UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: August 31, 2006 Commission File Number 000-49908
----------------- ---------
CYTODYN, INC.
-------------
(Exact name of small business issuer as specified in its charter)
COLORADO 75-3056237
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
227 E. Palace Avenue, Suite M, Santa Fe, New Mexico 87501
--------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(505) 988-5520
(Registrant's telephone number, including area code)
(Former address, changed sine last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, no par value 11,225.264
-------------------------- ---------
Class Number of shares outstanding
at November 28, 2006
Transitional Small Business Disclosure Format: Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes No X
--- ---
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TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
---------------------
Item 1 Financial Statements
Consolidated Balance Sheets As of August 31 2006 (unaudited)
and May 31, 2006 (audited) 2
Consolidated Statements of Operations Three Months ended
August 31, 2006 (unaudited) from Inception October 28, 2003
to August 31, 2006 (unaudited) 3
Consolidated Statements of Cash Flows for the Three Months
ended August 31, 2006 (unaudited) and from Inception
October 28, 2003to August 31, 2006 (unaudited) 4
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis or Plan of Operation 14
Item 3 Controls and Procedures 19
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 20
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits
Part I Item 1. Financial Statements
1
Part I, Item 1. Financial Statements
CYTODYN, INC.
(A Development Stage Company)
Condensed Balance Sheet
(Unaudited)
Assets
August 31, 2006 May 31, 2006
Current Assets: (unaudited) (audited)
--------------- ---------------
Cash .......................................................... $ 502,840 $ 125,320
Prepaid Insurance ............................................. 26,164 36,100
Prepaid Sponsored Research .................................... 162,800 --
--------------- ---------------
Total current assets ............................... 691,804 161,420
Furniture and equipment, less accumulated
depreciation of $2,583 (Note 4) ............................... 2,948 2,334
License Agreements ............................................... 150,000 --
Intangible asset, less accumulated
amortization of $2,014 (Note 5) .............................. 886 1,128
Deposit .......................................................... 495 495
--------------- ---------------
$ 846,133 $ 165,377
=============== ===============
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable .............................................. 104,809 $ 110,267
Accrued liabilities ........................................... 133,588 133,588
Accrued interest payable ...................................... 7,373 5,267
Convertible notes payable, net (Note 7) ....................... 11,336 23,863
Indebtedness to related parties (Note 9) ...................... 455,702 393,360
--------------- ---------------
Total current liabilities .......................... 712,807 666,345
Commitments and contingencies .................................... 150,000 150,000
--------------- ---------------
Total liabilities .................................. 862,807 816,345
--------------- ---------------
Shareholders' deficit :
Preferred stock, no par value; 5,000,000 shares authorized,
-0- shares issued and outstanding .......................... -- --
Common stock, no par value; 20,000,000 shares authorized,
11,225,264 shares issued and outstanding ................... 3,160,566 3,062,566
Stock for Services ............................................ (168,517) (267,060)
Additional paid-in capital .................................... 2,400,194 1,324,509
Accumulated deficit ........................................... (637,934) (1,601,912)
Deficit accumulated during development stage .................. (4,770,983) (3,169,071)
--------------- ---------------
Total shareholders' deficit ........................ (16,674) (650,968)
--------------- ---------------
$ 846,133 $ 165,377
=============== ===============
2
CYTODYN, INC.
(A Development Stage Company)
Condensed Statements of Operation
(Unaudited)
Three Months Ended October 28, 2003
August 31, (Inception)
---------------------------------- through
Operating expenses: 2006 2005 August 31, 2006
--------------- --------------- ---------------
General and administrative (Note 6) $ 229,481 $ 67,057 $ 1,538,187
Stock-based compensation:
Consultants ............ 149,950 -- 954,580
Amortization / Depreciation ....... 620 488 4,596
Research and Development .......... 171,741 -- 534,083
Legal Fees ........................ -- -- 66,750
Commitments and Contigencys ....... -- -- 150,000
--------------- --------------- ---------------
Total operating expenses 551,792 67,545 3,248,196
--------------- --------------- ---------------
Operating loss ......... (551,792) (67,545) (3,248,196)
Interest income ...................... 439 14 1,117
Interest expense:
Interest on convertible debt ...... (86,579) -- (558,044)
- ----------
Other ............................. -- (1,880) (1,880)
--------------- --------------- ---------------
Loss before income taxes (637,932) (69,411) (3,807,003)
Income tax provision ................. -- -- --
--------------- --------------- ---------------
Net loss .............. $ (637,932) $ (69,411) $ (3,807,003)
=============== =============== ===============
Basic and diluted loss per share ..... $ (0.06) $ (0.01)
=============== ===============
Basic and diluted weighted average
common shares outstanding ......... 10,156,751 8,489,453
=============== ===============
3
CYTODYN, INC.
(A Development Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
Three Months Ended October 28, 2003
August 31, (Inception)
------------------------------- through
2006 2005 August 31, 2006
-------------- ------------- ---------------
Cash flows from operating activities:
Net loss ........................................ $ (637,933) $ (57,892) $ (3,807,004)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization /Depreciation ................... (373) -- 3,603
Additional interest on debt
conversion .......................... (8,027) -- 348,005
Stock-based compensation ..................... 804,630
Changes in current assets and liabilities:
Increase in prepaid expenses ........ 276,995 -- 230,895
Increase in deposits ................ -- -- (495)
Increase in accounts payable
and accrued liabilities ......... (5,456) -- 384,054
Net cash used in
operating activities ................ (374,794) (57,892) (2,036,312)
-------------- ------------- ---------------
Cash flows from investing activities:
Property and equipment purchases ................ -- (936) (7,438)
-------------- ------------- ---------------
License Agreement ............................ (150,000) -- (150,000)
Prepaid Sponsored Research Agreement ......... (162,800) -- (162,800)
Net cash used in
investing activities ......................... (312,800) (936) (320,238)
-------------- ------------- ---------------
Cash flows from financing activities:
Capital contributions by president .............. -- -- 5,512
Proceeds from notes payable issued to
related parties (Note 9) ..................... (4,500) 5,197 496,625
Proceeds of notes payable to related
parties (Note 9) ............................. 62,341 (38,324) 62,341
Proceeds from notes payable issued to individuals 92,500 -- 673,000
Stock options vested ............................ 49,786 -- 49,786
Proceeds from the sale of common stock .......... 97,000 217,418 882,767
Payments for offering costs ..................... -- (27,867) (81,867)
Stock for Services .............................. (168,517) -- (168,517)
Proceeds from acqusition of AITI ................ 934,399 -- 934,399
Accrued Interest payable ........................ 2,106 -- 2,106
-------------- ------------- ---------------
Net cash provided by
financing activities ......................... 1,065,115 156,424 2,856,152
-------------- ------------- ---------------
Net change in cash ........................... 377,521 97,596 499,602
Cash, beginning of period ............................ 125,319 930 3,238
-------------- ------------- ---------------
Cash, end of period .................................. $ 502,840 $ 98,526 $ 502,840
============== ============= ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ................................. $ -- $ -- $ --
============== ============= ===============
Interest ..................................... $ 439 $ 14 $ 1,126
============== ============= ===============
4
CYTODYN, INC.
(A Development Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
Non-cash investing and financing transactions:
Net assets acquired in exchange for common
stock in CytoDyn/Rexray business
combination (Note 1) ............... $ -- $ -- $ 7,542
============== ============= ===============
Common stock issued to former officer to
repay working capital advance ....... $ -- $ -- $ 5,000
============== ============= ===============
Common stock issued for debt ................. $ -- $ -- $ 120,082
============== ============= ===============
Options to purchase common stock issued
for debt ............................ $ -- $ -- $ 86,341
============== ============= ===============
Common stock issued for convertible
debt (Note 7) ....................... $ 92,500 $ 122,748 $ 437,000
============== ============= ===============
5
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
1 - Organization:
The Company was incorporated under the laws of Colorado on May 2, 2002 under the
name Rexray Corporation ("Rexray"). The Company entered the development stage
effective October 28, 2003 and follows Statements of Financial Accounting
Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage
Enterprises". On October 27, 2003, Rexray changed its name to CytoDyn, Inc.
2 - Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying audited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and reflect all adjustments, consisting
solely of normal recurring adjustments, needed to fairly present the financial
results for these periods. The results of the operations for the three months
ended August 31, 2006 are not for the entire year. The review of the August 31,
2006 financial statements by our independent certified public accounts has not
yet been completed due to force majure. We expect their review to be completed
shortly.
The audited condensed consolidated financial statements and notes are presented
as permitted by Form 10-QSB. Accordingly, certain information and note
disclosures normally included in the 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 years ended May 31,
2006 and 2005 and notes thereto in the Company's annual report on Form 10-KSB
for the year ended May 31, 2005, filed with the Securities and Exchange
Commission on November 9, 2006. In the opinion of management, all adjustments
consisting only necessarily indicative of the results that may be expected of
normal recurring adjustments necessary for a fair statement of (a) the results
of operations for the three month period ended August 31, 2006 and 2005 and the
Period October 28, 2003 (Date of Inception) through August 31, 2006, (b) the
financial position at August 31, 2006, and (c) cash flows for the three month
period ended August 31, 2006 and 2005, and the Period October 28, 2003 (Date of
Inception) through August31, 2006, have been made.
Going Concern - The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying financial statements, the Company is currently in the development
stage with losses for all periods presented. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to obtain additional operating
capital, complete development of its medical treatment, obtain FDA approval,
outsource manufacturing of the treatment, and ultimately to attain
profitability. The Company intends to seek additional funding through equity
offerings to fund its business plan. There is no assurance that the Company will
be successful in these endeavors.
Acquisition - On July 18, 2006 CytoDyn, Inc. entered into an acquisition
agreement with UTEK Corporation, to purchased all 1,000 issued and outstanding
6
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
shares of Advanced Influenza Technologies, Inc. (AITI), a Florida Corporation in
exchange for 2,000,000 unregistered restricted common shares of CytoDyn, Inc
stock. Pursuant to the agreement, Company acquired 675,000 in cash of which
$162,800 was paid to the University of Massachusetts for the development of the
seeds, leaving net available funds of $512,200. In addition to the cash, Company
acquired the worldwide nonexclusive and exclusive license agreements from the
University of Massachusetts for certain technologies.
Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less when acquired, to
be cash equivalents. The Company had no cash equivalents as of August 31, 2006.
Furniture, Equipment and Depreciation - Furniture and equipment are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, generally three to seven years. Maintenance
and repairs are charged to expense as incurred and major improvements or
betterments are capitalized. Gains or losses on sales or retirements are
included in the statement of operations in the year of disposition.
Impairment of Long-Lived Assets - The Company evaluates the carrying value of
any long-lived assets under the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell. There were no impairment charges for the three months
ended August 31, 2006.
Research and Development - Research and development costs are expensed as
incurred.
Financial Instruments - At August 31, 2006, the fair value of the Company's
financial instruments are the approximate fair value due to the short-term
maturity of the instruments.
Stock-based compensation - In December 2004, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123 (Revised 2004), Share-Based Payments ("SFAS
No. 123R"). SFAS No. 123R requires a public entity to measure the cost of
employee services received in exchange for the award of equity instruments based
on the fair value of the award at the date of grant. The expense is to be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005 and accordingly the Company adopted this standard on June 1,
2006.
SFAS No. 123R provides for two transition methods. The "modified prospective"
method requires that share-based compensation expense be recorded for any
employee options granted after the adoption date and for the unvested portion of
any employee options outstanding as of the adoption date. The "modified
retrospective" method requires that, beginning June 1, 2006, all prior periods
presented be restated to reflect the impact of share-based compensation expense
consistent with the proforma disclosures previously required under SFAS No. 123.
7
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
The Company adopted the modified prospective application of SFAS 123(R),
"Share-Based Payment" ("SFAS 123(R)"), for all options and warrants issued to
employees and directors during the three month period ended August 31, 2006 and,
as a result, has not restated its financial results for prior periods.
Prior to June 1, 2006, the Company had adopted SFAS No. 123, Accounting for
Stock-Based Compensation. As provided for by SFAS No. 123, the Company had
elected to continue to account for its stock-based compensation programs
according to the provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees. Accordingly, compensation expense
had been recognized to the extent of employee or director services rendered
based on the intrinsic value of stock options granted under the plan. The
Company accounts for common stock, stock options, and warrants granted to
non-employees based on the fair market value of the instrument, using the
Black-Scholes option pricing model based on assumptions for expected stock price
volatility, term of the option, risk-free interest rate and expected dividend
yield at the grant date.
For all awards granted prior to June 1, 2006, the unearned deferred fair value
of stock-based compensation was recognized as an expense on a straight-line
basis over the remaining requisite service period, ranging from three months to
four years.
In certain circumstances, the Company issued common stock for invoiced services,
to pay creditors and in other similar situations. In accordance with Emerging
Issues Task Force 96-18 ("EITF 96-18"), payments in equity instruments to
non-employees for goods or services are accounted for by the fair value method,
which relies on the valuation of the service at the date of the transaction, or
public stock sales price, whichever is more reliable as a measurement. For the
three month period ended August 31, 2006, Company has a balance of $168,516 for
stock for services.
The estimated fair value of warrants granted was determined in accordance with
SFAS No. 123R on the date of grant using the Black-Scholes option valuation
model with the following weighted-average assumptions. Risk free interest rate
of 5.0% to 5.2%; dividend yield 0%; volatility 153.3% and expected life of five
years. The risk-free interest rate assumption is based upon observed interest
rates appropriate for the expected term of the stock options. The expected
volatility is based on the historical volatility of the common stock of an
appropriate proxy company. 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 expectations regarding future exercises of options which generally vest
over three to ten years.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Based on historical experience, the Company estimated future
unvested option forfeitures at 0% as of August 31, 2006 and incorporated this
rate in estimated fair value of employee option grants.
As a result of adopting SFAS No. 123R, the Company's operating loss, loss before
income taxes, and net loss were approximately 50,000 lower for the three months
ended August 31, 2006, than if the Company had continued to account for stock
based compensation under APB Opinion No. 25. The impact to basic and diluted
weighted averages was less than $0.01.
There was no impact on operating results and per share information had the
Company accounted for stock based compensation in accordance with SFAS No. 123R
for the three months ended August 31, 2005.
8
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
Net cash proceeds from the exercise of stock options and warrants were $0 for
the three months ended August 31, 2006. At August 31, 2006, there was $746,789
of unrecognized compensation cost related to share-based payments which is
expected to be recognized over a weighted average period of 4.0 years.
The following table represents stock option and warrants activity as of and for
the three months ended August 31, 2006.
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic
of shares Price Life Value
--------- -------- ----------- ---------
Options outstanding - May 31, 2006 1,532,222 $1.73
Granted 74,000 2.50
Exercised - -
Forfeited/expired/cancelled - -
Options Outstanding -August 31, 2006 1,606,222 $1.76 6.76 years $ 615,000
--------- -------- ----------- ---------
1,251,702 $1.63 6.10 years $ 612,500
--------- -------- ----------- ---------
Outstanding Exercisable - August 31, 2006
The total grant date fair value of options vested during the three months ended
August 31, 2006 and 2005 was $47,000 and $0 respectively.
Earnings (Loss) per Common Share -. Basic earnings (loss) per share is computed
by dividing the net income or loss by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average common shares and
potentially dilutive common share equivalents. The effects of potential common
stock equivalents are not included in computations when their effect is
antidilutive. Because of the net loss for the three month period ended August
31, 2006, the basic and diluted weighted average shares outstanding are the
same, since including the additional shares would have an antidilutive effect on
the loss per share calculation. With a net (loss) of ($637,690), the Per-Share
amount is equal to ($.06). For the three months ended August 31, 2006 1,606,222
options and warrants and 54,000 shares of common stock related to convertible
debt were excluded for earnings (loss) per share. The weighted average shares
outstanding for the three month period ended August 31, 2006 is 10,156,751.
Reclassification - Certain prior period amounts have been reclassified to comply
with current period presentation.
Segments of an Enterprise and Related Information - Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") replaces the industry segment approach under
previously issued pronouncements with the management approach. The management
approach designates the internal organization that is used by management for
allocating resources and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers. At present, the Company only
operates in one segment.
3 - Recent Accounting Pronouncements:
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections.
This statement, which replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
9
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
requires that a voluntary change in accounting principle be applied
retrospectively to all prior period financial statements presented, unless it is
impracticable to do so. SFAS 154 also provides that a change in method of
depreciating or amortizing a long-lived nonfinancial asset be accounted for as a
change in estimate effected by a change in accounting principle, and also
provides that correction of errors in previously issued financial statements
should be termed a "restatement." SFAS 154 is effective for our fiscal year
beginning July 1, 2006. We anticipate that the adoption of SFAS 154 will not
have a material impact on our financial statements.
In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments--an amendment of FASB Statements No. 133 and 140. This
statement allows financial instruments that have embedded derivatives to be
accounted for as a whole (eliminating the need to bifurcate the derivative from
its host) if the holder elects to account for the whole instrument on a fair
value basis. SFAS 155 shall be effective for all financial instruments acquired,
issued, or subject to a remeasurement (new basis) event occurring after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
We anticipate that SFAS 155 will not have a material impact on our financial
statements.
In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140. The statement addresses the
recognition and measurement of separately recognized servicing assets and
liabilities and provides an approach to simplify efforts to obtain hedge-like
(offset) accounting. Entities shall adopt this statement as of the beginning of
the first fiscal year that begins after September 15, 2006. Earlier adoption is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. The effective date of this statement is the
date that an entity adopts the requirements of this statement. We anticipate
that SFAS 156 will not have a material impact on our financial statements.
In September 2006, Statement 157, Fair Value Measurements, was issued by the
FASB and is effective for financial statements for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Statement 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. We anticipate that SFAS 157 will not
have a material impact on our financial statements.
In September 2006, SFAS 158, "Employers' Accounting for Defined Benefit Pensions
and Other Post-Retirement Plans" ("SFAS 158"), was issued by the FASB and is
effective for financial statements for fiscal years ending after December 15,
2006. SFAS 158 improves financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This Statement also improves financial reporting by requiring an
employer to measure the funded status of a plan as of the date of its year-end
statement or financial position, with limited exceptions. We anticipate that
SFAS 158 will not have a material impact on our financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Current Year Misstatements." SAB No. 108 requires
analysis of misstatements using both an income statement (rollover) approach and
10
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
a balance sheet (iron curtain) approach in assessing materiality and provides a
one-time cumulative effect transition adjustment. SAB No. 108 is effective for
our 2006 annual financial statements. We are currently assessing the potential
impact that the adoption of SAB no. 108 will have on our consolidated financial
statements. The adoption of SAB No. 108 is not expected to materially impact the
consolidated financial statements.
We have reviewed all other recently issued, but not yet effective, accounting
pronouncements and do not believe any such pronouncements will have a material
impact on our financial statements.
4 - Property and Equipment - Property and equipment are as follows at August 31,
2006:
Office Equipment
Furniture $ 1,721
Computer Equipment 3,809
------------
Total $ 5,531
Less: Accumulated depreciation (2,583)
------------
Net property and equipment $ 2,948
============
5 - Intangible Assets - Intangibles are as follows at August 31, 2006:
Website
------------
Cost $ 2,900
Less accumulated amortization (2,014)
------------
Net intangibles $ 886
============
6 - General and Administrative Expenses - General and administrative expenses
consist of the following:
August 31,
---------------------------
2006 2005
------------ ------------
Salaries and payroll taxes .. $ 83,750 $ 42,798
Legal ....................... 31,989
Consulting .................. 22,000
Other professional fees ..... 11,800 1,000
Patent fees ................. 130 4,964
Insurance ................... 8,379 10,177
Office, travel, and other ... 71,433 8,118
------------ ------------
$ 229,481 $ 67,057
============ ============
7 - Convertible Notes Payable - During the year ended May 31, 2006, the Company
issued convertible promissory notes and 407,600 warrants to purchase common
stock to individuals in exchange for proceeds totaling $509,500. The notes bear
11
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
interest at five percent per annum and mature in January and February 2007.
Principal and accrued interest are payable in any combination of cash and common
stock of the Company at the option of the lender. The Company can repay
principal and accrued interest with common stock at the rate of $1.25 per share.
The warrants to purchase common stock which accompanied the convertible
promissory notes are exercisable at $2.50 per share, vest immediately, and
expire in October 2010. Additionally, the Company recorded the original issue
discount based on the fair value of the warrants. In accordance with EITF Issue
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios ("EITF 98-5") and EITG
Issue No. 00-27, Application of Issue Mo. 98-5 to Certain Convertible
Instruments ("EITF 00-27"), the Company recorded the intrinsic value of the
embedded beneficial conversion feature related to the option for conversion into
the Company's common stock. To recognize the original issue discount and the
beneficial conversion feature, the Company discounted the notes and increased
additional paid-in capital. The discount is amortized over the life of the debt.
During the three month period ended August 31, 2006, the Company amortized
approximately $84,000 of the discounts which is included as a component of
interest expense.
During the three months ended August 31, 2006, the Company issued convertible
promissory notes and 74,000 warrants to purchase common stock to individuals in
exchange for proceeds totaling $92,500. These notes and warrants were issued
with the same terms as the convertible notes and warrants issued during the year
ended May 31, 2006. The Company followed the accounting prescribed in the
preceding paragraph. As of August 31, 2006, the face amount and unamortized
discount related to convertible notes was $67,500 and $56,164 respectively.
8 - Commitments and Contingencies - Rex H. Lewis, a Defendant and former
director and C.E.O. of Amerimmune Pharmaceuticals, Inc. filed a First Amended
Cross-Complaint against CytoDyn of New Mexico, Inc., (predecessor company) Allen
D. Allen, Corinne E. Allen, Ronald J. Tropp, Brian J. McMahon , Daniel M.
Strickland, M.D. and unknown others designated as "Does 101-150".
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
In connection with that settlement, Mr. Lewis and Maya LLC were awarded by the
Los Angeles Superior Court attorneys' fees in the amount of approximately
$150,000. We have appealed the Court's order. The matter has not yet been
briefed. Management believes it is reasonably possible that we will not prevail
on appeal. A $150,000 liability entitled "Commitments and contingencies" has
been accrued on the Company's balance sheet.
9 - Related Party Transactions - As of August 31, 2005, the Company owed two
officers promissory notes totaling of $71,375. The notes are due on demand and
carry no interest rate. Management plans to repay the notes through cash
payments, issuance of the Company's common stock, or a combination thereof. The
balance due of $71,375 remained unpaid at August 31, 2006 and is included in the
accompanying condensed financial statements as "Indebtedness to related
parties".
A former director has provided legal services to the Company over the past
several years. As of August 31, 2006, the Company owed the former director
$46,985 and it is included in the accompanying financial statements as
12
CYTODYN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
As of August 31, 2006 (unaudited) and May 31, 2006 (audited)
and for the three months ended August 31, 2006 and 2005 (unaudited)
and for the period October 28, 2003 (inception date)
through August 31, 2006 (unaudited)
"Indebtedness to related parties"as of August 31, 2005. As of August 31, 2006,
no arrangements had been made for the Company to repay the balance of this
obligation. The Company anticipates that the former director will continue to
provide legal services in the future.
The Company's former director, Peggy C. Pence, PhD., is the President and Chief
Executive Officer of Symbion Research International, Inc. ("Symbion"). On
January 5, 2005, the Company entered into a buy-sell agreement to purchase
certain intellectual property owned by Symbion. The agreement describes the
intellectual property in detail which summarized, is the Phase I clinical data
and the protocol for the Phase II study. This intellectual property is necessary
to obtain approval for, and to conduct, further FDA clinical tests of Cytolin.
Cytolin is a potential new drug being developed by the company for the treatment
of Human Immunodeficiency Virus ("HIV").
Under the terms of this agreement:
- The Company may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
studies for Cytolin.
- The Company granted 83,122 non-qualified stock options with an
exercise price of $.75 per share that vested immediately and are
exercisable over 5 years.
- The Company will pay $25,000 to Symbion by February 10, 2005, 30 days
after execution of the agreement.
- The Company will pay $275,000 to Symbion once the Company's secondary
financing is received.
The Company paid Symbion $25,000 out of loan proceeds received in March 2005.
Although the payment was late, Symbion accepted it and the contract is in force.
The Company issued the above-referenced 83,122 non-qualified stock options on
March 20, 2006.
The results of the Phase II/III studies for Cytolin shall be the sole property
of the Company upon Symbion's receipt of the final payment called for by this
agreement. If all remaining payments are not received, the property shall revert
to Symbion. The balance due of $337,342 is included in the accompanying
financial statements as "Indebtedness to related parties".
10 - Subsequent Events - The Company has no subsequent events for the period
ending August 31, 2006.
13
Part I. Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provides information which
management of CytoDyn, Inc. (the "Company") believes to be relevant to an
assessment and understanding of the Company's results of operations and
financial condition. This discussion should be read together with the Company's
financial statements and the notes to financial statements, which are included
in this report. This information should also be read in conjunction with the
information contained in our annual report on Form 10-KSB for the fiscal year
ended May 31, 2006, including the audited financial statements and notes
included therein. Because of the nature of a relatively new and growing company,
the reported results will not necessarily reflect future results of operations
or financial condition.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance. Some
discussions in this report may contain forward-looking statements that involve
risk and uncertainty. A number of important factors could cause our actual
results to differ materially from those expressed in any forward-looking
statements made by us in this report. Forward-looking statements are often
identified by words like: "believe," "expect," "estimate," "anticipate,"
"intend," "project" and similar expressions or words which, by their nature,
refer to future events.
In some cases, you can also identify forward-looking statements by terminology
such as "may," "will," "should," "plans," "predicts," "potential" or "continue,"
or the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity or achievements. You should not place undue certainty on these
forward-looking statements, which apply only as of the date of this report.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
our predictions. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.
Financial Performance Summary
The following discussion and analysis sets forth the major factors that affect
the Company's results of operations and financial condition reflected in the
audited financial statements for the three-month period ended August 31, 2006.
The review of the August 31, 2006 financial statements by our independent
certified public accounts has not yet been completed due to force majure. We
exepct their review to be completed shortly. This discussion and analysis should
be read in conjunction with the Company's Consolidated Financial Statements
contained herein and notes attached thereto. This information should also be
read in conjunction with the information contained in our annual report on Form
10-KSB for the fiscal year ended May 31, 2006, including the audited financial
statements and notes included therein.
Historical financial information presented is that of CytoDyn, Inc., pursuant to
the Share Exchange Agreement.
Comparison of Historical Results - Quarter Ended August 31, 2006 and Quarter
Ended August 31, 2005
REVENUES. Overall net revenues for the quarter ended August 31, 2006 were $0, as
compared to $0 for the quarter ended August 31, 2005.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted of payroll and related expenses for executive, accounting and
administrative personnel, professional fees and other general corporate
expenses. General and administrative expenses for the quarter ended August 31,
2006 were $229,481, as compared to general and administrative expenses of
$67,057 for the quarter ended August 31, 2005. These general and administrative
costs have increased as our activity levels have increased in connection with
the decision to change our business from a shell company to an operating
company.
14
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures for the
quarter ended August 31, 2006 were $171,741, as compared to research and
development expenditures of $0 for the quarter ended August 31, 2005. These
research and development expenses increased due to expenses associated with the
AITI transaction.
NET INCOME (LOSS). The net loss for the quarter ended August 31, 2006 was
$588,146, as compared to a net loss of $69,411 for the quarter ended August 31,
2005. The increase in net loss is primarily due to (i) research and development
expenses under a Sponsored Research Agreement to conduct lab work in association
with the University of Massachusetts, and (ii) the issuance of stock to service
providers for services rendered.
Plan of Operation
During the next 12 months, our objectives are
o to meet with the FDA and seek approval to continue Phase II(b) clinical
trial of Cytolin;
o to obtain three seeds from the University of Massachusetts from plasmid-DNA
products to protect human subjects from the flu, and, depending upon the
animal data provided by the University, to have a pre-IND meeting with the
FDA.
o to begin formulation of Formaxycin(TM)as a topical product.
o to continue our efforts to protect our technology by obtaining additional
patents in The United Kingdom, the European Union and Hong Kong;
o to raise approximately $2 to $8 million in additional funds needed to
support our research and development efforts, the clinical trials relating
to Cytolin and our general and administrative expenses, while keeping
dilution to a minimum if possible.
o to explore joint venture arrangements for or in combination with other
possible pharmaceutical products.
Continuing Clinical Trials:
Phase I(b)/II(a) clinical trials were conducted by Symbion Research
International under the sponsorship of Amerimmune, Inc. during 2002. We believe
that the data from these trials support approval by the FDA of Phase II(b)
trials. We are purchasing the data from these trials from Symbion and will use
the data to present to the FDA.
Projected costs to complete our research and development and to obtain FDA
approval of a Biologics Licensing Application:
We have negotiated with Symbion International for the right to use the Phase
I(b)II(a) data for a total of $362,000 and to seek approval for the Phase II(b)
trials from the FDA. If the Phase II study is approved by the FDA, we expect it,
together with the pre-Phase II efforts, to cost an estimated 6,056,981 for
Symbion to conduct the clinical trials, including estimated manufacturing and
supply costs of $450,000 and $362,000 for the Phase Ia/b data .
Once AITI has obtained the seeds from the University of Massachusetts, AITI will
begin developing a commercial manufacturing method in consultation with the FDA.
We believe we have earmarked sufficient funds on hand to complete this task.
Timing and anticipated completion dates for research and development.
--------------------------------------------------------------------------------
Clinical trials for Cytolin can take anywhere from 29 to 42 months. Until we
have met with the FDA, which we plan to do within the next six months, we cannot
be certain what additional work must be done before commencing Phase II(b)
trials of Cytolin(R). Until we receive the seeds from the University of
Massachusetts and have had a pre-IND meeting with the FDA, we cannot be certain
what additional work will be required for beginning studies of the plasmid DNA
products.
Date we expect to begin benefiting from the product:
--------------------------------------------------------------------------------
We hope to complete our research and development of all Cytolin clinical trials
needed for approval of a marketing application, if at all, by December 2012 but
might get product into the clinic for the limited indication of salvage therapy
as early as 2009 via treatment INDs depending upon the results from Phase II(b).
We hope to begin in fiscal 2007 a placebo-controlled proof-of-principle trial of
plasmid DNA containing two common influenza A antigens. This would allow us to
use the inactivated flu vaccine as a safe and available surrogate for the wild
virus. If successful, this could justify the manufacturing and safety testing of
a polyvalent product to be stockpiled by public health officials to prevent a
15
future lethal pandemic associated with the avian (bird) virus. The indication
for the seasonal antigens would probably be limited to individuals at high risk,
such as children, the elderly, and those with chronic diseases, such as COPD.
Much depends upon the next couple of flu seasons, the potential emergence of
avian-mammalian hybrid influenza viruses, and competing vaccines.
Risks and uncertainties associated with completing development within reasonable
period of time and if products are not completed on a timely basis:
Even if we are able to complete the development within a reasonable period of
time our competitors could still come out with something competitive to our
product. Toxicity in the product could go undetected until Phase IV Safety
Surveillance after drug approval. We may have to continue to litigate to protect
technology, or challenges to patents that have not yet expired, etc. The medical
community may lack of acceptance of our product. There may be an inability to
secure 3rd party payees such as if medicare would cover costs. Post registration
manufacturing problems or downturn of economy or industry could also be risks.
If we are unable to complete clinical trials on a timely basis, with favorable
results, our costs will increase significantly and we may not have enough
capital to support further research and development and continue in business.
Also, if we incur significant delays in being able to market our product, even
if we are ultimately able to do so, we will be delayed in earning revenues and
probably will require additional financing to continue in business. Please see
the section entitled "Risk Factors."
Patents
We have a License Agreement with Allen D. Allen, our president that gives us the
exclusive right to develop his technology worldwide. This includes issued U.S.
patents 5,424,066; 5,651,970 and 6,534,057, foreign counterparts, as well as
European Patent No. 94 912826.8, for the United Kingdom, Germany, France,
Switzerland, Italy, the Netherlands, Portugal, Spain, and Sweden. Other Patents
are pending in those same countries We estimate the costs associated with these
pending patents to be approximately $65,000, including amounts we have already
spent. We may file additional patents during the current fiscal year if our
research and development efforts warrant them, but we do not have any such
potential patents identified at this time other than Hong Kong. The license
acquired gives us the right to develop Mr. Allen's patents worldwide.
Our wholly owned subsidiary AITI has a non-exclusive license to the following
patents from the University of Massachusetts
-------------------------- --------------- -------------- ------------- --------
Serial Number Filing Date Issue Date Patent # Country
-------------------------- --------------- -------------- ------------- --------
08/009,833 1/27/1993 7/1/1997 5,643,578 USA
-------------------------- --------------- -------------- ------------- --------
08/187,879 1/27/1994 1/11/2005 6,841,381 USA
-------------------------- --------------- -------------- ------------- --------
10/763,049 1/22/2004 NA pending USA
-------------------------- --------------- -------------- ------------- --------
PCT/US93/02394 3/17/1993 NA NA PCT
-------------------------- --------------- -------------- ------------- --------
PCT/US95/00997 1/25/1995 NA NA PCT
-------------------------- --------------- -------------- ------------- --------
93907536 3/17/1993 NA NA EP
-------------------------- --------------- -------------- ------------- --------
01202355.2 6/18/2001 NA NA EP
-------------------------- --------------- -------------- ------------- --------
2,132,836 9/23/1994 NA NA CA
-------------------------- --------------- -------------- ------------- --------
2,181,832 1/25/1995 NA NA CA
-------------------------- --------------- -------------- ------------- --------
07-520142 1/25/1995 NA NA JP
-------------------------- --------------- -------------- ------------- --------
2003-28160 7/29/2003 NA NA JP
-------------------------- --------------- -------------- ------------- --------
JP7507203
-------------------------- --------------- -------------- ------------- --------
JP9508622T
-------------------------- --------------- -------------- ------------- --------
JP2004099603
-------------------------- --------------- -------------- ------------- --------
AU3150295
-------------------------- --------------- -------------- ------------- --------
16
Our wholly owned subsidiary AITI has an exclusive license to the following
patents(s) exclusively from the University of Massachusetts
University invention disclosure UMMC04-96 entitled "Influenza Nucleic Acids,
Polypeptides, and Uses Thereof" as embodied in Patent Applications 60/655,979;
11,362,617; and PCT/US2006/006701 and naming Shan Lu and Shixia Wang as
inventors.
Litigation
For a thorough discussion of our pending litigation, please see the section
entitled "Legal Proceedings."
Establishing a Market and Obtaining Funding
On June 17, 2005 5:00pm EST, the Securities and Exchange Commission declared our
public registration prospectus effective. 450,000 shares were then sold at $0.75
per shares and the offering was closed July 31, 2005. The proceeds from the
public offering paid were used for working capital.
As of May 31, 2005, we had seven unsecured notes payable to individuals,
totaling $121,000. The notes were issued in February and March 2005, carried a
5% interest rate, and were to mature one year from the date of the note. On
August 29, 2005, the Company extinguished the outstanding promissory notes at
related accrued interest with the issuance of 160,110 shares of its common
stock.
From January through July 26, 2006 we raised $602,000 through convertible
promissory notes at a conversion price of $1.25 with warrants attached and
exercisable at $2.50 per share and an interest rate of 5% per annum. $534,500 of
the notes have been converted into 427,600 common shares. 54,000 shares remain
from convertible notes outstanding of $67,500. To date, none of the warrants
have been exercised.
When we acquired the wholly owned subsidiary Advanced Influenza Technologies
Inc. AITI, in July 2006, we acquired $675,000 in cash of which $162,800 was paid
to the University of Massachusetts for the development of the seeds, leaving net
available funds of $512,200.
We will require additional funding during the 2007 fiscal year in order to
continue with research and development efforts. In addition to operating funds,
we will need from approximately $2,000,000 to $8,000,000 for research and
development, including clinical trials, and manufacturing and supply costs,
depending upon whether we are approved by the FDA to conduct a Phase II(b) study
of Cytolin and/or a Phase I study of plasmid DNA.
We do not have any of this funding arranged or secured, and we do not yet have
plans for raising the funding we require. We anticipate that we will seek the
funding through further equity offerings, either by private placement or by
registered offering, or by possible joint venture arrangements with other
parties. If we are unable to secure the necessary funding, we will not be able
to conduct our research and development activities or to continue in business.
Joint Ventures
Buy-Sell Agreement with Symbion Research International. Effective January
5, 2005.
Peggy C. Pence, PhD., is the President and Chief Executive Officer of Symbion
Research International, Inc. On January 5, 2005, we entered into a buy-sell
agreement to purchase intellectual property owned by Symbion. The agreement
describes the intellectual property in detail which summarized, is the Phase 1
clinical data and the protocol for the Phase II study.
Under the terms of this agreement:
o CytoDyn, Inc may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
stud(ies) for Cytolin.
o CytoDyn, Inc granted 83,122 non-qualified stock options with an exercise
price of $.75 per share in March 2006 - Symbion requested in September 2006
that these options be cancelled and the remaining $62,341 would be payable
in cash. We therefore cancelled these options previously granted.
o CytoDyn, Inc paid $25,000 in March 2005.
o CytoDyn, Inc will pay $275,000 plus the additional $62,341 to Symbion over
this next fiscal year 2007.
The results of the Phase II(b) stud(ies) for Cytolin shall be the sole property
of CytoDyn, Inc upon Symbion's receipt of the final payment called for by this
agreement. If all remaining payments are not received, the property shall revert
to Symbion.
17
Contract with UTEK(r)
We have entered into an agreement with UTEK(r) in March 2006, wherein UTEK(r)
agrees to identify and present new technology and company acquisition
opportunities for CytoDyn in exchange for 40,000 unregistered shares of common
stock. 1/12th of the shares (3,333) shall vest each month during the term of
the12 month agreement.
UTEK(R) is a leading, market-driven technology transfer company that enables
companies to rapidly acquire innovative technologies from universities and
research laboratories worldwide. UTEK facilitates the identification and then
finances the acquisition of external technologies for clients in exchange for
their equity securities. This unique process is called U2B(r). In addition to
its U2B(r) service, UTEK offers both large and small capitalization companies
the tools to search, analyze and manage university intellectual properties. UTEK
has operations in the United States, United Kingdom and Israel. For more
information about UTEK, please visit its website at www.utekcorp.com.
Acquisition of Advanced Influenza Technologies, Inc - a wholly owned subsidiary
-------------------------------------------------------------------------------
On July 18, 2006 CytoDyn, Inc. entered into an Acquisition agreement with UTEK
Corporation, to acquire 100% of the outstanding stock of Advanced Influenza
Technologies, Inc.(AITI), a Florida Corporation in exchange for 2,000,000
unregistered restricted common shares of CytoDyn, Inc stock.
AITI holds the worldwide nonexclusive and exclusive license agreements from the
University of Massachusetts for certain technologies as described in patents:
US Patent Application 60/655,979
US 11,362,617 for "Influenza Nucleic Acids Polypeptides and Uses Therof
US 5,643,578
US 6,841,381
European Patents 93907536 and 01202355.2 for "Immunization by Inoculation of DNA
Transcription Unit"
The term of the licensing agreement is until the later of 20 years from the
filing date of the Licensed Patents or the expiration of the last to expire
patent of the Licensed Patents.
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 4% royalties of net sales of the licensed
products.
AITI also has agreed to fund a two year ($325,600) unrestricted project for
($162,800 per year) under a Sponsored Research Agreement with the primary
objective during the first year to conduct lab work to provide well documented 3
DNA plasmids (H1,H3 and H5) in preparation for GMP manufacturing. If after one
year the desired outcome is not achieved the agreement can be cancelled and the
second year's payment is not required.
Exploring Other Joint Ventures
While we continue to pursue FDA approval of our existing pipeline products, we
are also considering entering into joint ventures to develop or co-develop other
related, synergistic types of products. We may also pursue joint ventures or
other arrangements to obtain funding but we have not pursued this possibility
and do not have any prospects at this time.
Other Matters
We do not expect, in the next 12 months, to make any significant expenditures
for equipment. We will continue to staff the company as we grow and funds become
available. During the fiscal year ended May 31, 2006, we expended $215,384 in
professional fees, consisting of $150,894 legal fees and professional fees
incurred in connection with our public registration, our additional patent
protection filings, and litigating our pending lawsuits, and $15,900in
accounting and auditing fees. Transfer agent fees and EDGAR filing fees were
$5,926 and $1,979 respectively. $50,685 was paid for consulting work to various
consultants.
18
Part 1 Item 3. Controls and Procedures
-------------------------------
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of August 31, 2006, to ensure that information required
to be disclosed by us in the reports filed or submitted by us under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commission's rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that as of August
31, 2006, our disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weakness described below.
A material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. On April 7, 2006, in connection
with its audit of our consolidated financial statements for the year ended
December 31, 2005, and again in connection with its review of our consolidated
financial statements for the three and nine months ended August 31, 2006, Pender
Newkirk & Company LLP, our independent registered public accounting firm
("Pender"), advised management and our audit committee of the following matter
that Pender considered to be a material weakness: The organization of our
accounting department did not provide us with the appropriate resources and
adequate technical skills to accurately account for and disclose our activities.
Pender stated that this matter was evidenced by the following issues encountered
in connection with its review of the audited consolidated financial statements
for the year ended May 31, 2006: (i) our closing procedures were not adequate
and resulted in significant accounting adjustments, and (ii) we were unable to
adequately perform the financial reporting process as evidenced by a significant
number of suggested revisions and comments by Pender to our consolidated
financial statements and related disclosures for the year ended May 31, 2006. In
addition to issues (i) and (ii) above, which Pender restated as issues
encountered in connection with its review of our consolidated financial
statements for the three months ended August 31, 2006, Pender stated that this
matter was further evidenced by inadequate supervision within our accounting
department which contributed to our inability to provide accurate accounting for
and disclosure of certain basic transactions.
As a result of the identification of this matter by Pender, management
evaluated, with consultation from our audit committee, in the first quarter of
2006 and as of August 31, 2006, the impact of our lack of appropriate resources
and adequate technical skills in our accounting department and concluded, that
the control deficiency that resulted in our lack of appropriate resources and
adequate technical skills in our accounting department represented a material
weakness and concluded that, as of August 31, 2006, our disclosure controls and
procedures were not effective at the reasonable assurance level.
Historically, the Company has not had a formal system of controls and procedures
due to the fact that the Company was small in size and had no operations.
Currently, management, with the oversight of the Chief Executive Officer and
Chief Financial Officer, is devoting considerable effort to develop and
implement a formal system of disclosure controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
To initially address this material weakness, management performed additional
analyses and other procedures to ensure that the financial statements included
herein fairly present, in all material respects, our financial position, results
of operations and cash flows for the periods presented.
19
Remediation of Material Weakness
To remediate the material weakness in our disclosure controls and procedures
identified above, we have done or intend to do the following, in the periods
specified below:
In the second quarter of 2006, we developed plans to alter the current
organization of our accounting department to hire additional consultant(s) to
assist in our financial reporting processes, with expertise in public company
financial reporting compliance.
In the second quarter of 2006, we sought guidance from financial consultants who
are certified public accountants with the requisite background and experience to
assist us in identifying and evaluating complex accounting and reporting
matters. In addition, during these periods, we implemented new internal
processes for identifying and disclosing both routine and non-routine
transactions and for researching and determining proper accounting treatment for
those transactions. During these periods, we also assigned personnel to perform
these processes and continued to provide those individuals with technical and
other resources to help ensure the proper application of accounting principles
and the timely and appropriate disclosure of routine and non-routine
transactions. Management is unsure, at the time of the filing of this report,
when the actions described above will remediate the material weakness also
described above. Although management intends to hire one or more additional
accounting supervisory support staff members, future additional funds will be
necessary to support the staff. Until we hire the necessary additional
accounting supervisory support staff members, management may hire outside
consultants to assist us in satisfying our financial reporting obligations.
Management is unable, however, to estimate our expenditures related to fees paid
or that may be paid in the future to financial consultants in connection with
their guidance in identifying and evaluating complex accounting and reporting
matters. Management is also unable to estimate our expenditures related to the
development of new internal processes for identifying and disclosing both
routine and non-routine transactions and for researching and determining proper
accounting treatment for those transactions. Management is also unable to
estimate our expenditures related to the hiring of other outside consultants to
assist us in satisfying our financial reporting obligations. In addition,
management is unable to estimate our expenditures related to higher fees to be
paid to our independent auditors in connection with their review of this
remediation.
(b)
--------------------------------------------------------------------------------
Changes in Internal Control over Financial Reporting
The changes noted above, specifically, the changes relating to our (i) engaging
of financial consultants who are certified public accountants to assist us in
identifying and evaluating complex accounting and reporting matters, (ii) new
internal processes for identifying and disclosing both routine and non-routine
transactions and for researching and determining proper accounting treatment for
those transactions, and (iii) assignment of individuals to perform these
processes and provision to those individuals of technical and other resources to
help ensure the proper application of accounting principles and the timely and
appropriate disclosure of routine and non-routine transactions, are the only
changes during our most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act.
Part II Item 1 Legal Proceedings
--------------------------------
All litigation reflects the efforts of Rex H. Lewis, the previous CEO of our
previous licensee Amerimmune, Inc., to take the property of Amerimmune, Inc.,
CytoDyn, Inc. and our CRO, Symbion Research International, Inc., for his
privately held Nevada corporation, Maya, LLC. Although these efforts have been
multifaceted and interstate in scope, all litigation reflects this one dispute
or artifice.
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn of
New Mexico, Inc., (predecessor company) Allen D. Allen, Corinne E. Allen, Ronald
J. Tropp, Brian J. McMahon , Daniel M. Strickland, M.D. and unknown others
designated as "Does 101-150".
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
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In connection with that settlement, Mr. Lewis and Maya LLC were awarded by the
Los Angeles Superior Court attorneys' fees in the amount of approximately
$150,000. We have appealed the Court's order. The matter has not yet been
briefed. Management believes we have a strong basis to appeal. This judgement
has been accrued the accompanying financial statements.
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
--------------------------------------------------------------------------------
Pharmaceuticals, Inc. v. Biovest International, Inc., Commonwealth of
Massachusetts, Superior Court, Worcester County, Civil Action No. 05-0452-C.
--------------------------------------------------------------------------------
Nature of the claims:
The Company and Allen filed a complaint against Amerimmune, Inc. and Amerimmune
Pharmaceuticals, Inc. (together, "Amerimmune") to domesticate an October 4, 2004
judgment that the Company and Allen obtained against Amerimmune in the Superior
Court of California for Ventura County, case number SC-039250. Further, the
Company and Allen named Biovest International, Inc. ("Biovest") as a
trustee-defendant because Biovest possesses a Cell-Bank, the rights to which the
Company and Allen own.
Progress to Date:
The Company and Allen were successful in having the California judgment
domesticated. Further, the Company and Allen were successful in "charging"
Biovest and securing an order that Biovest transfer the Cell-Bank to the Company
and Allen. However, the transfer has not occurred because recently Amerimmune's
purported successor-in-interest, Maya, Inc. ("Maya"), intervened. Since CytoDyn
expects to make a new cell bank in any event, this action is opposed because it
is one part of an interstate scheme or artifice to convert our property. The
Company's Response:
The Company has a superior right to the Cell-Bank, and the Company intends to
litigate the matter vigorously.
Expected Outcome:
We cannot express judgment regarding the outcome of the case or the probable
ultimate liability, if any, to be incurred by the Company. However, the
Company's claim to the Cell-Bank is strong.
Other legal/patent issues:
CytoDyn has recently discovered that former employees of ex-licensee, Amerimmune
Inc., are attempting to convert technology previously adjudicated by the
Superior Court of California, County of Ventura to belong to Symbion Research
International, LLC. The technology involves LFA-1 Alpha subunit antibodies and
the use of the antibodies to treat HIV-infected patients. Because of uncertain
consequences resulting from the actions of these rogue Amerimmune Inc.
employees, Symbion Research International is acting to remedy the situation. The
former employees have filed two U.S. patent applications and several foreign
patent applications based on a derivative international patent application.
Symbion Research International intends to correct the inventorship and assignee
in these applications.
Background
CytoDyn granted a license in its patented technology to Amerimmune Inc., which
represented that it would assist in obtaining FDA approval of Cytolin(R).
Amerimmune in turn contracted with Symbion Research International, LLC to assist
with the clinical trials of Cytolin(R). Symbion sued Amerimmune in 2003 in
Superior Court of California, County of Ventura asserting breach for non-payment
of services performed. Symbion prevailed in that suit and the Ventura Court
awarded title to all data and additional intellectual property developed by
Symbion during its relationship with Amerimmune to Symbion. This additional
intellectual property is the subject matter of the patent applications filed by
the former employees of ex-licensee Amerimmune.
Maya LLC v. CytoDyn, et al
--------------------------------------------------------------------------------
Superior Court of Los Angeles Van Nuys Case # EC041590
--------------------------------------------------------------------------------
Maya LLC filed an action in Van Nuys, California alleging a smorgasbord of
complaints against CytoDyn and two of its officers, some of which have been
dismissed on demurrer without leave to amend, some of which can be amended, and
some of which have been sustained but with a request from Maya's attorney that
CytoDyn's attorneys agree to an amended complaint. Management believes that
these events reflect a retaliatory and frivolous action on the part of Maya.
Although the outcome of litigation is uncertain, CytoDyn's in-house counsel
believes an outcome unfavorable to CytoDyn is highly unlikely.
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Part II Item 2 Unregistered Sales of Equity and Use of Proceeds
From March through August 31, 2006 we raised $602,000 through convertible
promissory notes at a conversion price of $1.25 with warrants attached and
exercisable at $2.50 per share. $534,500 of the notes were converted into
427,600 shares. The remaining notes payable amount is $67,500. To date, none of
the warrants have been exercised.
We have entered into an agreement with UTEK(r) in April 2006 wherein UTEK(r)
agrees to identify and present new technology and company acquisition
opportunities for CytoDyn in exchange for 40,000 unregistered shares of our
common stock.
On July 18, 2006 CytoDyn, Inc. entered into an Acquisition agreement with UTEK
Corporation, to acquire 100% of the outstanding stock of Advanced Influenza
Technologies, Inc.(AITI), a Florida Corporation in exchange for 2,000,000
unregistered restricted common shares of CytoDyn, Inc stock.
Item 3 Defaults Upon Seniors
None
Item 4 Submission of Matter to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
1. 31.1: Certification by the CEO
2. 31.2: Certification by the CFO
3. 32.1: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO
4. 32.2: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO
(b) Reports on Form 8-K:
On July 21, 2006 we filed an 8K to disclose our acquisition of AITI
On August 31, 2006 filed an 8K disclosing auditors change in items
reported
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SIGNATURES
The financial information furnished herein has not been audited by an
independent accountant; however, in the opinion of management, all adjustments
(only consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations for the three months ended August 31, 2006 have
been included.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTODYN, INC.
(Registrant)
DATE: December 6, 2006 BY: /s/ Allen D. Allen
---------------- -----------------------
Allen D. Allen
President and CEO
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