NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2013
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 its drug candidate 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.
CytoDyn Inc. 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).
The Company entered the development stage effective October 28, 2003 upon the reverse
merger and recapitalization of the Company and follows Financial Standard Accounting Codification No. 915, Development Stage Entities.
Advanced 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), to
explore 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 as an effort to strategically
diversify the use of its proprietary monoclonal antibody technology.
2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company 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 2013 presentation. These reclassifications did not have any effect on total
current assets, total assets, total current liabilities, total liabilities, total shareholders(deficit), or net loss.
Going Concern
The consolidated 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 $9,568,301 for the period ended May 31, 2013, has an accumulated deficit of $34,002,819, and a working capital deficit of $2,388,138 as of May 31, 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 its product candidates, obtain U.S. Food & Drug Administration (FDA) approval, outsource manufacturing of the product candidates, and ultimately attain profitability. The Company intends to seek
additional funding through equity and debt offerings to fund its business plan. There can be no assurance, however, that the Company will be successful in these endeavors.
52
Use of Estimates
The preparation of the 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 May 31, 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.
Identified Intangible Assets
The Company
follows the provisions of FASB ASC Topic 350 IntangiblesGoodwill and Other, which establishes accounting standards for the impairment of long-lived assets such as intangible assets subject to amortization. The Company reviews long-lived assets
to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a
long-lived asset group is less than its carrying value, the asset is considered impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset (See Note 11 for acquisition
of patents). There were no impairment charges for the years ended May 31, 2013 and 2012, or for the period October 28, 2003 through May 31, 2013. The value of the Companys patents would be significantly impaired by any adverse
developments as they relate to the clinical trials pursuant to the patents acquired as discussed in Notes 9 and 11.
Research and
Development
Research and development costs are expensed as incurred.
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 granted based on the fair market value of
the instrument using the Black-Scholes option pricing model utilizing certain weighted average assumptions such as expected stock price volatility, term of the options and warrants, risk-free interest rates, and expected dividend yield at the grant
date. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the stock options. The expected volatility is based on the historical volatility of the 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 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.
U.S. GAAP
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on limited historical experience of forfeitures, the Company estimated future
unvested option forfeitures at 0% as of May 31, 2013 and May 31, 2012.
Preferred Stock
As of May 31, 2013, the Companys Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock without shareholder
approval. As of May 31, 2013, the Company has authorized the issuance of 400,000 shares of Series B convertible preferred stock (see Note 4). The remaining preferred shares authorized have no specified rights other than the shares are
non-voting and no par value.
53
Deferred Offering Costs
In connection with a stock rescission liability as discussed at Note 3, the Company has recorded approximately $97,000 and $677,000 in deferred offering costs as of May 31, 2013 and May 31,
2012, respectively. These deferred offering costs have been recorded as a current asset for the respective periods. The asset is amortized and reduces equity on a pro rata basis with the decreases in the rescission liability. If investors exercise
their rescission rights and forfeit their shares, the deferred offering costs would be expensed at that time.
Stock for Services
The Company 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 18,146,938, 10,327,664 and 18,146,938 shares of common stock were not included in the computation of diluted weighted average
common shares outstanding for the periods ended May 31, 2013 and 2012 and for the period October 28, 2003 to May 31, 2013, respectively, as inclusion would be anti-dilutive for these periods. Additionally, as of May 31, 2013,
95,100 shares of Series B convertible stock can potentially convert into 951,000 shares of common stock, and $6,021,250 of convertible debt can potentially convert into 8,106,282 shares of common stock based on fixed conversion prices ranging from
$.65 to $.75 per share.
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, 2013 or 2012 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.
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, originally estimated
to total approximately $6.4 million, 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
54
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.
The Company estimates an amount
that is a probable indicator of the rescission liability and recorded rescission liabilities for May 31, 2013 and May 31, 2012 of $537,000 and $3,749,000, respectively. These amounts represent the believed remaining 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 various states. Although the Company has assumed that affirmative defenses based upon the application 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 considered methods to offer to rescind the previous investment purchase or subscription by
persons who acquired or subscribed for investments during the period April 15, 2008 to February 18, 2011, but did not pursue any such methods.
The Company entered into a seven-year Personal Services Agreement on August 4, 2008 (the Contract) with Nader Pourhassan, now the Companys President and Chief Executive Officer. It
was subsequently determined that the compensation provided for under the Contract may have 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 did 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.
4 - Convertible Instruments
During fiscal 2010, the Company authorized the issuance of 400,000 shares of Series B Convertible Preferred Stock (Series B) at $5.00
per share. During the year ended May 31, 2013, 3,800 shares of the Series B were converted into 38,000 shares of common stock. The Series B is convertible into ten shares of the Companys common stock including any accrued dividends, with
an effective fixed conversion price of $0.50 per share. The holders of the Series B are able to convert their shares to common shares only if the Company has sufficient authorized common shares at the time of conversion. Accordingly, the conversion
option was contingent upon the Company increasing
55
its authorized common shares, which occurred in April 2010 when the Companys shareholders approved an increase in the authorized common shares. At the commitment date, which occurred upon
the shareholders approving the increase in the authorized shares, the conversion option related to the Series B was beneficial. The intrinsic value of the conversion option at the commitment date resulted in a constructive dividend to the Series B
holders of approximately $6,000,000. The constructive dividend increased and decreased additional paid-in capital by the same amount. 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 $0.25 per share per annum. The Series B holders have no voting rights.
During the year ended May 31, 2013, the Company issued $6,588,250 in unsecured convertible notes (the Notes) to investors for cash. Each Note is convertible at the election of the holder
at any time into common shares at a fixed conversion price. Total principal of $6,208,250 is convertible at $.75 per share, and $380,000 is convertible at $.65 per share. The Notes are payable in full between November 30, 2013 and
March 6, 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. In connection with the sale of the Notes, detachable common stock warrants with a
two-year term to purchase a total of 8,527,984 common shares at exercise prices ranging from $.75 to $2.00 per share were issued to the investors, The warrants are currently exercisable in full and will expire between October 1, 2014 and
May 31, 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 debt discounts to the Notes, and a corresponding increase to additional paid-in capital. The debt discounts are being amortized over the life of the Notes. At the time of conversion, any unamortized
discounts associated with the Notes are fully amortized and recorded as interest expense. During the year ended May 31, 2013, activity related to the Notes was as follows:
|
|
|
|
|
Face amount of convertible notes
|
|
$
|
6,588,250
|
|
|
|
|
|
|
Debt discounts
|
|
|
(6,243,502
|
)
|
Amortization of debt discount
|
|
|
1,703,616
|
|
Conversions
|
|
|
(567,000
|
)
|
|
|
|
|
|
Total carrying value of convertible notes
|
|
|
1,481,364
|
|
Short-term portion of convertible notes
|
|
|
(328,347
|
)
|
|
|
|
|
|
Long-term portion of convertible notes
|
|
$
|
1,153,017
|
|
|
|
|
|
|
The Company utilized the following weighted average assumptions to value the above warrants:
|
|
|
Expected dividend yield
|
|
-0-%
|
Stock price volatility
|
|
70 94%
|
Expected term
|
|
2 years
|
Risk-free interest rate
|
|
.28%
|
Grant-date fair value
|
|
$.11 - $1.10
|
5 - Stock Options and Warrants
The Company has one stock-based equity plan at May 31, 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
56
issue options to purchase up to 7,600,000 shares of the Companys common stock. On December 12, 2012, the Companys shareholders approved the CytoDyn Inc. 2012 Equity Incentive
Plan (the 2012 Plan), which replaced 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 May 31,
2013, the Company had 1,976,710 shares available for future stock-based grants under the 2012 Plan.
During the year ended May 31, 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, 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 $.89 per share.
During the year ended May 31, 2013, the Company granted a
total of 1,225,000 common stock options to employees with exercise prices ranging from $.80 to $1.80 per share. Of the options, 112,500 vested immediately, and 112,500 vest in October 2013. The remaining options vest annually over three years,
beginning one year following the grant date. The options have expiration dates that range from three to five years from the date of grant. The average grant date fair value related to these options was $.60 per share.
During the year ended May 31, 2013, 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 were fully vested in 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.
On July 27, 2012, the Company entered into a Settlement Agreement and Mutual Release (the Settlement
Agreement) with William Carmichael and Mojdeh Javadi (the Plaintiffs) with respect to a complaint filed in December 2011 alleging breach of contract for failure to issue warrants to purchase shares of the Companys common
stock to the Plaintiffs pursuant to a contract entered into between the Company and the Plaintiffs in November 2007, as well as failure to pay compensation to which the Plaintiffs were allegedly entitled pursuant to the Contract described in Note 3
above. In the Settlement, the Company granted warrants to purchase a total of 750,000 common shares to the Plaintiffs at an exercise price of $.25 per share. All compensation expense associated with the warrants was recognized at May 31, 2012,
totaling approximately $540,000. All the warrants were exercised during the year ended May 31, 2013. Ms. Javadi is the spouse of the Companys chief executive officer.
As discussed in Note 4, the Company issued warrants to purchase a total of 8,527,984 common shares to investors. The grant date fair value of the warrants was $.72 per share.
Net cash proceeds from the exercise of common stock warrants and options were $201,000 for the year ended May 31, 2013.
Compensation expense related to stock options and warrants was approximately $3,262,000 and $1,692,000 for the year ended May 31, 2013, and 2012,
respectively. The grant date fair value of options and warrants vested during the year ended May 31, 2013 and 2012 was approximately $8,889,000 and $1,562,000, respectively. As of May 31, 2013 there was approximately $1,748,000 of
unrecognized compensation costs related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 1.57 years.
The estimated fair value of options and warrants is determined using the Black-Scholes option valuation model with the following weighted-average assumptions for the periods ended May 31, 2013 and
2012:
|
|
|
|
|
|
|
2013
|
|
2012
|
Risk free rate
|
|
0.12% - 0.70%
|
|
0.12% -.87%
|
Dividend yield
|
|
|
|
|
Volatility
|
|
87% - 102%
|
|
93% - 102%
|
Expected term
|
|
1 - 4 years
|
|
1 - 4 years
|
57
The following table represents stock option and warrants activity for the periods ended May 31, 2013
and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic Value
|
|
Options and warrants outstanding - May 31, 2011
|
|
|
7,473,576
|
|
|
$
|
1.34
|
|
|
|
3.84
|
|
|
$
|
10,495,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,456,088
|
|
|
$
|
2.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(527,500
|
)
|
|
$
|
.62
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(74,500
|
)
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding - May 31, 2012
|
|
|
10,327,664
|
|
|
$
|
1.60
|
|
|
|
3.20
|
|
|
$
|
2,308,279
|
|
Granted
|
|
|
11,166,274
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(780,000
|
)
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(2,567,000
|
)
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding - May 31, 2013
|
|
|
18,146,938
|
|
|
$
|
1.65
|
|
|
|
1.86
|
|
|
$
|
140,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - May 31, 2013
|
|
|
16,253,188
|
|
|
$
|
1.68
|
|
|
|
1.65
|
|
|
$
|
140,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 - Common Stock and common stock payable issued for services
During the year ended May 31, 2013, the Company issued 51,520 fully vested shares of common stock at prices ranging from $.80 to
$1.60 per share, and recognized approximately $49,000 in compensation expense to directors for past services. Compensation expense to directors related to common stock issuances was approximately $35,000 for the year ended May 31, 2012.
During the year ended May 31, 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, which was amortized over the requisite service period. During the year ended May 31, 2013 the Company recognized approximately $161,000 in stock-based compensation related to this grant. During the year ended
May 31, 2012, compensation expense related to common stock issuances to consultants was approximately $203,000.
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 for the year ended May 31, 2013.
At May 31, 2013, the Company is committed, subject to satisfaction of certain conditions, to issue approximately $108,000 of common stock to two
executives of the Company for past services. This amount is included in common stock payable as of May 31, 2013. At May 31, 2013, the Company is committed to issue approximately $10,000 of common stock to a director of the Company related
to accrued interest on a note payable (see Note 10). This amount is included in common stock payable. Pursuant to the Settlement Agreement described in Note 5, the Company issued 400,000 shares of common stock, which was recorded as common stock
payable at May 31, 2012. The Company recognized approximately $388,000 in stock compensation expense during the year ended May 31, 2012 related to the issuance of this common stock.
7 - Recent Accounting Pronouncements
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 effect on the Companys present or future financial statements.
8 - Income Taxes
Deferred taxes are recorded for all existing temporary differences in the Companys 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, 2013 and 2012, or for the period ended October 28, 2003
through May 31, 2013.
58
Reconciliation of the federal statutory income tax rate of 34% to the effective income tax rate is as
follows for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Income tax provision at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net
|
|
|
5.1
|
|
|
|
5.1
|
|
Rate change
|
|
|
0.0
|
|
|
|
0.0
|
|
Other
|
|
|
0.0
|
|
|
|
0.0
|
|
Valuation allowance
|
|
|
(39.1
|
)
|
|
|
(39.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities are comprised of the following as of May 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax asset (liability) current:
|
|
|
|
|
|
|
|
|
Accrued salary and expenses
|
|
$
|
291,100
|
|
|
$
|
49,100
|
|
Debt discount amortization
|
|
|
(118,100
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(173,000
|
)
|
|
|
(49,100
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset (liability) non-current
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
8,256,000
|
|
|
$
|
6,317,000
|
|
Debt discount
|
|
|
(1,659,300
|
)
|
|
|
|
|
Expense on non-qualified stock options
|
|
|
2,928,000
|
|
|
|
2,093,100
|
|
Other
|
|
|
155,500
|
|
|
|
96,500
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(9,680,200
|
)
|
|
|
(8,506,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013, the Company had available net operating loss carryforwards of
approximately $21,000,000 which expire beginning in 2022.
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. Mr. Van Ness ceased to be a
director on December 12, 2012.
The Transition Agreement provided 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 following the Transition Period, (ii) the opportunity
to elect the timing of distribution of his account balance in the Companys 401(k) Plan, and (iii) reimbursement for continuing health care insurance coverage under COBRA for nine months.
The Transition Agreement also amended (A) the CytoDyn Inc. Stock Option Award Agreement, dated December 6, 2010, with Mr. Van Ness 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,
59
with Mr. Van Ness 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. In
addition, the expiration date of the 25,000 options granted to Mr. Van Ness on September 22, 2010, as well as the options described above, will be August 8, 2016.
Pursuant to the terms of the Transition Agreement described above, during the year ended May 31, 2013, the Company recognized approximately $479,000 in severance expense and has an accrued liability
of approximately $365,000, which is included in accrued salaries and severance on the consolidated balance sheet as of May 31, 2013. 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 year ended
May 31, 2013. This amount was determined based on the provisions of the above Transition Agreement, including the impact of the accelerated vesting and forfeitures.
Under the Asset Purchase Agreement (the Asset Purchase Agreement), dated July 22, 2012, between the Company and Progenics Pharmaceuticals, Inc. (Progenics), the Company
acquired 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 U.S. Food and Drug Administration (FDA) regulatory filings. On October 16, 2012, the Company paid $3,500,000 in cash to Progenics to
close the acquisition transaction. The Company is also required to pay Progenics the following milestone payments and royalties: (i) $1,500,000 at the time of the first dosing in a U.S. Phase III trial or non-US equivalent;
(ii) $5,000,000 at the time of the first US new drug application approval by the FDA or other non-U.S. approval for the sale of PRO 140; and (iii) royalty payments of up to five percent (5%) 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, in each case determined on a country-by-country
basis. Payments to Progenics are in addition to payments due under a Development and License Agreement, dated April 30, 1999 (the PDL License), between Protein Design Labs (now AbbVie Inc.) and Progenics, which was assigned to us in
the PRO 140 transaction, pursuant to which we must pay additional milestone payments and royalties as follows: (i) $1,000,000 upon initiation of a Phase III clinical trial; (ii) $500,000 upon filing a Biologic License Application
with the FDA or non-U.S. equivalent regulatory body; (iii) $500,000 upon FDA approval or approval by another non-U.S. equivalent regulatory body; and (iv) royalties of up to 7.5% of net sales for the longer of 10 years and the date of
expiration of the last to expire licensed patent. Additionally, the PDL License provides for an annual maintenance fee of $150,000 until royalties paid exceed that amount. Such amount remains due for calendar year 2013 and the failure to pay such
amount gives rise to a termination right after notice and an opportunity to cure.
In addition, from time to time, the Company is involved in
claims and suits that arise in the ordinary course of business. Management currently believes that resolving any such claims against the Company will not have a material adverse effect on the Companys business, financial condition or results
of operations.
10 - Related Party Transactions
During the year ended May 31, 2013, the Company issued a note payable to a director of the Company for $500,000. The note is
included in Indebtedness to related parties on the consolidated balance sheet as of May 31, 2013. The note bears interest at an annual rate of 15%, and principal and interest are payable in full at the April 11, 2014 maturity date. At the
election of the Company, interest may be paid in the form of shares of common stock not to exceed 150,000 shares at a fixed price of $.50 per share.
During the year ended May 31, 2013, the Company issued a convertible note (see Note 4) to the above director. The note has a face value of $1,000,000, and interest is payable at a rate of 5% in cash
semi-annually in arrears beginning on April 1, 2013. The principal of the note is payable in full at the October 16, 2015 maturity date. The note is convertible into common shares at a fixed conversion price of $.75 per share at any time
at the election of the holder of the note. In conjunction with the note, the Company issued 1,333,333 detachable common stock warrants at an exercise price of $2.00 per share. The warrants expire on October 16, 2014. The Company recorded debt
discounts related to the fair value of the warrants and the intrinsic value of the beneficial conversion feature at the commitment date of the note. As of May 31, 2013, the carrying value of this convertible note was approximately $207,000,
which is included in convertible notes payable, net in long-term liabilities on the consolidated balance sheet. During the year ended May 31, 2013, the Company recognized approximately $207,000 in interest expense related to the amortization of
the above discounts.
60
See also the description of the Settlement Agreement with the spouse of the Companys chief executive
officer and an unrelated party in Note 5 above.
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.
11 - Acquisition of patents
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 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 May 31, 2013, the Company has recorded $3,500,000 of intangible assets in the form of patents. The Company estimates the
patents have an estimated life of ten years. As of the date of this filing, management cannot reasonably estimate the likelihood of paying the milestone payments and royalties described in Note 9 and, accordingly, as of May 31, 2013, the
Company has not accrued any liabilities related to these contingent payments, as more fully described above in Note 9.
The following presents
intangible assets as of May 31, 2013:
|
|
|
|
|
Gross carrying amounts
|
|
$
|
3,500,000
|
|
Accumulated amortization
|
|
|
(218,750
|
)
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
3,281,250
|
|
Patents currently not amortized
|
|
|
35,989
|
|
|
|
|
|
|
Carrying value of intangibles, net
|
|
$
|
3,317,239
|
|
|
|
|
|
|
Amortization expense related to intangible patents was approximately $219,000 for the year ended May 31, 2013. The
estimated aggregate future amortization expense related to the Companys intangible assets with finite lives is estimated at approximately $350,000 per year for the next five years.
12 - Subsequent Events
Subsequent to year-end and effective July 31, 2013, the Company issued $1,200,000 in unsecured convertible promissory notes (the
Six-Month Notes) to investors. The Six-Month Notes bear simple interest at the annual rate of 5% payable on the maturity date of February 1, 2014, or earlier date of repayment. Each investor has the right to demand earlier repayment
if the Company raises $3,000,000 or more in gross cash proceeds from the sale of equity securities after August 1, 2013. Each Six-Month Note is convertible at the election of the holder into shares of common stock at a price of $0.65 per share;
provided that upon a default in repayment of a Six-Month Note, the conversion price will decrease by $0.10 per share, to a minimum of $0.35 per share, for each month that the default continues. In connection with the sale of the Six-Month Notes, the
Company issued common stock warrants exercisable for three years to the investors to purchase a total of 923,072 shares at a price of $0.50 per share. Until October 1, 2013, each holder of a Note has the right to convert the principal amount of
the Note plus accrued but unpaid interest into Units consisting of two shares of common stock plus a warrant to purchase one share of common stock. Each Unit is valued at $1.30 for purposes of this conversion right. Each Unit warrant, if any, issued
upon conversion will have an exercise price of $0.75 per share and a five-year term. The Company paid a cash fee of $120,000 to a registered broker-dealer who acted as placement agent with respect to the Six-Month Notes and related warrants.
Subsequent to year-end and effective August 1, 2013, holders of $920,000 in principal amount of Notes (see Note 4) converted the
aggregate principal amount, plus accrued but unpaid interest totaling $12,071, into common stock at a conversion price of $.75 per share, resulting in the issuance of a total of 1,242,762 shares.
61