47,601. The Company has classified the balance as short-term obligation as of November 30, 2012, as the Companys intention is to pay the note
completely in the next twelve months.
The above terms and amounts are not necessarily indicative of the terms and amounts that would have
been incurred had comparable transactions been entered into with independent parties.
Note 9 - Commitments and Contingencies
On July 25, 2012, the Company and Kenneth J. Van Ness entered into a Transition Agreement (the Transition Agreement).
Pursuant to the Transition Agreement, Mr. Van Ness stepped down as the Chairman of the Board, effective immediately. In addition, Mr. Van Ness agreed to step down as the President and CEO of the Company (see Note 10 below). Mr. Van
Ness ceased to be a director on December 12, 2012, and Gregory A. Gould, a current member of the Board, serves as Chairman of the Board.
The Transition Agreement provides that, in lieu of any compensation otherwise payable to Mr. Van Ness under the Executive Employment Agreement,
dated April 16, 2012, but effective as of August 9, 2011 (the Employment Agreement), by and between the Company and Mr. Van Ness, during the period beginning on July 18, 2012 through October 16, 2012 (the
Transition Period) Mr. Van Ness will be paid a salary equal to $13,890 per month and will continue to receive, during the Transition Period, the fringe benefits, indemnification and miscellaneous business expense benefits provided
for in the Employment Agreement. Mr. Van Ness is also entitled to (i) receive a cash severance payment equal to $13,890 per month for 33 months after the end of the Transition Period, (ii) the opportunity to elect the timing of
distribution of his account balance in the Companys 401(k) Plan, (iii) reimbursement for continuing health care insurance coverage under COBRA for nine months, and (iv) all amounts due by the Company to an affiliate of Mr. Van
Ness for every month that the Company continued to occupy a portion of the real property owned by an affiliate of Mr. Van Ness located at 110 Crenshaw Lake Road, Lutz, Florida.
13
The Transition Agreement also provides that: (i)(A) the CytoDyn Inc. Stock Option Award Agreement, dated
December 6, 2010, with Mr. Van Ness is amended to provide for immediate vesting of all of the 500,000 options granted at $1.19 per share, and (B) the CytoDyn Inc. Stock Option Award Agreement, dated April 16, 2012, but effective
as of August 9, 2011, with Mr. Van Ness is amended to provide for (I) immediate vesting of 750,000 of the 1,500,000 options granted at $2.00 per share, and (II) forfeiture of the remaining 750,000 options; and (ii) the
Company and Mr. Van Ness agreed that the expiration date of the 25,000 options granted to him on September 22, 2010, is August 8, 2016, although the Company amended the grants to waive the earlier expiration of such options if
Mr. Van Ness no longer is in Continuous Service with the Company, as that term is defined in the Companys Stock Incentive Plan.
Pursuant to the terms of the Transition Agreement described above, as of November 30, 2012, the Company has accrued approximately $462,000 in severance liabilities. The Company accrued for the
severance to be paid to Mr. Van Ness, as Mr. Van Ness has no significant continuing service obligation to the Company. Additionally, related to the modification of the above stock option awards to Mr. Van Ness, the Company recognized
approximately $1,128,000 of stock-based compensation expense during the six months ended November 30, 2012. This amount was determined based on the provisions of the above Transition Agreement, including the impact of the accelerated vesting
and forfeitures.
Effective July 25, 2012, the Company entered into an Asset Purchase Agreement (the Asset Purchase
Agreement) with Progenics Pharmaceuticals, Inc. (Progenics) to acquire from Progenics its proprietary HIV viral-entry inhibitor drug candidate PRO 140 (PRO 140), a humanized anti-CCR5 monoclonal antibody, as well as
certain other related assets, including the existing inventory of bulk PRO 140 drug product, intellectual property, certain related licenses and sublicenses, and United States Food and Drug Administration (FDA) regulatory filings. The
terms of the Asset Purchase Agreement provide for an initial cash payment at closing of $3,500,000, as well as the following milestone payments and royalties: (i) $2,500,000 at the time of the first dosing in a US Phase III trial or non-US
equivalent; (ii) $500,000 upon filing a New Drug Application with the FDA or other non-US equivalent; (iii) $5,500,000 at the time of the first US new drug application approval by the FDA or other non-US approval for the sale of PRO 140;
and (iv) royalty payments of up to eleven and one-half percent (11.5%) (comprised of 5% to Progenics and 3.5% and 3% to each of two sub-licensors to Progenics of certain patent estates) on net sales during the period beginning on the
date of the first commercial sale of PRO 140 until the later of (a) the expiration of the last to expire patent included in the acquired assets, and (b) 10 years following the first commercial sale of PRO 140, in each case determined on a
country-by-country basis. The Asset Purchase Agreement also requires the Company to pay a minimum annual license maintenance fee of the greater of $150,000 or the royalty fees paid on certain licensed products. On October 16, 2012, the
acquisition of PRO 140 by the Company was closed and the Company paid $3,500,000 in cash.
Note 10 - Acquisitions
As discussed in Note 9 above, the Company consummated an asset purchase on October 16, 2012 and paid $3,500,000 for certain
assets, including intellectual property, certain related licenses and sublicenses, FDA filings and various liquid forms of the PRO 140 drug product. The Company followed the guidance in Financial Accounting Standards topic 805 to determine if the
Company acquired a business. Based on the prescribed accounting, the Company acquired assets, and not a business. As of November 30, 2012, the Company recorded $3,500,000 of intangible assets and recorded an assumed liability of $150,000 in
connection with the Asset Purchase Agreement. The Company has not yet obtained a final valuation for the acquired assets. Any significant differences in the preliminary values assigned to the acquired assets, as recorded at November 30, 2012,
may be retrospectively adjusted pending the final third-party valuation. As of the date of this filing, management cannot reasonably estimate the likelihood of paying the milestone payments and royalties, and accordingly, as of November 30, 2012,
has not accrued any liabilities related to these contingent payments, as more fully described above in Note 9.
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Note 11 - Subsequent Events
On December 10, 2012, a holder of two of the Companys convertible promissory notes totaling $567,000 in principal exercised
his right to convert such notes into 755,999 shares of common stock at a conversion price of $0.75 per share.
On December 12, 2012, the
Companys shareholders approved, at its Annual Meeting, the CytoDyn Inc. 2012 Equity Incentive Plan, which replaces the 2004 Stock Incentive Plan and provides for the issuance of up to 3,000,000 shares of common stock pursuant to various forms
of incentive awards allowed under the 2012 Plan.
Effective December 28, 2012, the Company settled a disputed balance of approximately
$472,000 owed to its previous principal law firm in exchange for a cash payment of $45,000 and 66,116 shares of Company common stock with a value of $80,000 as determined by the closing price of the stock on December 24, 2012.