NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 31, 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, 2013 and 2012 and notes thereto in the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 2013, filed with the Securities and Exchange Commission on August 29,
2013. Operating results for the three months ended August 31, 2013 and August 31, 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 month periods ended August 31, 2013 and August 31, 2012 and the period October 28, 2003 through August 31, 2013,
(b) the financial position at August 31, 2013, and (c) cash flows for the three month periods ended August 31, 2013 and August 31, 2012 and the period October 28, 2003 through August 31, 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 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.
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 $2,573,551 for
the three months ended August 31, 2013, and has an accumulated deficit of $36,576,370 and a working capital deficit of $2,508,799 as of August 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 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 consolidated
financial statements in accordance with 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 August 31, 2013 or May 31, 2013. 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 months ended August 31, 2013 and August 31, 2012, and for the period October 28, 2003
through August 31, 2013.
Research and Development
Research and development costs are expensed as incurred.
Financial Instruments
At August 31, 2013 and
May 31, 2013, 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 $97,000 in deferred offering costs as of August 31, 2013 and May 31, 2013, 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 assert their rescission rights and retain their shares. Conversely, if the
investors assert their rescission rights and forfeit their shares, the deferred offering costs will be expensed at that time.
During the three months
ended August 31, 2013, the Company incurred $120,000 in direct costs associated with the issuance of convertible notes as described at Note 4, and recorded $20,000 in amortization expense for the three months ended August 31, 2013. The
debt issuance costs of $100,000 as of August 31, 2013 are included as a current asset as a component of deferred offering costs, and are being amortized over the life of the convertible notes.
During the three months ended August 31, 2013, the Company incurred approximately $200,000 in direct incremental costs associated with sale of the equity
securities as described in Note 10. The deferred offering costs are included as a long-term asset as of August 31, 2013, and will be recorded as a component of equity in the period the proceeds are received.
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 18,866,510 and 9,697,664 shares of common stock were not included in the computation of basic and diluted weighted average common shares outstanding for the three months ended August 31, 2013 and August 31, 2012,
respectively, as inclusion would be anti-dilutive for these periods. Additionally, as of August 31, 2013, 95,100 shares of Series B convertible preferred stock can potentially convert into 951,000 shares of common stock, and $6,301,250 of
convertible debt can potentially convert into 8,725,769 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 carry forwards 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.
9
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.
10
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 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.
The
Company estimates an amount that is a probable indicator of the rescission liability and recorded rescission liabilities for August 31, 2013 and May 31, 2013 of $536,500 and $536,500, 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 certain states based upon a literal interpretation of the applicable statute. 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.
11
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 August 31, 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 periods ended August 31, 2013 and May 31, 2013, the Company
issued $1,200,000 and $6,588,250, respectively, of 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 of the
principal balance at August 31, 2013, $4,721,250 is convertible at $.75 per share, and $1,580,000 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 terms of two or three years, were issued to the
investors to purchase a total of 9,451,056 common shares at exercise prices ranging from $.50 to $2.00 per share. The warrants are currently exercisable in full. 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 commitment 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 August 31, 2013 and 2012, the Company recognized approximately $1,452,000 and $ -0- in expense related to amortization of the debt discount. For the period
October 28, 2003 through August 31, 2013, the Company recognized approximately $3,156,000 in expense related to amortization of the debt discount. The unamortized discounts are fully amortized upon the conversion of the Notes before
maturity. Activity related to the Notes was as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2013
|
|
|
May 31, 2013
|
|
Face amount of Notes
|
|
$
|
7,221,250
|
|
|
$
|
6,588,250
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
(4,287,489
|
)
|
|
|
(4,539,886
|
)
|
Conversions
|
|
|
(920,000
|
)
|
|
|
(567,000
|
)
|
|
|
|
|
|
|
|
|
|
Total carrying value of Notes
|
|
|
2,013,761
|
|
|
|
1,481,364
|
|
Short-term portion of Notes
|
|
|
(670,093
|
)
|
|
|
(328,347
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of Notes
|
|
$
|
1,343,668
|
|
|
$
|
1,153,017
|
|
|
|
|
|
|
|
|
|
|
Note 5 - Stock Options and Warrants
The Company has one active stock-based equity plan at August 31, 2013. Pursuant to the 2004 Stock Incentive Plan, as amended, which was
approved by the Companys shareholders in 2005, the Company was authorized to grant 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
12
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 August 31, 2013, the Company had 1,776,710 shares available for future stock-based grants under the 2012 Plan.
During the three months ended August 31, 2013, the Company granted options to purchase a total of 200,000 shares of common stock to directors with an
exercise price of $.80 per share. These option awards vest at 25% per quarter over one year. The grant date fair value related to these options was $.47 per share.
During the three months ended August 31, 2013, the Company issued common stock warrants exercisable for three years to investors in certain convertible
notes to purchase a total of 923,072 shares at a price of $0.50 per share. The warrants were issued in connection with the sale of $1,200,000 in convertible promissory notes effective July 31, 2013 (the July Notes) (see Note 4).
Until October 1, 2013, each holder of a July Note had the right to convert the principal amount of the July 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 issued upon conversion will have an exercise price of $0.75 per share and a five-year term.
Compensation expense related to stock options and warrants was approximately $226,000 and $1,612,000, for the three months ended August 31, 2013 and
August 31, 2012, respectively. The grant date fair value of options and warrants vested during the three month periods ended August 31, 2013 and August 31, 2012 was $1,115,000 and $2,092,000, respectively. As of August 31, 2013,
there was approximately $1,615,000 of unrecognized compensation expense related to share-based payments for unvested options, which is expected to be recognized over a weighted average period of 2.32 years.
The following table represents stock option and warrant activity as of and for the three months ended August 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options and warrants outstanding May 31, 2013
|
|
|
18,146,938
|
|
|
$
|
1.65
|
|
|
|
1.86
|
|
|
$
|
140,321
|
|
Granted
|
|
|
1,123,072
|
|
|
$
|
.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(403,500
|
)
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding August 31, 2013
|
|
|
18,866,510
|
|
|
$
|
1.59
|
|
|
|
1.77
|
|
|
$
|
417,243
|
|
Outstanding exercisable August 31, 2013
|
|
|
17,104,010
|
|
|
$
|
1.62
|
|
|
|
1.57
|
|
|
$
|
417,243
|
|
Note 6 - Common Stock and Common Stock Payable Issued for Services
During the three months ended August 31, 2013 and 2012, the Company recognized approximately $-0- and $12,000 in stock compensation expense related to
common stock issued to directors for past services. During the three months ended August 31, 2013 and 2012, the Company recognized approximately $-0- and $153,000 in stock compensation expense related to common stock issued to consultants.
13
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
As of August 31, 2013, the Company has 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 August 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. Interest is payable in the
form of shares of common stock not to exceed 150,000 shares at a fixed price of $.50 per share. For the three months ended August 31, 2013, the Company has recorded approximately $19,000 in common stock payable and interest expense,
respectively.
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 August 31, 2013,
the carrying value of this convertible note was approximately $291,000, which is included in convertible notes payable, net in long-term liabilities on the consolidated balance sheet. During the three months ended August 31, 2013, the Company
recognized approximately $84,000 in interest expense related to the amortization of the above discounts.
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 Chairman of the Board, effective immediately, and as President and CEO of the Company on September 10, 2012. Mr. Van Ness ceased to be a director on December 12, 2012.
The Transition Agreement provides that, in lieu of any compensation otherwise payable to Mr. Van Ness under his Executive Employment Agreement, (the
Employment Agreement) with the Company, 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 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, 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, is August 8, 2016.
Pursuant to the terms of the Transition
Agreement described above, as of August 31, 2013, the Company has accrued approximately $318,000 in severance liabilities. The Company accrued for the severance payable to Mr. Van Ness, as he has no significant continuing service
obligation to the Company.
14
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-U.S. equivalent; (ii) $5,000,000 at the time of the first U.S. 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.
Note 10 - Subsequent Events
On September 5, 2013, the Companys board of directors granted a stock option to purchase a total of 305,000 shares of common
stock at an exercise price of $.75 per share to the principal of an Austrian investor relations firm the Company has retained to provide investor relations services in Europe. The option, which will terminate on September 4, 2018, vested as to
50,000 shares on the date of issuance and will vest at the monthly rate of 15,000 shares for each month during which the consulting agreement is in place. The consulting agreement, which has a term of 18 months, may be terminated for any reason
after six months.
Subsequent to quarter end, the Company has thus far completed the private sale of 5,300,773 units (Units) at a
purchase price of $1.30 per Unit for total gross sale proceeds of $6,911,024 in a private placement to 91 purchasers. The Company will issue two shares of its common stock, or a total of 10,601,546 shares, plus a warrant to purchase one additional
share of common stock, or a total of 5,300,773 shares subject to Unit warrants, for each Unit sold. Unit warrants are exercisable at an exercise price of $.75 per share and will expire five years after issuance.
Subsequent to quarter end, six holders of six-month term convertible notes with principal totaling $850,000 elected to convert the aggregate principal plus
accrued interest into Units pursuant to the Companys ongoing private placement. In addition, one holder in principal amount of 250,000 exercised his right for repayment.
Subsequent to quarter end, two holders of six-month term convertible notes (see Note 4) with principal totaling $380,000 converted the aggregate
principal amount, plus accrued but unpaid interest totaling $6,351, into common stock at a conversion price of $.65 per share, resulting in the issuance of a total of 594,384 shares. In addition, such holders received warrants to purchase 292,307
shares of common stock at an exercise price of $.75 per share which will expire five years after issuance.
Subsequent to quarter end, the holder of a
three-year term convertible note (see Note 4) with principal totaling $200,000 converted the aggregate principal amount into common stock at a conversion price of $.75 per share, resulting in the issuance of 266,666 shares. At the time of the
conversion, there was no accrued but unpaid interest.
Subsequent to quarter end and effective October 4, 2013, the holder of $9,000 in principal amount
of Notes converted the aggregate principal amount, plus accrued interest totaling $884, into common stock at a conversion price of $.45 per share, resulting in the issuance of a total of 21,964 shares.