NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 2013
(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 are unaudited and 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 nine months ended February 28, 2013 and February 29, 2012 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 nine month
periods ended February 28, 2013 and February 29, 2012 and the period October 28, 2003 through February 28, 2013, (b) the financial position at February 28, 2013, and (c) cash flows for the nine month periods ended
February 28, 2013 and February 29, 2012 and the period October 28, 2003 through February 28, 2013, 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.
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.
7
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 $7,082,759 for the nine months ended February 28, 2013, has
an accumulated deficit of $31,517,277, and a working capital deficit of $2,989,559 as of February 28, 2013. 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 February 28, 2013 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.
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 nine months ended February 28, 2013 and February 29, 2012, and for the period October 28, 2003 through February 28,
2013.
Research and Development
Research and development costs are expensed as incurred.
Financial Instruments
At February 28, 2013 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
8
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 $423,000 and $677,000 in deferred offering costs as of February 28, 2013 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 during which 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 18,038,297 and 8,331,576 shares of common stock were not included in the computation of basic and diluted weighted average common
shares outstanding for the nine months ended February 28, 2013 and February 29, 2012, respectively, as inclusion would be anti-dilutive for these periods. Additionally as of February 28, 2013, 95,100 shares of Series B convertible
preferred stock can potentially convert into 951,000 shares of common stock, and $5,341,250 of convertible debt can potentially convert into 7,121,667 shares of common stock.
Income Taxes
Deferred taxes are provided on the asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating loss 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 for all periods presented. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would
recognize interest accrued related to unrecognized tax benefit in interest expense and penalties in operating expenses. The Company is subject to examination by the Internal Revenue Service and state tax authorities for tax years ending after 2008.
9
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 $2.3 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 February 28, 2013 and May 31, 2012 of $2,344,000 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.
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).
10
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 95,100 shares remain outstanding at February 28, 2013. 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.
During the nine months ended February 28, 2013, the Company
issued $5,908,250 of 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 January 15, 2016. 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. Note holders, upon notice to
the Company, may elect to convert accrued and unpaid interest into common shares at the rate of $.75 per share. In connection with the sale of the Notes, warrants to purchase a total of 7,877,343 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 January 15, 2015. 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 nine months ended February 28, 2013, activity related to the Notes was as follows:
|
|
|
|
|
Face amount of notes
|
|
$
|
(5,908,250
|
)
|
Debt discounts
|
|
|
5,908,250
|
|
Amortization of debt discount
|
|
|
1,234,571
|
|
Conversions
|
|
|
(567,000
|
)
|
Carrying value of the notes
|
|
$
|
(671,571
|
)
|
Note 5 - Stock Options and Warrants
The Company has one stock-based equity plan at February 28, 2013. Pursuant to the 2004 Stock Incentive Plan, as amended, 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. On December 12, 2012, the Companys shareholders approved, at
its Annual
11
Meeting, the CytoDyn Inc. 2012 Equity Incentive Plan (the 2012 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. As of February 28, 2013, the Company had 2,876,710 shares available for future stock option grants under the 2012 Plan.
During the nine months ended February 28, 2013, the Company granted a total of 148,290 common stock options to directors with exercise prices
ranging from $1.40 to $1.55 per share. With respect to two option awards covering 23,290 shares, approximately one-half of such awards vest in approximately three month from grant date and the balance vest approximately six months from grant date,
while 125,000 options 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 $.89 per share.
During the nine months ended February 28, 2013, the Company granted options covering a total of 325,000 shares of common stock to employees with
exercise prices ranging from $1.40 to $1.80 per share. With respect to 225,000 options, 50% vested immediately and 50% vest in October 2013, with the options expiring to the extent not exercised three years from the grant date. The remaining options
vest annually over three years and expire five years following grant date. 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 $.90 per share.
During the nine months ended February 28, 2013, the Company granted warrants to purchase a total of 515,000 shares of common stock to consultants
with exercise prices ranging from $1.00 to $5.00 per share. The warrants have varying vesting terms, but will all fully vest 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 to purchase 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 nine months ended February 28, 2013.
As discussed in Note 4,
the Company issued warrants to purchase 7,877,343 common shares to investors. The grant date fair value of the warrants was $.75 per share.
Net cash proceeds from the exercise of common stock warrants were $192,500 for the nine months ended February 28, 2013.
Compensation expense related to stock options and warrants was approximately $473,000 and $2,827,000, and $367,000 and $1,159,000 for the three and nine
months ended February 28, 2013 and February 29, 2012, respectively. The grant date fair value of options and warrants vested during the three and nine month periods ended February 28, 2013 and February 29, 2012 was $378,000 and
$8,773,000, and $457,000 and $914,000, respectively. As of February 28, 2013 there was approximately $1,649,000 of unrecognized compensation costs related to share-based payments for unvested options, which is expected to be recognized over a
weighted average period of 1.39 years.
The following table represents stock option and warrant activity as of and for the nine months ended
February 28, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
9,615,633
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(755,000
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(1,150,000
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding February 28, 2013
|
|
|
18,038,297
|
|
|
$
|
1.68
|
|
|
|
2.02
|
|
|
$
|
1,793,958
|
|
Outstanding exercisable February 28, 2013
|
|
|
16,833,232
|
|
|
$
|
1.67
|
|
|
|
1.89
|
|
|
$
|
1,793,958
|
|
Note 6 - Common Stock and Common Stock Payable Issued for Services
During the three months ended February 28, 2013, the Company was committed to issue 12,500 fully vested shares of common stock at
$1.00 per share. During the nine months ended February 28, 2013 the Company issued 24,040 shares of fully vested common shares. The Company recognized approximately $12,500 and $37,500 in stock-based compensation for the three and nine months
ended February 28, 2013, respectively, related to these issuances. During the three and nine months ended February 29, 2012, the Company issued 72,500 shares of common stock at $2.80 per share to consultants for services, and recognized
$203,000 of stock-based compensation based on the fair market value of the common stock at the commitment date.
12
During the nine months ended February 28, 2013, the Company issued 60,000 shares of common stock to a
consultant at $2.68 per share, which was the fair value at the commitment date, and is being amortized over the requisite service period. During the three and nine months ended February 28, 2012, the Company recognized $-0- and $161,000 in
stock-based compensation related to this grant.
Effective December 28, 2012, the Company settled trade payable balances of approximately
$447,000 owed to its previous principal law firm in exchange for a cash payment of $45,000 and 66,116 shares of Company common stock with a value of $80,000 as determined by the closing price of the stock on December 24, 2012. The Company
recorded a gain on the satisfaction of the payables of approximately $322,000 and $373,000 for the three and nine months ended February 28, 2013, respectively.
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. The balance was paid in full during the three months ended February 28, 2013.
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 no later than October 16, 2012.
Mr. Van Ness ceased to be a director on December 12, 2012, and Gregory A. Gould, a current member of the Board, is serving 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 would
be paid a salary equal to $13,890 per month and continue to receive, during the Transition Period, the fringe benefits, indemnification and miscellaneous business expense benefits provided for in the Employment Agreement. Mr. Van Ness is also
entitled to (i) receive a cash severance payment equal to $13,890 per month for 33 months 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.
Under the
Transition Agreement: (i)(A) the CytoDyn Inc. Stock Option Award Agreement, dated December 6, 2010, with Mr. Van Ness was 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 was 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. The Company
also amended the grants to waive the earlier expiration of such options upon Mr. Van Nesss ceasing to be 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 February 28, 2013, the Company has accrued approximately $413,000 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 nine months ended February 28, 2013. 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
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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 requires the Company to pay, among other milestone payments and royalties, a minimum annual license maintenance fee of the greater of $150,000 or the royalty fees paid on certain licensed
products. During the three months ended February 28, 2013, the Company paid $150,000 related to the minimum annual license fee. 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 February 28, 2013, the Company recorded $3,500,000 of intangible assets. 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 February 28, 2013, 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 February 28, 2013, has not accrued any liabilities related to these contingent payments, as more fully described
above in Note 9.
Note 11 - Subsequent Events
Subsequent to February 28, 2013, the Company raised an additional $300,000 in cash through the issuance of convertible notes
payable to two individuals, together with warrants to purchase 358,334 shares of common stock, on terms and conditions generally comparable to previously issued convertible notes and warrants.
Subsequent to February 28, 2013, the Company raised an additional $500,000 in cash through the issuance of a one-year promissory note to a director of
the Company. The principal of the note is due in cash in a single payment at maturity and bears simple interest at the rate of 15% per annum. The interest is payable in the form of common stock of the Company at a rate of $0.50 per share and is
payable semiannually in arrears. The note has no other conversion features and does not include warrants.