U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to _________
Commission File Number 000-49908
CYTODYN, INC.
(Name of small business issuer in its charter)
Colorado 75-3056237
(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
200 West DeVargas Street, Suite 1
Santa Fe, New Mexico 87501
(Address of principal executive offices) (Zip Code)
Telephone Number: 505-988-5520
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Check whether the issuer (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for which shorter
period that the was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ...
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the most recent fiscal year $0
Aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of common stock as of a specified
within the past 60 days. $1,264,337
Number of shares of common stock outstanding as of August 22, 2005: 8,519,307.
------------
CYTODYN, INC
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 2004
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business.......................................... 3
Item 2. Description of Property.......................................... 20
Item 3. Legal Proceedings................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.............. 23
PART II
Item 5. Market for Common Equity, related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities............. 22
Item 6. Management's Discussion and Analysis or Plan of Operation........ 24
Item 7. Financial Statements............................................. 32
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 32
Item 8A. Controls and Procedures.......................................... 32
Item 8B. Other Information................................................ 32
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 32
Item 10. Executive Compensation........................................... 36
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters.................................. 38
Item 12. Certain Relationships and Related Transactions................... 39
Item 13. Exhibits......................................................... 43
Item 14. Principal Accountant Fees and Services........................... 45
Certifications of President and Chief Financial Officer
2
Item 1. Description of Business
Our Business
In October 2003 we entered into an Acquisition Agreement with CytoDyn of New
Mexico, Inc., pursuant to which we effected a two for one reverse split of our
common stock, and amended our articles of incorporation to change our name from
Rexray Corporation to CytoDyn, Inc. Pursuant to the acquisition agreement, we
were assigned the patent license agreement dated July 1, 1994 between CytoDyn of
New Mexico and Allen D. Allen covering three United States patents along with
foreign counterpart patents which describe a method for treating HIV disease
with the use of monoclonal antibodies. We also acquired the trademarks, CytoDyn
and Cytolin, and a related trademark symbol. The license acquired gives us the
worldwide, exclusive right to develop, market and sell the HIV therapies from
the patents, technology and know-how invented by Mr. Allen. The term of the
agreement is for the life of the patents of which the first shall expire in
2013. As consideration for the intellectual property and trademarks we paid
CytoDyn of New Mexico $10,000 in cash and issued 5,362,640 post-split shares of
common stock to CytoDyn of New Mexico.
We have two full time employees, Allen D. Allen, our Chief Executive Officer,
and Corinne Allen, Vice President of Business Development, and one part time
employee, Wellington Ewen, our Chief Financial Officer.
In the last two fiscal years, there have not been any research and/or
development expenditures by us or our predecessor companies.
We have not been an operating businesses. CytoDyn New Mexico previously licensed
the technology out for development and had not been an operating business since
1998. We were only incorporated in May 2002 and this was not an operating entity
until the acquisition of the license in October 2003. We expect to incur
significant research and development expenses in the near future. However, our
expenditures in the last two fiscal years have been for general and
administrative purposes, legal fees, and patent protection.
Our principal executive offices are located at 200 West DeVargas Street, Suite
1, Santa Fe, New Mexico 87501; telephone: (505) 988-5520, facsimile: (800)
417-7252, and website address; www.cytodyn.com.
CytoDyn(R)and Cytolin(R)are our registered trademarks. Our service trademark
symbol is:
[GRAPHIC OMITTED]
The Biotechnology Industry
We estimate that approximately 4,000 biotech companies are operating around the
world today, about 1,500 of which are in the United States. According to
Biotechnology Industry Organization: Biotechnology Industry Statistics, 2003,
revenues of U.S. biotech companies increased from about $8 billion in 1992 to
about $34.8 billion in 2001. In 1990, the market capitalization of public
companies in the biotechnology industry was less than $50 billion. By April of
2003, the market capitalization was estimated to be $206 billion. More than 370
biotechnology drug products and vaccines are currently in human trials in the
U.S., and we estimate that there are hundreds more in development. The number of
U.S. patents issues annually to biotechnology companies has climbed from about
2,500 in 1992 to about 7,760 in 2002.
3
Background on HIV and AIDS
UNAIDS, the Joint United Nations Programme on HIV/AIDS, estimates that 40
million people were living with HIV/AIDS in 2003, reflecting a steady increase
since 1999, especially in sub-Saharan Africa, as well as in Asia and the
Pacific, Eastern Europe and Central Asia. According to the AIDS epidemic update,
December 2003, in 2003, about 3 million people died from HIV/AIDS, and another 5
million contracted the disease. In the United States, the Centers for Disease
Control and Prevention estimates that as of the end of 2002, about 530,000
people were living with HIV, of whom about 384,900 were living with AIDS, the
full-blown Acquired Immune Deficiency Syndrome that develops from HIV. During
2002, over 35,000 new cases of HIV were reported in the United States. No cure
is currently known for HIV.
The human immune system is the body's primary defense against disease. It
consists of a vast number of specialized cells and proteins that assist in
detecting and destroying foreign organisms and eliminating disease cells.
Normally, the body's immune system can distinguish between normal cells and
those that appear to be foreign by recognizing proteins, or antigens. CD4 "watch
dog" cells identify foreign cells, and the immune system launches an antibody
response against the foreign organisms or cells.
HIV triggers a flaw in the human immune system that leads to its destruction.
Patients with HIV proliferate CD8 "killer" cells, which kill off CD4 watch dog
cells, whether healthy or not, leading to the loss of immune function. But for
this flaw, HIV infection in humans might be similar in character to the
infection in other primates, which can be infected with HIV without the
destruction of their immune systems because their CD8 killer cells do not
destroy their CD4 cells. The destruction of CD4 cells in humans leaves those
persons susceptible to certain cancers and other infections that would normally
not be fatal to a person with a normal number of CD4 cells. When AIDS first
surfaced in the United States, no medicines were available to combat the
underlying immune deficiency, and few treatments were available to combat the
diseases that resulted. Since then, the FDA has approved a number of drugs in
two groups, both antivirals, for treating HIV infection. These groups are:
o Drugs that interrupt an early stage of the virus making copies of
itself; and
o Drugs that treat HIV infection by interrupting virus replication at a
later step in the virus' life cycle.
Frequently, these two groups of drugs are used in combinations for treatment.
Treatment with these drugs, whether alone or in combination, has two primary
drawbacks: the virus can mutate to avoid the attack, rendering the drugs
ineffective, and the side effects can be severe. Some of the first group of
drugs can cause a decrease of red or white blood cells, especially when taken in
later stages of the disease. Some may also cause inflammation of the pancreas
4
and painful nerve damage, in addition to other severe reactions. The most common
side effects in the second group of drugs include nausea, diarrhea, and other
gastrointestinal symptoms. This second group can also interact with other drugs
to produce severe side effects. Current research and development for HIV is
focused on therapies to reduce the side effects of the antiviral drugs so as to
enhance the efficacy of existing treatments and delay the progression of the HIV
virus.
Potential drugs
Cytolin
Our president, Allen D. Allen, has been researching treatments for HIV and AIDS
since 1987. He identified a family of monoclonal antibodies that protect the CD4
watchdog cells from the CD8 killer cells of the immune systems of people
infected with HIV. He received three U.S. patents and additional foreign
counterpart patents, now licensed to us, covering the use of these antibodies
for treating patients with HIV. Our leading drug candidate, Cytolin, is based on
a monoclonal antibody that protects CD4 cells from CD8 cells, thus preventing
the weakening of the immune system.
In 1993, a small group of scientists and doctors treated six HIV-infected
patients with Cytolin. Blood and skin tests of these patients demonstrated that
the antibody was producing improvements in the immune function of each patient.
In 1995, subacute and acute toxicology studies found Cytolin safe to administer
to humans.
A relatively small number of physicians in the United States administered
Cytolin to their HIV-infected patients over two years. As results from this
initial use became available, other physicians obtained and administered Cytolin
to their patients as well. Four of the doctors using Cytolin allowed CytoDyn's
predecessor to send in an independent Institutional Review Board to inspect the
medical records of 188 patients treated with Cytolin once or twice a month over
18 months. Data were recorded and summarized and formed part of the material
presented to the FDA as an early indication of the safety and potential efficacy
of Cytolin.
In 1996, the FDA approved a drug master file, designated BB-DMF#6836, for the
manufacture of Cytolin at Vista Biologicals Corporation. CytoDyn of New Mexico
and Vista Biologicals Corporation worked cooperatively to develop the drug
master file. In accord with the practice of the FDA, the drug master file was
issued to and became the property of the entity with the capacity to manufacture
the drug, in this case Vista Biologicals Corporation. By contract with Vista
Biologicals Corporation, CytoDyn of New Mexico had the exclusive right to
reference the drug master file, that is, to authorize Vista Biologicals
Corporation to manufacture Cytolin in accordance with the terms of the drug
master file.
In 1996, the FDA also designated our investigational new drug application for
Cytolin as BB-IND #6845, and subsequently approved a clinical trial.
5
In 2002, Symbion Research International, a contract research organization,
completed a Phase I a/b clinical trial of Cytolin. The trial was sponsored by
Amerimmune, Inc, the previous licensee of CytoDyn of New Mexico but Symbion was
never paid for its work. As a result, its work product became Symbion's. See
"Legal Proceedings." CytoDyn, Inc. has entered into a buy-sell agreement with
Symbion to purchase the Phase Ia study data. The Phase Ia study, conducted in 13
subjects suffering from HIV/AIDS, found Cytolin to be safe and well tolerated.
The initial safety study affirmed the safety and tolerability of the drug in
these dose groups, as well as preliminary efficacy in lowering the concentration
of HIV by up to one log (measurement of efficacy) and increasing T-cell counts
in the study's patient population with no severe adverse events reported. Some
of the data were presented as an abstract and poster session, entitled "Phase I
Study of Anti-LFA-1 Monoclonal Antibody (Cytolin(R)) in Adults with HIV
Infection" at the 9th Conference on Retroviruses and Opportunistic Infections
held in Seattle, Washington on February 24-28, 2002.
We intend to develop Cytolin and other antibodies covered by the licensed
patents as a treatment for HIV/AIDS in the U.S. and other countries. However, we
must raise sufficient and substantial capital in order to pursue these
objectives.
Other Potential Drugs
We have entered into a confidential letter of intent with another biotech
company for a joint development of a new drug to treat Biopolar Disorder. There
is no guaranty that this effort will be made or will result in a successful new
treatment for Bipolar Disorder.
Product Liability Insurance
The testing, marketing and sale of therapeutic products for use in humans entail
an inherent risk of allegations of product liability, and there can be no
assurance that product liability claims will not be asserted against us. We have
not obtained product liability insurance, and there can be no assurance that we
will be able to obtain insurance coverage in the future on acceptable terms or
that any claims against us will not exceed the amount of such coverage.
Government Regulation
The estimated cost and length and stage of each process of FDA approval is
outlined as followed:
o Purchase of Phase I data: $362,000
o End of Phase 1/Pre Phase 11 FDA: 6 months; $ 50,000 - $100,000
o Phase II/III Pivotal Study BLA: 24-36 months; $1,250,000 - $1,750,000
o Cost to Investigators: $ 750,000 - $1,500,000
o Manufacturing for Clinical Trials: 3-6 months; $ 350,000 - $400,000
Total time and cost estimated to get FDA approval for a BLA to sell Cytolin to
certain HIV patients is approximately 29-42 months, at an estimated $2,762,000
to $4,1120,000.
6
Regulatory Approval Process - Summary
On October 1, 2003, the Food and Drug Administration (FDA) transferred certain
product oversight responsibilities from the Center for Biologics Evaluation and
Research (CBER) to the Center for Drug Evaluation and Research (CDER). The
review and approval of Cytolin(R) is now under the jurisdiction of the Division
of Monoclonal Antibodies (DMA; Steven Kozlowski, MD, acting director, Patrick
Swann, Ph.D., acting deputy director) in the CDER Office of Pharmaceutical
Science: Office of Biotechnology Products (Keith O. Webber, Ph.D., Acting
Director).
Under current law, all new drugs and biologic products need clinical proof that
they are safe and effective before they can be approved for marketing in the
United States. The approval of Cytolin will be subject to submission of a
Biologics Licensing Application (BLA), submitted to CDER. The BLA is the vehicle
through which CytoDyn will formally propose that the FDA approve Cytolin for
sale in the United States. To obtain this authorization, CytoDyn will submit for
review, as contained in the BLA, nonclinical (in vitro and animal) and clinical
(human) test data and analyses, drug information, and descriptions of
manufacturing procedures.
The BLA must provide sufficient information, data, and analyses to permit FDA
reviewers to reach several key decisions, including:
o whether Cytolin is safe and effective for its proposed use(s), and
whether the benefits of Cytolin outweigh its risks;
o whether the proposed labeling for Cytolin is appropriate, and, if not,
what the labeling should contain; and
o whether the methods used in manufacturing Cytolin and the controls
used to maintain quality are adequate to preserve the identity,
strength, quality and purity of Cytolin.
In order to initiate clinical testing of a new drug or therapeutic biologic
product, an Investigational New Drug Application (IND) must be submitted to FDA.
In most cases, the IND summarizes preclinical studies. The purpose of
preclinical studies - animal pharmacology/toxicology testing - is to develop
adequate data to support a decision that it is reasonably safe to proceed with
human trials of the drug.
If an IND is considered `allowable' by FDA, the sponsor may begin clinical
trials in humans. The standard procedure for clinical testing involves studies
from Phase I to Phase III.
Clinical Trials Process
Phase I
Phase 1 includes the initial introduction of an investigational new drug or
biologic into humans. These studies are closely monitored and may be conducted
in patients, but are usually conducted in a small number of healthy volunteer
subjects. These studies are designed to determine the metabolic and
pharmacologic actions of the investigational product in humans, the side effects
7
associated with increasing doses, and, if possible, to gain early evidence on
effectiveness. During Phase 1, sufficient information about the investigational
product's pharmacokinetics and pharmacological effects are obtained to permit
the design of well-controlled, scientifically valid, Phase 2 studies.
Phase II
Phase 2 includes the early controlled clinical studies conducted to obtain some
preliminary data on the effectiveness of the drug for a particular indication or
indications in patients with the disease or condition. This phase of testing
also helps determine the common short-term side effects and risks associated
with the drug. Phase 2 studies are typically well-controlled, closely monitored,
and conducted in a relatively small number of patients, usually involving
several hundred people.
Phase III
Phase 3 studies are expanded controlled clinical studies. They are performed
after preliminary evidence suggesting effectiveness of the drug has been
obtained in Phase 2, and are intended to gather the additional information about
effectiveness and safety that is needed to evaluate the overall benefit/risk
relationship of the drug. Phase 3 studies also provide an adequate basis for
extrapolating the results to the general population and transmitting that
information in the physician labeling. Phase 3 studies usually include several
hundred to several thousand people.
Cytolin - Clinical Development and Regulatory Approval
To date an allowable IND has been submitted for Cytolin and Cytolin has been
studied in two Phase I controlled clinical studies (Phase Ia and Phase Ib/II).
Data has also been collected from four physicians who treated patients with
Cytolin in an uncontrolled clinical setting from 1983 to 1995.
Once adequate clinical testing of Cytolin is complete, the BLA must be submitted
to FDA containing full reports of the studies such that CDER can evaluate the
data. Data from the controlled clinical trials are especially important because
they provide the only basis, under law, for demonstrating safety and
effectiveness. The clinical trials answer the questions: "Does this drug work
for the proposed use?" and "Is the drug safe?" From analyses of the data, CDER
reviewers assess the benefit-to-risk relationship and based on CDER's
assessment, the BLA for Cytolin will either be considered approvable, approvable
with minor changes, or not approvable. Once considered approvable, the sale and
marketing of Cytolin may legally proceed in the United States.
In order to obtain approval for the sale and marketing of Cytolin in the United
States, the clinical development strategy described below has been devised.
1. Safety and efficacy data have been assembled into an abbreviated clinical
study report for the Phase Ia study and a clinical report synopsis for the Phase
Ib/II study. The data demonstrate that in these studies Cytolin was safe and
well tolerated in HIV positive individuals. In addition, the Phase Ib/II study
provided some initial evidence of efficacy for maintaining a reduction in viral
load and a correlated increase in CD4+ T-lymphocytes.
8
2. A Pre-Phase II meeting will be requested with CDER. CDER encourages these
meetings before conducting large-scale controlled clinical trials in order to
obtain CDER advice about the design of the study plan and to ensure that planned
studies will be acceptable. At this meeting safety and efficacy data from the
two completed studies (Phase Ia and Phase Ib/II) will be presented to CDER. In
addition, the clinical study design for the planned study (Phase II/III) will
also be presented. In addition to obtaining FDA agreement on study design, the
goal of this meeting will also be to discuss the possibility for considering the
Phase II/III study suitable as the primary basis for obtaining regulatory
approval for Cytolin.
3. Following FDA review, discussion, and feedback, the Phase II/III study will
be conducted. We have entered into a preliminary agreement to have the study
conducted by Dr. Jacob Lalezari, a leading HIV research physician in San
Francisco, CA. As currently drafted, this is a double-blind, placebo-controlled,
multi-center, 2-part study of Cytolin to be conducted in approximately 150
subjects. Part 1 is designed to determine dose-regimen and Part 2 is designed to
study the safety and efficacy of long-term administration of Cytolin of the most
efficacious dose regimen as determined from Part 1. The target population for
the study is HIV seropositive adults who are receiving a standard course of
three- or four-drug HAART (combination anitviral therapy) after failing their
first HAART regimen. Duration of treatment in the study will be approximately 48
weeks.
4. Data for this study will be compiled into a clinical study report and
submitted to the FDA. Endpoints will include, but are not limited to:
o Proportion of responders after 12 weeks (A responder will be defined
by a = 0.5 log reduction in HIV-1 viral load or reduction in viral
load below the level of detection.);
o Safety;
o Change from baseline in CD4+ T-cell count after 12 and 24 weeks (Part
1 and Part 2, respectively);
o Pharmacokinetics (percent Cytolin binding); and
o Time to treatment with additional HAART drugs or other HIV therapies.
5. An End-of-Phase II meeting will be requested with the FDA to present safety
and efficacy data from the Phase II/III study, as well as to summarize safety
and efficacy across all studies. The possibility of submitting the BLA with the
data from the three controlled clinical studies will be discussed.
Cytolin is a good candidate for obtaining regulatory approval after
Phase II, provided the safety and efficacy data are compelling. FDA has
established that a sustained reduction (e.g., 24 weeks) in HIV-1 viral load is
highly predictive of meaningful clinical benefit and is a sufficient surrogate
endpoint for obtaining approval for drugs intended to treat HIV. The Phase II/II
9
study has been designed to evaluate safety and efficacy in a subject population
that has very few treatment options and will evaluate efficacy in maintaining a
reduced HIV-1 viral load. A strong argument will be presented to FDA to consider
the Phase II/III data sufficient for the basis of approval, with the provision
that additional efficacy data be collected post-marketing.
6. Depending on the meeting outcome, the BLA will be submitted on the basis of
the Phase II/III data, or development will continue with the initiation of
additional Phase II and/or Phase III clinical studies.
We may encounter significant difficulties or costs in our efforts to obtain FDA
approvals, which could delay or preclude us from marketing any potential drugs
that we may develop.
Noncompliance with applicable requirements can result in criminal prosecution
and fines, recall or seizure of potential drugs, total or partial suspension of
production, refusal of the government to approve Biological License
Applications, BLAs, Product License Applications, PLAs, New Drug Applications,
NDAs, or refusal to allow us to enter into supply contracts. The FDA also has
the authority to revoke product licenses and establishment licenses previously
granted.
Sales of biological and pharmaceutical potential products outside the United
States are subject to foreign regulatory requirements that vary widely from
country to country. Whether or not FDA approval has been obtained, approval of a
product by a comparable regulatory authority of a foreign country must generally
be obtained prior to the commencement of marketing in that country.
Our contract manufacturers will also subject to regulation by the Occupational
Safety and Health Administration (OSHA) and the Environmental Protection Agency
(PA) and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations.
We signed a consulting contract with Symbion Research International Inc, the
contract research organization that prepared the Phase Ia/b clinical trials of
Cytolin. We have also entered into a buy- sell agreement with Symbion to
purchase the Phase Ia/b clinical data and the Phase II/III study protocol. Peggy
C. Pence, Phd, Symbion Research International's founder, is also on the Board of
Directors of CytoDyn, Inc. We will be attempting to obtain permission to advance
to a Phase II/III pivotal study on Cytolin.
We will not know for sure if certain studies will be required and what the total
costs of such studies until we have a meeting with the FDA which we expect to
take place within the next six months. We estimate that the cost for the "End of
Phase I/Pre- Phase II" meeting with the FDA will be $50,000 to $100,000. We also
estimate costs for the Phase II/III Pivotal Study will be $1,250,000 to
$1,750,000 for the Contract Research Organization. We expect the Phase II/III
Pivotal Study to take 29 to 42 months to complete at a cost estimated to be
$2,050,000 to $3,350,000. In addition to these estimated costs, we believe the
10
manufacturing and supply costs to be an additional $350,000 to $450,000.
Therefore we expect the total cost of the Phase II/III study to be $2,400,000 to
$3,800,000 plus $362,000 for the purchase of the Phase Ia/b clinical data and
Phase II/III protocol design of approximately a total of $2,762,000 to
$4,112,000. Substantially more capital will need to be obtained to get FDA
approval for Cytolin's general use in the U.S. and to conduct further studies
that the FDA may require.
Patents
We have licensed the following patents from Mr. Allen D. Allen, the Inventor and
Registered Owner:
U.S. Patent Nos. 5424066 5651970 and 6534057, and foreign counterpart patents.
We have also licensed the following foreign patents: Canada, Australia, United
Kingdom, Germany, Switzerland, France, Italy, Netherlands, Portugal, Spain and
Sweden. These patents are the equivalent of the U.S. Patent No. 5424066. There
is also a European patent pending which would be the equivalent of U.S. Patents
No. 5651970.
The patents are registered to Allen D. Allen, the inventor and are licensed
exclusively to us until they expire, the first of which is to occur in 2013. We
will develop, market and sell the technology contained in the patents in
accordance with the license agreement (See Exhibit 10.6 for Patent License
Agreement).
CytoDyn owns the registered trademarks, CytoDyn and Cytolin, and a related
trademark symbol.
Competition
The pharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition. CytoDyn will compete with other more
established biotechnology companies with greater financial resources than us.
Our potential competitors include entities that develop and produce therapeutic
agents for treatment of human and animal disease. These include numerous public
and private academic and research organizations and pharmaceutical and
biotechnology companies pursuing production of, among other things, biologics
from cell cultures, genetically engineered drugs and natural and chemically
synthesized drugs. Almost all of these potential competitors have substantially
greater capital resources, research and development capabilities, manufacturing
and marketing resources and experience than CytoDyn. Our competitors may succeed
in developing potential drugs or processes that are more effective or less
costly than any that may be developed by CytoDyn, or that gain regulatory
approval prior to our potential drugs. Worldwide, there are many antiviral drugs
for treating HIV and AIDS. In seeking to manufacture, distribute and market the
various potential drugs we intend to develop, we face competition from
established pharmaceutical companies. All of our potential competitors in this
field have considerably greater financial and personnel resources than we
possess. Also, based on the premise that HIV patients lose their CD4 cells
because of the way some white blood cells stick together in people infected with
the virus, Johns Hopkins Medical School owns patents on specific antibodies
which are believed to prevent the clumping of white blood cells, which is known
11
as syncytia. It is possible that these antibodies may be licensed by Johns
Hopkins and marketed in competition with Cytolin. CytoDyn also expects that the
number of its competitors and potential competitors will increase as more
potential drugs receive commercial marketing approvals from the FDA or analogous
foreign regulatory agencies. Any of these competitors may be more successful
than CytoDyn in manufacturing, marketing and distributing its potential drugs.
There can be no assurance that CytoDyn will be able to compete successfully.
Seasonality
Our business is not materially affected by seasonal factors.
Employees
We have two full time and employees and one part time employee, engaged in
management and product development. CytoDyn is severely understaffed and will
expand its employee force upon completion of its $3 to $5 million offering.
There can be no assurance we will be able to locate or secure suit able
employees upon acceptable terms in the future. Corinne Allen, Allen Allen and
Wellington Ewen have entered into Personal Services Agreement with the Company
to provide professional services to us for two years.
RISK FACTORS
An investment in our shares is very risky. You should only invest if you can
afford to lose your entire investment. Before you invest, carefully consider the
risks we discuss in this section, as well as the information elsewhere in these
materials. You should also consider the information we incorporate by reference,
and information that we file with the Securities and Exchange Commission from
time to time.
RISK FACTORS
In addition to other information included in this report, the following factors
should be considered in evaluating our business and future prospects:
Risks Related to Our Financial Condition
Our Accountant Has Expressed a Substantial Doubt that We Can Continue As a Going
Concern. If We Do Not Continue As a Going Concern, Investors Could Lose Their
Entire Investment.
We have accumulated losses since our inception, and our independent accountant
has expressed that there is a substantial doubt that we may continue as a going
concern. If we do not continue as a going concern, there will be no way for
investors to recoup their investments.
12
We Are a New Business With a Limited Operating History and No Revenues to Date
and Cannot Commence Operations Unless We Can Overcome the Many Obstacles We
Face.
We are a development-stage company with no prior business operations and no
revenues. We are presently engaged in the early stage development of certain
potential drugs. Unless we are able to secure adequate funding, we may not be
able to successfully develop and market our potential drugs and our business
will most likely fail. Because of our limited operating history, you may not
have adequate information on which you can base an evaluation of our business
and prospects. To date, our efforts have been allocated primarily to the
following: aggressively patenting our technology; organizational activities;
developing a business plan; obtaining interim funding; and conducting research
and working toward the ultimate successful development of our potential drugs.
In order to establish ourselves in the bio pharmaceutical market, we are
dependent upon funding by sales of our securities and the successful development
and marketing of our potential drugs. As a research and development company, we
face increased risks, uncertainties, difficulties and expenses such that an
investment in our common stock may be worthless if our business fails. We have a
history of losses and a large accumulated deficit and we expect future losses
that may cause our stock price to lose its value.
For the fiscal years ended May 31, 2004 and May 31, 2005, we incurred net losses
of $345,914 and $777,083, respectively. The losses since the company's
development stage (October 23, 2003 through May 31, 2005) were $1,115,127.
CytoDyn of New Mexico incurred approximately $1.3 in net losses before it
assigned its license to us. We expect to lose more money as we spend additional
capital to develop and market our technologies and establish our infrastructure
and organization to support anticipated operations. We cannot be certain whether
we will ever earn a significant amount of revenues or profit, or, if we do, that
we will be able to continue earning such revenues or profit. Also, the current
economic weakness may limit our ability to develop and ultimately market our
technologies. Any of these factors could cause our stock price to decline and
result in you losing a portion or all of your investment.
Risks Related to Our Business
Our Inability to Retain and Attract Key Personnel Could Cause Our Business to
Fail.
We believe that our future success will depend on the abilities and continued
service of certain of our senior management and executive officers, particularly
our president and CEO and those persons involved in the research and development
of our potential drugs. If we are unable to retain the services of these
persons, or if we are unable to attract additional qualified employees,
researchers and consultants, we may be unable to successfully finalize and
eventually market our drugs being developed, which would have a material adverse
effect on our business.
13
Our Research and Development Efforts May Note Result In Commercially Viable
Potential Drugs Which Could Result in a Loss of Investment.
Our technologies are in the development stage. Further research and development
efforts will be required to develop these technologies to the point where they
can be incorporated into commercially viable or salable potential drugs. We have
set forth in this report our proposed research and development program as it is
currently conceived. We cannot assure you, however, that this program will be
accomplished in the order or in the time frame set forth. We reserve the right
to modify the research and development program. We may not succeed in developing
commercially viable potential drugs from our technologies. If not, our ability
to generate revenues from our technologies will be severely limited. This would
result in the loss of all or part of your investment.
Our Potential Drugs Have Not Yet Been Extensively Tested On Humans, and Their
Efficacy Is Not Yet Known. If We Cannot Develop Effective Potential Drugs, Our
Business Will Fail.
There are numerous legal, scientific and regulatory risks that may prevent us
from carrying out its project to develop the proposed antibody therapy to treat
HIV disease and AIDS. Investment in CytoDyn must be considered highly
speculative because, among other reasons, only limited testing on humans has
been conducted. It is possible that proposed therapies will not be effective for
treating HIV disease or AIDS or that they will have adverse side effects on
human subjects which will prohibit or undermine their intended use.
Consequently, investment in our securities involves a high degree of risk and
only those persons of adequate financial means, who have no need for liquidity
with respect to the investment, and can bear the risk of losing all or part of
the investment, are suitable for such investment.
In Order to Create Our Potential Drugs, We Will Need to License or Purchase
Clones. If We Are Unable to Do So, We May Not Be Able to Continue Development of
Our Potential Drugs.
The patents licensed by us cover the use of certain antibodies to treat HIV
disease. Antibodies are produced in a process similar to that of making wine. A
seed or "clone" is planted to grow a cellbank. The cell bank is then used to
grow a crop of cells. Cells are harvested from the cell bank and then fermented
or otherwise processed to make raw antibodies. Finally, the raw antibodies are
purified and vialed using an FDA approved method. CytoDyn does not currently own
or license the clones used to produce antibodies. We have not yet commenced
negotiations with the owners of the needed clones, and there can be no assurance
that we will be able to obtain such an agreement. In the event we are unable to
obtain a clone license, our use of the antibody will be restricted to research
only. In order to protect our potential drugs, we must be able to license the
clones, and no such license has yet been negotiated.
We Are Dependent Upon Patents Licensed From Allen D. Allen, Our Chief Executive
Officers. The Failure to Maintain These Licenses May Cause Our Business to Fail.
14
We currently have the right to use patent and proprietary rights which are
material to the development of our HIV treatments, by assignment of a license
from Allen D. Allen, the owner of the patents. The license requires us to defend
the licensed patents from infringement. If we were to fail to defend or maintain
patents or other protections of the licensed patents and proprietary technology,
it may have a materially adverse effect on our ability to develop our potential
drugs.
We May Not Have the Opportunity to Enter Into Strategic Partnerships For the
Commercialization of Our Technologies Which Could Have a Severe Negative Impact
on Our Ability to Market Our Potential Drugs.
We intend to enter into strategic partnerships or other relationships with
established biomedical, pharmaceutical and biopharmaceutical companies to obtain
the necessary regulatory approvals and to undertake the manufacturing and
marketing efforts required for commercializing our potential drugs. However, we
do not have commitments at this time from any potential partners. If we are
unable to enter into any new partnerships, then we may be unable to commence the
commercialization of our potential drugs.
A Market For Our Potential Drugs May Not Develop, Causing a Failure of Our
Business.
Our future success will depend, in part, on the market acceptance, and the
timing of such acceptance, of new potential drugs or technologies that may be
developed or acquired. To achieve market acceptance, we must make substantial
marketing efforts and spend significant funds to inform potential customers and
the public of the perceived benefits of these potential drugs. We currently have
limited evidence on which to evaluate the market reaction to potential drugs
that may be developed, and there can be no assurance that any potential drugs
will obtain market acceptance and fill the market need that is perceived to
exist.
Our Business Depends on Our Ability to Protect Our Proprietary Technology. If We
Cannot Protect It, Our Business May Fail.
We have entered, and will continue to enter, into confidentiality agreements
with our employees, consultants, advisors and collaborators. Corinne Allen our
Vice President of Business Development and Wellington Ewen our Chief Financial
Officer, have entered into Proprietary Information and Inventions Agreements in
order to protect our proprietary information. Allen D. Allen as the Inventor of
the technology is bound under the Patent License Agreement licensed to CytoDyn.
However, these parties may not honor these agreements and we may not be able to
successfully protect our rights to unpatented trade secrets and know-how. Others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and know-how. Although
we encourage and expect all of our employees to abide by any confidentiality
agreement with a prior employer, competing companies may allege trade secret
violations and similar claims against us. We may collaborate with universities
and governmental research organizations which, as a result, may acquire part of
the rights to any inventions or technical information derived from collaboration
with them. To facilitate development and commercialization of a proprietary
technology base, we may need to obtain licenses to patents or other proprietary
rights from other parties. Obtaining and maintaining such licenses may require
the payment of substantial amounts. In addition, if we are unable to obtain
these types of licenses, our product development and commercialization efforts
may be delayed or precluded. We may incur substantial costs and be required to
15
expend substantial resources in asserting or protecting our intellectual
property rights, or in defending suits against us related to intellectual
property rights. Disputes regarding intellectual property rights could
substantially delay product development or commercialization activities.
Disputes regarding intellectual property rights might include state, federal or
foreign court litigation as well as patent interference, patent reexamination,
patent reissue, or trademark opposition proceedings in the United States Patent
and Trademark Office. Opposition or revocation proceedings could be instituted
in a foreign patent office. An adverse decision in any proceeding regarding
intellectual property rights could result in the loss or limitation of our
rights to a patent, an invention or trademark.
We Will Engage Contract Manufacturers to Produce Our Potential Drugs, Including
Our Potential HIV Drugs.
Our dependence on third party manufacturers creates a risk that the manufacturer
will become unable to perform work for us, or perform it properly, or the
manufacturer may go out of business. This would create a substantial delay in
the development of our products, which would have a materially adverse effect on
our business.
As a Producer of Potential Drugs, We May Be Exposed to Product Liability and
Recall Risks for Which Insurance Coverage Is Expensive, Limited and Potentially
Inadequate.
We produce potential drugs, which, if approved for use by humans, subjects us to
risks of product liability claims or product recalls, particularly in the event
of false positive or false negative reports. The drug platform we are developing
is also subject to product liability claims with respect to safety of the
product, especially with regard to potential side effects. At the moment we have
no product liability insurance, but even if we are successful in obtaining
insurance for our potential drugs, a product recall or a successful product
liability claim or claims that exceed our insurance coverage could have a
material adverse effect on us. Product liability insurance is expensive. In the
future we may not be able to obtain coverage on acceptable terms, if at all.
Moreover, our insurance coverage may not adequately protect us from liability
that we incur in connection with clinical trials or sales of our potential
drugs.
Our Management Has Substantial Voting Control Over All Matters.
As of May 31, 2005 Allen D. Allen our president holds 2,118,515 and Corinne
Allen, our Secretary and Vice President, holds 1,736,335 of our 8,519,307 shares
of common stock outstanding. This gives them 45% voting control over all matters
submitted to a vote of the shareholders.
16
Technological Changes May Render Our Potential Drugs Obsolete.
The biopharmaceutical industry is subject to rapid and significant technological
change, and our ability to compete is dependent in large part on its ability
continually to enhance and improve its potential drugs and technologies. In
order to do so, we must effectively utilize and expand its research and
development capabilities, and, once developed, expeditiously convert new
technology into potential drugs and processes which can be commercialized. Our
competitors may succeed in developing technologies, potential drugs and
processes that render our processes and potential drugs obsolete. Certain
companies have filed applications for or have been issued patents and may obtain
additional patents and proprietary rights relating to potential drugs or
processes competitive with or otherwise related to those of CytoDyn. The scope
and viability of these patents, the extent to which we may be required to obtain
licenses under these patents or under other proprietary rights and the cost and
availability of licenses are unknown, but these factors may limit our ability to
market potential drugs.
It Is Uncertain If Healthcare Facilities, Providers and Insurance Companies Will
Approve Benefits or Reimbursement for Their Members for Our Potential Drugs,
Thus Rendering Them More Expensive and More Difficult to Market.
The industry is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operations of
healthcare industry participants. During the past several years, state and
federal government regulation of reimbursement rates and capital expenditures in
the United States has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain programs to
increase governmental involvement in healthcare, lower Medicare and Medicaid
reimbursement rates or otherwise change the operating environment in the
healthcare industry. Healthcare industry participants may react to these
proposals by curtailing or deferring use of new treatments for disease,
including treatments utilizing the biologics that CytoDyn is developing.
We Need to Raise at Least $3,000,000 to $5,000,000 in the Next 12 Months or We
Will Not Be Able to Continue Our Business.
If we are unable to raise at least $3,000,000 to $5,000,000 in the next 12
months by continuing to obtain capital or by borrowing funds, we will not be
able to operate our business.
Risks Related to Legal Proceedings
Management's Responsibility Is to Protect Our Patents, Trademarks and
Technology. This Includes Legal Expenses to Oppose Attempts to Steal, Convert or
Misappropriate Our Property.
We have been targeted in the past and have had to spend significant legal fees
to recover our property. Please see disclosures under "Legal Proceedings" below.
If we are unsuccessful in opposing efforts to steal, convert or misappropriate
our property, this could have a materially adverse effect on our business.
17
Risks Related to Regulatory Approvals and Clearances
The Time Needed to Obtain Regulatory Approvals and Respond to Changes In
Regulatory Requirements Could Cause Our Business to Fail.
On October 1, 2003, the Food and Drug Administration (FDA) transferred certain
product oversight responsibilities from the Center for Biologics Evaluation and
Research (CBER) to the Center for Drug Evaluation and Research (CDER). The
review and approval of Cytolin(R) is now under the jurisdiction of the Division
of Monoclonal Antibodies (DMA; Steven Kozlowski, MD, acting director, Patrick
Swann, Ph.D., acting deputy director) in the CDER Office of Pharmaceutical
Science: Office of Biotechnology Products (Keith O. Webber, Ph.D., Acting
Director).
Under current law, all new drugs and biologic products need clinical proof that
they are safe and effective before they can be approved for marketing in the
United States. The approval of Cytolin will be subject to submission of a
Biologics Licensing Application (BLA), submitted to CDER. The BLA is the vehicle
through which CytoDyn will formally propose that the FDA approve Cytolin for
sale in the United States. To obtain this authorization, CytoDyn will submit for
review, as contained in the BLA, nonclinical (in vitro and animal) and clinical
(human) test data and analyses, drug information, and descriptions of
manufacturing procedures. The submission of a BLA to the FDA does not guarantee
that an approval or clearance to market a product will be received.
This process could be costly and lengthy. There may be delays that increases our
costs to develop new potential drugs as well as the risk that we will not
succeed in introducing or selling them in the United States or other countries.
Newly promulgated or changed regulations could also require us to undergo
additional trials or procedures, or could make it impractical or impossible for
us to market our potential drugs for certain uses, in certain markets, or at
all.
Failure to comply with FDA or similar international regulatory bodies or other
requirements may require us to suspend production of our potential drugs which
could result in further losses or inability to produce revenues.
Risks Related to Our Common Stock
A Public Market for Our Shares May Never Develop, Making the Shares Illiquid.
A public market for our shares may never develop. This may make it difficult or
impossible for investors in our shares to sell them. If our shares are approved
for a quotation on the over-the-counter market, they may be thinly traded and
highly volatile.
If a Trading Market Develops In Our Securities, It Will Be Limited, Which Makes
Transactions In Our Stock Cumbersome and May Reduce the Value of an Investment
In Our Stock.
18
There is no current market for our common stock, but, if one develops, shares of
our common stock are "penny stocks" as defined in the Exchange Act, which are
traded in the over-the-counter market on the over-the-counter bulletin board. As
a result, investors may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the common stock being registered
hereby. In addition, the "penny stock" rules adopted by the Securities Exchange
Commission under the Exchange Act subject the sale of the shares of our common
stock to certain regulations which impose sales practice requirements on
broker/dealers. For example, brokers/dealers selling such securities must, prior
to effecting the transaction, provide their customers with a document that
discloses the risks of investing in such securities. Included in these documents
are the following:
o the bid and offer price quotes in and for the "penny stock", and the
number of shares to which the quoted prices apply;
o the brokerage firm's compensation for the trade;
o the compensation received by the brokerage firm's sales person for the
trade;
o the brokerage firm must send the investor a monthly account statement
that gives an estimate of the value of each "penny stock" in the
investor's account; and
o a written statement of the investor's financial situation and
investment goals.
Legal remedies, which may be available to you as an investor in "penny stocks",
are as follows:
o if "penny stock" is sold to you in violation of your rights listed
above, or other federal or state securities laws, you may be able to
cancel your purchase and get your money back;
o if the stocks are sold in a fraudulent manner, you may be able to sue
the persons and firms that committed the fraud for damages; and
o if you have signed an arbitration agreement, however, you may have to
pursue your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker/dealer, the broker/dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker/dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Securities and Exchange Commission's rules may
limit the number of potential purchasers of the shares of our common stock.
Resale restrictions on transferring "penny stocks" are sometimes imposed by some
states, which may make transaction in our stock more difficult and may reduce
the value of the investment. Various state securities laws pose restrictions on
transferring "penny stocks" and as a result, investors in our common stock may
have the ability to sell their shares of our common stock impaired.
19
Item 2. Description of Property
Our principal offices are located at 200 West De Vargas Street, Suite 1, Santa
Fe, New Mexico 87501. We lease this 169 square foot office space on a month to
month basis at a rent of $514 per month.
Item 3. Legal Proceedings
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. has 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".
Mr. Lewis alleges, among other things, misrepresentations or failure to make
disclosures related to Cytolin and its development, approval and marketing;
interference with Amerimmune's attempt to complete clinical research related to
Cytolin and Mr. Lewis' actual or prospective business relationships; and libel
and slander of Mr. Lewis.
Currently the Cross-Complaint asserts causes of action for fraud, interference
with prospective business interests, libel and slander. The requested relief
includes damages (alleged to range from $3 million to $20 million or more),
punitive damages, costs and other "just and proper" relief.
The outcome of litigation is uncertain. Management believes that an unfavorable
result is unlikely with respect to the claims raised by the Complaint, and that
the claims raised by the Cross-Complaint are without merit and are retaliatory.
The defendants have retained new counsel which are the same attorney's that
represented us in the following case that was decided in our favor.
Mr. Lewis has filed a motion to include CytoDyn, Inc. as a defendant in the
Cross-Complaint. We are opposing this motion which will be heard September 2005.
Trial is currently scheduled for October 2005.
20
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"), has sought to intervene in
the case, alleging a competing right to the Cell-Bank. The Court recently heard
oral argument on Maya's Motion to Intervene and has taken the Motion under
advisement. If Maya's Motion to Intervene is denied, the Cell-Bank will be
transferred to the Company and Allen, and the litigation will be concluded
(absent an appeal). Alternatively, if Maya's Motion to Intervene is granted, the
Cell-Bank will not be transferred to any person or entity pending a
determination by the Court of the parties' respective rights to the Cell-Bank.
The Company's Response:
-----------------------
The Company has a superior right to the Cell-Bank, and the Company intends to
litigate the matter vigorously if Maya does indeed intervene.
21
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, Cytodyn 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. Cytodyn will 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 technology developed during its relationship with
Amerimmune to Symbion. This technology is the subject matter of the patent
applications filed by the former employees of ex-licensee Amerimmune.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
Market Information.
On June 17, 2005 5:00pm EST, the Securities and Exchange Commission declared our
public registration prospectus effective. The public offering shares were sold
and the offering closed on July 31, 2005. We have not yet commenced trading the
shares we registered in the registration as we are awaiting a trading symbol. We
do not currently have a public trading market for our common stock. . We are in
the process of obtaining a trading symbol and a trade date from the National
Association of Securities Dealers (NASD). Once and if we receive the symbol from
the NASD, the company's shares will be trading on the Over-The-Counter Bulletin
Board.(OTCBB) As of August 22, 2005, we have approximately 171 holders of record
of our common stock.
22
Dividends.
Holders of our common stock are entitled to receive dividends as may be declared
from time to time by our Board of Directors. We have not paid any cash dividends
on our common stock and do not anticipate paying any in the foreseeable future.
Management's current policy is to retain earnings, if any, for use in CytoDyn's
operations and for expansion of the business.
Securities Authorized for Issuance under Equity Compensation Plans.
The following table sets forth, as of May 31, 2005, all compensation plans under
which equity securities of CytoDyn, Inc. are authorized for issuance:
--------------------------- ---------------------- ---------------------- ----------------------
Plan Category Number of Weighted average Number of
securities to be exercise price of Securities remaining
issued upon exercise outstanding options, available for future
of outstanding warrants and rights issuance under
options, warrants equity compensation
and rights plans (excluding
securities reflected
in column (a))
(a) (b) (c)
--------------------------- ---------------------- ---------------------- ----------------------
Equity compensation plans None None None
approved by security
holders
--------------------------- ---------------------- ---------------------- ----------------------
Equity compensation plans 150,000* $1.00 per share -0-
not approved by security
holders
--------------------------- ---------------------- ---------------------- ----------------------
Total 150,000
--------------------------- ---------------------- ---------------------- ----------------------
*This plan is an individual plan pursuant to an employment agreement between us
and Wellington A. Ewen. The plan states he is eligible to receive an option for
50,000 shares that will become exercisable at the end of his first year of
employment, exercisable at $0.50 a share, additional options for 50,000 shares
that will become exercisable at the end of his second year of employment,
exercisable at $1.00 a share, and options for 50,000 shares that will become
exercisable at the end of his third year of employment, exercisable at $1.50 a
share. We have adopted no other option plans.
23
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during the last fiscal quarter of
our fiscal year ended May 31, 2005.
Purchases of Equity Securities
We did not repurchase any of our common stock during the fiscal year ended May
31, 2005.
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Overview
We incorporated as Rexray Corporation in Colorado in May 2002. We were
originally a blank check company created to target companies for merger or
acquisition. We issued to our founder, James B. Wiegand 800,000 shares of our
common stock in exchange for services valued at $8,000, and thereafter $3,400
for administrative purposes through a private placement equity offering of
340,000 shares in 2002.
In October 2003, we entered into an acquisition agreement with CytoDyn of New
Mexico, Inc., the purpose of which was to acquire the license to three patents
and foreign counterpart patents. These patents cover the use of monoclonal
antibodies to treat patients with Human Immunodeficiency Virus (HIV) by
protecting crucial cells of the body's immune system that are otherwise killed
by the disease, permitting the immune system to inhibit the disease and protect
against the collateral illnesses that commonly accompany the disease.
We are a development stage company. We have not commenced any significant
product commercialization and, until we do, we will not generate any significant
product revenues. Most of the efforts and resources commenced by the predecessor
New Mexico company, (CytoDyn of New Mexico, Inc, incorporated in New Mexico in
June of 1994) have been directed to research and development of Cytolin and
related technologies. Since inception of the company and the accumulated losses
of the predecessor CytoDyn of New Mexico, we have incurred total research and
development expenses of $1.8?? million. As a result of these research and
development costs, we have combined, since inception, incurred operating losses
generating an accumulated deficit of approximately $ as of May 31, 2005 our
fiscal year end. Since October 2003, when we entered into the acquisition
agreement with Rexray Corporation through November 30, 2004 , our accumulated
net losses had been approximately $581,176. This company has had no research and
development expenses during the last two fiscal years, as we have been
structuring this new company , focusing on compliance, financing and structure
of management. Our research and development expenses will be incurred once we
meet with the FDA for approval of a Phase II/III trial We expect to continue to
incur operating losses and we expect the accumulated deficit to increase until
we are able to market a product and have sales sufficient to support our
operations.
24
The Acquisition Agreement with CytoDyn of New Mexico. Under the October 28, 2003
acquisition agreement with CytoDyn of New Mexico, we:
o Effected a one-for-two reverse split of our common stock,
o Issued to CytoDyn of New Mexico 5,362,640 post-split shares, and
o Amended our articles of incorporation to change our name to CytoDyn,
Inc.
o Assumed $161,578 in liabilities related to assigned assets
As consideration for the issuance of our shares to it, CytoDyn of New Mexico:
o Assigned a Patent License Agreement dated July 1, 1994 between CytoDyn
of New Mexico and Allen D. Allen, covering United States patent
numbers 5424066, 5651970, and 6534057, and related foreign patents and
patents pending, for a method of treating HIV disease with the use of
monoclonal antibodies,
o Assigned its trademarks, CytoDyn and Cytolin, and related trademark
symbol, and
o Paid $10,000 in cash.
We accounted for the acquisition as a recapitalization of CytoDyn of New Mexico,
with Rexray Corporation as the legal surviving entity. For accounting purposes,
the acquisition has been treated as a recapitalization of CytoDyn of New Mexico,
with Rexray as the legal surviving entity. Since Rexray had minimal assets and
no operations, the recapitalization has been accounted for as the sale of
890,000 shares of CytoDyn of New Mexico common stock for the net assets of
Rexray. Therefore, the historical financial information prior to the date of the
reverse business acquisition is the financial information of CytoDyn of New
Mexico.
History of CytoDyn of New Mexico, Inc.
CytoDyn of New Mexico has been, since its incorporation in New Mexico in 1994, a
research and development company focused on developing a treatment for diseases
associated with HIV/AIDS. It has never had operating revenues and has never been
profitable. It is in the process of dissolving and has distributed the 5,362,640
shares of common stock that it received from us in the acquisition to its
shareholders, pro rata. The corporation is in the process of being liquidated.
Summary of Critical Accounting Policies
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, we are currently in the development stage with losses for
all periods presented. These factors, among others, raise substantial doubt
about our ability to continue as a going concern.
25
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern. Our continuation as a going concern
is dependent upon our 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. We
intend to seek additional funding through equity offerings to fund our business
plan. There is no assurance that we will be successful.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles 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
We consider all highly liquid debt instruments with original maturities of three
months or less when acquired, to be cash equivalents. We had no cash equivalents
at May 31, 2005. We have completed an initial public offering to pay company
expenditures through January 31, 2006. We will have to raise additional funds
within the next twelve months. We have not commenced any negotiations for
additional funding but we expect to need approximately $3 to $5 million dollars
to accomplish our plan of operation for the development of Cytolin. We may raise
capital through debt or equity offerings. Capital may be raised in tiers and at
different prices as the market price for our shares fluctuates.
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 3 to 7 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
We evaluate 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.
26
Income Taxes
We account for income taxes under the provisions of SFAS No. 109, Accounting for
Income Taxes (SFAS 109). SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Earnings (Loss) per Common Share
Basic earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if potentially dilutive common shares had been issued.
At there was no variance between basic and diluted loss per share as there were
no potentially dilutive common shares outstanding.
Plan of Operation
During the next 12 months, our objectives are
o to meet with the FDA and seek approval to continue Phase II/III
clinical trials of Cytolin;
o to conduct the further clinical trials needed to get Cytolin to market
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 market our shares and establish a solid reasonable market
capitalization,
o to raise approximately $3 to $5 million in additional funds to support
our research and development efforts, the clinical trials relating to
Cytolin, and our general and administrative expenses; and
o to explore joint venture arrangements for other possible
pharmaceutical products.
27
Continuing Clinical Trials:
Phase I 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 trials. We purchased 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 1
data for a total of $362,000 and to seek approval for the Phase II trials from
the FDA. If the Phase II/III study is approved by the FDA, we expect it,
together with the pre-Phase II/III efforts, to cost an estimated $2,050,000 to
$3,350,000 for Symbion to conduct the clinical trials, plus estimated
manufacturing and supply costs of $350,000 to $400,000 and $362,000 for the
Phase Ia/b data for a total of $2,762,000 to $ 4,112,000.
Timing and anticipated completion dates for research and development.
---------------------------------------------------------------------
These trials can take anywhere from 29 to 42 months. Until we have met with the
FDA, which we plan to do within the next three months, we cannot be certain what
additional studies, assuming that Phase II/III study supports the efficacy and
safety of Cytolin, will be required to receive marketing approval The completion
of a Phase II/III Pivotal Study would allow the submission of a marketing
application and if approved, would allow us to market Cytolin in the United
States to certain HIV patients
Date we expect to begin benefiting from the product:
----------------------------------------------------
We expect to complete our research and development of all Cytolin clinical
trials needed for approval of a marketing application if at all by December
2008.
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.
28
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
During fiscal year 2004, several European patents were granted.. The new patents
are covered by our License Agreement with Allen D. Allen, our president that
gives us the exclusive right to develop his technology worldwide. These patents
are designated European Patent No. 94 912826.8, for the United Kingdom, Germany,
France, Switzerland, Italy, the Netherlands, Portugal, Spain, and Sweden, and
are the counterparts to our United States Patent No. 5424066. Patents are
pending in those same countries which, if granted, will be the equivalent of our
United States Patent No. 5651970. 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 worldwide. Patents.
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. We are awaiting the
assignment of a trading symbol and "a trade date" from the NASD. The proceeds
from the public offering will pay for company expenditures through January 2006.
We will require additional funding during the 2006 fiscal year in order to
continue with research and development efforts and to stay in business. If we
are able to complete further offerings, we will be not be able to pay for the
company's expenses for more than 6 months. Additional funding will have to occur
within the next twelve months in order to continue operations. The amount of
that funding is directly related to the clinical trials we are able to conduct
and the amounts we will need to continue operations.
29
We will attempt to create a solid market for our company's shares once we are
trading on the OTCBB. We believe this will help obtain additional funding by
creating investor confidence in our company.
In addition to operating funds, we will need from approximately $2,762,000 to
$4,112,000 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/III pivotal study.
We borrowed $121,000 from certain individuals who are friends and business
acquaintances of the officers and directors of the Company in March 2005. The
company issued promissory notes in exchange for the borrowed funds. The notes
carry 5% interest and are due by March 9, 2006. In addition to operating funds
and clinical trial funds the company will need to raise the funds to repay these
notes.
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.
Our director, 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:
- 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.
- CytoDyn, Inc will grant 83,122 non-qualified stock options with an
exercise price of $.75 per share that will vest immediately and be
exercisable over 5 years.
- CytoDyn, Inc will pay $25,000 to Symbion by February 10, 2005, 30 days
after execution of the agreement.
- CytoDyn, Inc will pay $275,000 to Symbion once our secondary financing
is received.
We have paid Symbion $25,000 out of the loan proceeds we received in March 2005.
Although the payment was late, Symbion has accepted it and the contract is in
force.
30
In the event the shareholders do not approve the company's option plan by
December 31, 2005, CytoDyn, Inc will pay Symbion $62,341.50 in U.S. dollars.
The results of the Phase II/III 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.
Consulting Agreement with Jacob Lalezari, M.D.
We have entered into a consulting agreement with Dr. Jacob Lalezari to consult
with us on our next clinical trials, including but not limited to, revising the
protocol, conducting clinical trials as the medical monitor. Dr. Lalezari is a
successful AIDS doctor in the U.S that has conducted numerous clinical trials
for big pharmaceutical companies such as, Glaxo, Human Genome Sciences, ViTex,
Pfizer, Xcyte, BMS, Roche, and Aventis. His expertise and cooperation could help
us get this treatment approved the fastest, safest way possible.
Confidentiality Agreement with Paramount Capital
We have signed a confidentiality agreement with Paramount Biosciences, LLC,
where Paramount capital agrees not to divulge any confidential information while
conducting due diligence on our company. They are evaluating the possibility of
providing financing, or assisting us in the development of the product.
Exploring Other Joint Ventures
While we continue to pursue FDA approval of our Cytolin product, we are also
considering entering into joint ventures to develop other types of products. We
have, for instance, entered into a nondisclosure agreement with another
development stage biotech company to discuss the possibility of the joint
development of drugs to treat neuropsychiatric diseases or disorders. These
discussions are in the early stages and we do not know if we will enter into a
joint venture or other arrangement with this company or if any products might
ensue from our efforts.
We may also pursue joint ventures or other arrangements to obtain funding for
our Cytolin-related endeavors, 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 funds become available.
We plan to hire two to three additional financial, medical or business experts
in the near future. During the fiscal year ended May 31, 2005, we expended
$157,927 in professional fees, consisting of $129,664 legal fees and
professional fees incurred in connection with our public registration, our
additional patent protection filings, and litigating our pending lawsuits, and
$10,676 in accounting and auditing fees. Transfer agent fees and EDGAR filing
fees were $12,643. $5,000 was paid for consulting work to Symbion as under our
consulting agreement. For the year ended May 31, 2005, $87,185 in legal fees was
owed to our director, Ronald Tropp. We expect to incur similar fees in the
current fiscal year, based on our research and development efforts, our need for
additional capital, and continuing litigation.
31
Item 7. Financial Statements
The financial statements and supplementary data required by this item are
submitted in a separate section beginning on page F-1 of this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item 8A. Controls and Procedures.
An evaluation as of the end of the period covered by this report was carried
out, under the supervision and participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC
filings.
Item 8B. Other Information
None.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 10(a) of the Exchange Act.
--------------------------- --------- --------------------------------
Name Age Positions Held *
--------------------------- --------- --------------------------------
Allen D. Allen 69 President, Chief Executive
Officer, Director
--------------------------- --------- --------------------------------
Wellington A. Ewen 65 Chief Financial Officer
--------------------------- --------- --------------------------------
Corinne E. Allen 37 Vice President Business
Development, Secretary,
Treasurer, Director
--------------------------- --------- --------------------------------
Daniel M. Strickland, MD 60 Director
--------------------------- --------- --------------------------------
Peggy J. Pence, Ph.D. 55 Director
--------------------------- --------- --------------------------------
Ronald J. Tropp, Esq. 62 Director
--------------------------- --------- --------------------------------
32
* Each officer and Director holds office until his/her successor has been
elected and qualified.
Allen D. Allen. Mr. Allen has been our chairman of our board and our president
and chief executive officer since October, 2003. Before joining CytoDyn, he was
the chairman of the board of directors and chief executive officer of CytoDyn of
New Mexico, Inc., since its inception in 1994. from 1990 to 1994 he was a
research associate with Olive View-UCLA Medical Center where he collaborated and
published with various medical professors oribinal research on HIV, dermatology
and general immunology and was the co-investigator on an autologous vaccine
study. From1986 to 1990 Mr. Allen was director of scientific affairs, Center for
Viral Diseases, Northridge, California, where he conducted and published
original research on a large cohort of patients with complex constellations of
neuroimmunologic complaints. From 1971 to 1986 he was president of Algorithms,
Incorporated where he conducted and published original research in the areas of
artificial intelligence, perception, man and machine systems and societal
engineering. Over the past thirty years, he has published numerous papers in the
peer review science and medical journals. He has also served as an investigator
on clinical research sponsored by major pharmaceutical companies, such as Ortho
Biotech, Johnson & Johnson, and Sanofi-Winthrop. Mr. Allen invented and patented
the family of HIV/AIDS therapies licensed to CytoDyn. He is a member of the
American Physical Society and the American Federation of Scientists, a life
member of the Institute of Electrical and Electronics Engineers, and a founding
member of the Editorial Board of Physics Essays. Mr. Allen received an
Associates of Arts degree from the University of California at Berkeley in 1957
and attended the University of California at Los Angeles from 1957 to 1959. In
1953 he received a national ARS Student Award in aeronautics from the American
Rocket Society (now the Institute of Aeronautics and Astronautics). Mr. Allen is
the father of Corinne E. Allen, our Vice President of Business Development.
Wellington A. Ewen, CPA, MBA. Mr. Ewen, has been our chief financial officer
since May 6, 2004. From 1988 until 2000, Mr. Ewen was owner of Wellington Ewen &
Associates in Malibu, California, which represented many clients as financial
and accounting consultants. He also served as financial and accounting officer
for several development stage pharmaceutical companies, including Entropin, Inc.
from April 1998 to June, 2000. From February, 1999 until his resignation in
2000, he was the chief financial officer of Amerimmune, Inc. From January, 2000
to July, 2000, he also served as a manager at PriceWaterHouseCoopers in Los
Angeles, California. Mr. Ewen is currently licensed as a CPA in Oregon. He
received his Bachelor of Science in 1963 and Master of Business Administration
from Cornell University in 1964.
Corinne E. Allen, CPA. Ms. Allen has been a director and our secretary and
treasurer since October 2003, and was until May 2004, our chief financial
officer. In May 2004, Ms. Allen became the vice president of business
development. From April 1995 to October 2003, she served as secretary and
treasurer of CytoDyn of New Mexico, Inc. where she was also a director from
June, 1994 to October 2003. Ms. Allen is a licensed Certified Public Accountant.
From 1999 to 2003, Ms. Allen was employed as a senior manager at Deloitte &
Touche, and, from 1992 to 1998 was a CPA at Hallquist Jones P.C. She has over 17
years experience in the accounting industry. Ms. Allen received a B.S. in
Business Administration from California State University Northridge with a
specialty in Accounting Theory and Practice in 1992. She has been a Certified
Public Accountant since January 1997. Ms.Allen is the daughter of Allen D.
Allen.
33
Ronald J. Tropp, Esq. Mr. Tropp has been a director of CytoDyn, Inc. since
October 2003. Mr. Tropp was a director of CytoDyn of New Mexico, Inc. from
February 2000 to October 2003. He is an attorney admitted to practice of law in
New York, California and Wisconsin. He has practiced entertainment and
transactional law for over 25 years and has been representing CytoDyn of New
Mexico, Inc. since the Fall of 1999. From 1994-1997, he was counsel, legal and
business affairs for The Kushner-Locke Company. From 1992 to 1994, Mr. Tropp was
a consultant and attorney at law for the Data Group, Playboy Video Enterprises,
and the Sinclair Institute. From 1985-1992, he was vice president, legal and
business affairs and director legal and business affairs for Playboy Video
Enterprises, Los Angeles. From 1980 to 1984, Mr. Tropp was Vice President, Legal
Affairs, associate general counsel and as director of legal affairs for Embassy
Pictures, Los Angeles. From 1973 to 1980, he served as corporate counsel for
Pacific Coast Medical Enterprises; General Counsel for Pacific Medical
Enterprises, which owned five acute care hospitals in Southern California. He
received a Bachelor of Arts in political science from Swarthmore College in 1965
and a Juris Doctorate degree from University of Wisconsin at Madison in 1968.
Daniel M. Strickland, MD. Dr. Strickland has been a director of CytoDyn, Inc.
since October, 2003. He served as a director of CytoDyn of New Mexico, Inc. from
1999 to October 2003. From 1995 to 1998 he practiced with Reproductive
Endocrinologists, PC, Augusta, Georgia. From 1998 to the present he has
practiced with the Women's Health Clinic in West Jefferson, North Carolina. From
1989 to 1995, Dr. Strickland was Chief, Reproductive Endocrinology, Ob-Gyn
Services Division, Saudi Aramco Medical Services Organization in Dhahran, Saudi
Arabia. From 1986 to 1989, Dr. Strickland served as Clinical Associate Professor
at the University of Texas Health Science Center in San Antonio, Texas. Dr.
Strickland served as a nuclear engineer for the U.S. Air Force before he became
a physician. Dr. Strickland is board certified by the National Board of Medical
Examiners. He received training designations from the American College of
Surgeons, and the American Heart Association for Advanced Trauma Life Support
and Advanced Cardiac Life Support. He holds U.S. patent No. 3,909,624 for a
Split-Ring Marx Generator Grading. Dr. Strickland received a Bachelor of Science
in Physics from the University of Georgia in 1966, and a Master of Science in
Nuclear Engineering from the Air Force Institute of Technology in 1969. Dr.
Strickland received his Doctorate of Medicine from Medical College of Georgia in
1977.
Peggy C. Pence, PhD. Dr. Pence has been a Director since October, 2003. In 1995,
Dr. Pence founded Symbion Research International, the CRO (Contract Research
Organization) that conducted the successful Phase 1 study of Cytolin, and from
then to the present has been its president and chief executive officer. From
1988 to 1992, Dr. Pence was manager of clinical operations and manager of
clinical studies for Amgen. From 1986 to 1988, she was manager of therapeutic
products for Berlex Laboratories (then known as Triton Biosciences). from 1983
to 1986, she was a pharmaceutical research manager for Serono, Inc. Dr. Pence
was employed from 1970 to 1983 by Eli Lilly and Company where, from 1982 to1983,
she was a medical information administrator, regulatory affairs and from 1970 to
1974, she was an associate microbiologist for Eli Lilly's Immunology Research
Laboratory. Dr. Pence has 30 years of experience in the research and development
of traditional pharmaceutical and biotechnology-derived potential drugs and
medical devices, including 13 years at Eli Lilly and Company. Dr. Pence received
a bachelor of Science degree, magna cum laude, in microbiology from Louisiana
Polytechnic Institute in 1969, and a doctor of Philosophy in toxicology in 1983
from Indiana University.
34
We have no other significant employees whom we expect to contribute
significantly to our business.
Currently, we do not have an audit committee. Our Board of Directors acts as our
audit committee. Similarly, the Board of Directors has determined that we do not
have an audit committee financial expert as defined under the Exchange Act
rules. We have been seeking, and continue to seek, an independent person to fill
this role.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires our Officers and Directors, and
persons who beneficially own more than 10% of our common stock, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and to provide copies of those filings to us. Based solely on our
review of the copies of those forms furnished to us during the fiscal year ended
May 31, 2005, we are aware of the following untimely filings:
------------------- ------------------- ------------------- ------------------
Name Position Held Report Number of Late
Reports
------------------- ------------------- ------------------- ------------------
------------------- ------------------- ------------------- ------------------
------------------- ------------------- ------------------- ------------------
------------------- ------------------- ------------------- ------------------
------------------- ------------------- ------------------- ------------------
Code of Ethics.
We have adopted a Code of Ethics for our Chief Executive Officer, Vice President
of Business Development and our Chief Financial Officer. This Code of Ethics can
be found on our website at www.cytodyn.com.
35
Item 10. Executive Compensation
The following table provides an overview of compensation that CytoDyn, Inc. paid
to the Named Executive Officers for the fiscal years ended May 31, 2005, 2004
and 2003.
Summary Compensation Table
Annual Long Term
Compensation Compensation
Awards
---------------------- -------- ----------------- ---------------- ----------------
Name and Principal Year Salary Securities All Other
Position Underlying Compensation
Options
(# shares)
---------------------- -------- ----------------- ---------------- ----------------
Allen D. Allen, 2005 98,000(1) 0 0
President, Chief 2004 98,000(1) 0 0
Executive Officer 2003 0 0 0
---------------------- -------- ----------------- ---------------- ----------------
James E. Wiegand, 2005 0 0 0
President(2) 2004 45,000(3) 0 0
2003 0 0 0
---------------------- -------- ----------------- ---------------- ----------------
1 Mr. Allen's employment agreement with CytoDyn provides for a salary of
$98,000. He was paid a total of $32,668 as of the end of each fiscal
year 2004 and 2005, and the remainder of his salary was accrued.
2 Mr. Wiegand resigned as president following the acquisition of certain
assets of CytoDyn of New Mexico dated October 28, 2003.
3 Paid for services to CytoDyn in connection with the acquisition.
Director Compensation
Our directors did not receive any compensation for their services as directors,
nor did any director receive reimbursement for attendance at meetings of the
Board of Directors.
Personal Service Agreements
All of our named executive officers have personal service agreements with us.
Among other things, each agreement:
o Is effective for two years after its effective date;
o May be terminated by us:
o Without cause, immediately upon written notice,
o With "cause", immediately upon notice specifying the cause,
or
o Upon the death or disability of the executive;
o May be terminated by the executive:
o Voluntarily, upon 4 weeks notice,
36
o Within a specified period after a "change in control", upon
two weeks notice, and
o For "good reason", if we do not cure the reason within 30
days of notice;
o Entitles the executive, upon termination by him or her within the
specified period after a "change of control" and with "good reason",
to:
o Base salary for the remainder of the term and 12 additional
months,
o Immediate vesting of all stock options,
o 4 month period in which to exercise options thereby vested,
o Payment of our portion of premiums under our health plan for
the shorter of 12 months or the executive's eligibility for
coverage under a health plan offered by the executive's new
employer, and
o Payment of our portion of premiums under our life insurance
plan or an equivalent amount for 12 months;
o Entitles the executive, upon termination by him or her without cause
or for "good reason", to:
o Base salary for the remainder of the term and 12 additional
months, and
o Payment of our portion of premiums under our health plan for
the shorter of 12 months or the executive's eligibility for
coverage under a health plan offered by the executive's new
employer;
o Restricts the solicitation of persons who were our officers,
directors, executives, consultants or employees;
o Restricts the disclosure of confidential information during or after
the term of the Agreement; and
o Requires the disclosure and assignment to us of all "Innovations"
developed by the executive individually or jointly during the period
of employment and that relate in any way to our business.
Proprietary Information And Inventions Agreement
Wellington E. Ewen, our chief financial officer, and Corinne E. Allen, our vice
president for business development, have signed and delivered to us a
Proprietary Information and Inventions Agreement For Employees. Among other
things, each agreement provides that:
o It is effective from the first date of employment until five years
from the date of termination of employment. Employment is defined to
include any time retained as a consultant or on contract.
o The employee will refrain from any activity that is hostile, adverse
or competitive, or otherwise interferes with the executive's service,
to us;
o We are the sole owner of the "Proprietary Information" and all patents
and other rights related to it
o Any rights that the employee has or may acquire in the "Proprietary
Information" are assigned to us
37
o The "Proprietary Information" will be kept in confidence and trust
during and after employment
o All works made by the employee during employment that fall within our
scope of our business are Works for Hire, and we will have the sole
and exclusive copyrights in them.
o All "Inventions" made by the employee (either alone or jointly) during
the period of employment, will be disclosed to us and we will be the
sole owner of them, and any related patents and rights.
Change Of Control Agreement
Allen D. Allen, our president and chief executive officer, and Corinne E. Allen,
our vice president for business development, have signed and delivered to us a
Change of Control Agreement. Among other things, each agreement provides that:
o The Agreement will terminate at the time the executive's employment
with us terminates or is terminated;
o Upon termination of the executive's employment by us without "cause"
or by him or her with "good reason", in either case within 6 months
after a "change of control", the executive will be entitled to:
o Base salary for the remainder of the term and 12 additional
months
o Immediate vesting of all stock options,
o 4 month period in which to exercise options thereby vested,
o Payment of our portion of premiums under our health plan for
the shorter of 12 months or the executive's eligibility for
coverage under a health plan offered by the executive's new
employer, and
o Payment of our portion of premiums under our life insurance
plan or an equivalent amount for 12 months.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The following table sets forth as of August 22, 2005 the beneficial ownership of
common stock by each person who is known by CytoDyn to own beneficially more
than 5% of the outstanding shares of common stock.
------------------------- ----------------------- --------------------
Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership* Beneficially Owned
------------------------- ----------------------- --------------------
Allen D. Allen(2) 2,118,515 24.86%
------------------------- ----------------------- --------------------
Corinne E. Allen(2) 1,736,335 20.38%
------------------------- ----------------------- --------------------
J.P. Turner & Company, 426,000(1) 5.0%
LLC (1,3)
------------------------- ----------------------- --------------------
*To CytoDyn's knowledge, all persons have sole voting power of the shares.
38
1 J.P. Turner received 426,000 warrants to purchase shares of common
stock. The warrants were granted November 25, 2004,to J.P. Turner . They are
immediately exercisable at $0.30 per share. The address for these shareholders
is in care of the corporation at 200 West De Vargas Street, Suite 1, Santa Fe,
New Mexico 87501.
3 The address of the shareholder is 3060 Peachtree Road, Floor 1100,
Atlanta, Georgia 30305
The following table sets forth as of August 22, 2005, the number of common stock
beneficially owned by all directors and executive officers.
---------------------------------------- ---------------------- -----------
Name and Address of Beneficial Owner Amount and Nature of Percent
Beneficial Owner(1) of Class*
---------------------------------------- ---------------------- -----------
Allen D. Allen2 2,118,515 24.86%
---------------------------------------- ---------------------- -----------
Wellington A. Ewen(2,3) -0- *
---------------------------------------- ---------------------- -----------
Corinne E. Allen(2) 1,736,335 20.38%
---------------------------------------- ---------------------- -----------
Ronald J. Tropp(2) -0- *
---------------------------------------- ---------------------- -----------
Daniel M. Strickland(2) 8,476 *
---------------------------------------- ---------------------- -----------
Peggy J. Pence(2) -0- *
---------------------------------------- ---------------------- -----------
All Officers and Directors as a Group 3,863,326 45.24%
---------------------------------------- ---------------------- -----------
*Less than 1% of outstanding common stock
1 Each shareholder has sole voting and investment power for the shares.
2 The address for the shareholders is in care of the corporation at 200 West De
Vargas Street, Suite 1, Santa Fe, New Mexico 87501
3 Mr. Ewen has options to purchase 150,000 shares of common stock in connection
with an employment agreement. We know of no arrangements concerning anyone's
ownership of stock, which may, at a subsequent date, result in a change of
control.
Item 12. Certain Relationships and Related Transactions
Related Party Transactions, Actual or Proposed, In Last 2 Years. We
propose to be, or during the last two years were, party to certain transactions
involving amounts in excess of $60,000, in which our directors, executive
officers, others hold more than 5% of any class of our securities, or their
immediate family members, had or will have a material interest. The interested
parties and transactions are described below.
Common Stock, Options and Compensation. For a discussion of
transactions within the past two years having aggregate values in excess of
$60,000 and involving compensation paid or securities issued to our directors or
executive officers, please see the discussions entitled "Executive Compensation"
in Part III, Item 10 and "Security Ownership of Certain Beneficial Owners and
Management And Related Stockholder Matters" in Part III, Item 11.
39
Agreement to Issue Warrants to J.P. Turner & Company, LLC. J.P. Turner
& Company, LLC, is a beneficial owner of 5.02% of our common stock, by virtue of
a common stock warrants which it is entitled to receive pursuant to a "Financial
Representative Agreement" dated November 25, 2003. Pursuant to the terms of that
agreement:
o J.P. Turner acted as our agent in connection with a private offering
of our securities;
o We paid the sum of $54,000 to J.P. Turner;
o We are to issue to J.P. Turner warrants for the purchase of 426,000
shares of our common stock, at an exercise price of $0.30 per share;
o When issued, the warrants will:
o Vest immediately in favor of J.P. Turner;
o Be exercisable immediately and thereafter for 5 years;
o Contain customary anti-dilution provisions for stock
dividends, splits, mergers and sales of substantially all
assets;
o Contain a "cashless exercise" provision;
o We have granted J.P. Turner "piggyback" registration rights, at our
expense, with respect to the shares underlying the warrants;
o We are to indemnify J.P. Turner and others against certain losses
arising in connection with our material misrepresentations or
omissions, the performance by J.P. Turner of the agreement, or breach
of representations or warranties by an investor; and
o The term of the agreement is 12 months, subject to termination upon 45
days written notice.
Agreement with Symbion Research International, Inc. Our director, Peggy
C. Pence, PhD., is the President and Chief Executive Officer of Symbion Research
International, Inc. On October 1, 2003, we entered into a "Master Agreement for
Professional Services" with Symbion. The agreement describes general terms and
conditions intended to apply to services which Symbion may provide for us, most
likely in connection with the conduct of future FDA clinical trials of Cytolin.
That agreement requires an advance payment of $25,000 to Symbion, of which
$5,000 is to serve as a retainer and the remaining $20,000 is to be applied
against billing for services that may be rendered. We have made the advance
payment. We also have had discussions with Symbion regarding the possible
conduct of Phase II and III trials, and these discussions have resulted in
Symbion providing us with a cost estimate:
o based on the assumption that the Phase I trials will not have to be
repeated and that the FDA will approve the currently designed Phase
II/III study;
o that services related to the end of Phase I and the Pre-Phase II
meeting will cost between $50,000 and $100,000;
o that services related to the Phase II/Phase III pivotal study will
cost between $1,250,000 and $1,750,000; and
o that the cost to the Investigators will be between $750,000 and
$1,500,000, plus the costs of materials, investigational product
manufacturing or supplies.
40
Acquisition of the Assets of CytoDyn of New Mexico. Allen D. Allen, our
president, chief executive officer and the chairman of the board of directors,
Corinne E. Allen, our vice president of business development, secretary,
treasurer and director, Ronald J. Tropp and Daniel M. Strickland, M.D., our
directors, and Brian J. McMahon, our former executive vice president, formerly
also served as executive officers or directors of CytoDyn of New Mexico, Inc. In
October 2003, we acquired the assets of CytoDyn of New Mexico, Inc. and changed
our name to CytoDyn, Inc. Please see "The Acquisition Agreement with CytoDyn of
New Mexico" under "Description of Business" at Part I, Item 1. In connection
with that transaction:
o we issued to CytoDyn of New Mexico 5,362,640 post reverse- split
shares of our common stock;
o Allen D. Allen, who is our president, chief executive officer and the
chairman of our board of directors, ultimately received 2,118,515
shares of our post reverse-split common stock 1 and indirectly
benefited from our assumption of debts in the amount of $71,694 owed
to him and Corinne E. Allen by CytoDyn of New Mexico;
o Corinne E. Allen, who is our vice president of business development,
secretary and treasurer, ultimately received 1,736,335 shares of our
post reverse-split common stock 1 and indirectly benefited from our
assumption of debts in the amount of $71,694 owed to her and Allen D.
Allen by CytoDyn of New Mexico;
o Daniel M. Strickland, MD, who is a member of our board of directors,
ultimately received 8,476 shares of our post reverse-split common
stock 1; and
o James B. Wiegand, who until this transaction had been our president,
retained 400,000 shares of our post reverse-split common stock.
Services Provided by Ronald J. Tropp. Our director, Ronald J. Tropp,
Esq., has provided legal services to us, and to CytoDyn of New Mexico, for a
number of years. Currently, we owe him the sum of $87,185 for these services. No
arrangements have been made for the payment of this obligation. We anticipate
that Mr. Tropp will provide additional legal services to us in the future.
Indemnification, Legal Costs and Fees Incurred by Directors and
Officers. Allen D. Allen, our president, chief executive officer and the
chairman of the board of directors, Corinne E. Allen, our vice president of
business development, secretary, treasurer and director, Ronald J. Tropp and
Daniel M. Strickland, M.D., our directors, and Brian J. McMahon, our former
executive vice president, are named as Cross-Defendants in a Cross-Complaint
filed in the California Superior Court in and for Los Angeles County in an
action originally captioned CytoDyn of New Mexico, Inc. et al., v. Amerimmune
Pharmaceuticals, Inc. et al., Case number BC 290154. The Cross-Complaint is
based upon alleged acts and omissions of these individuals occurring before we
entered into the Acquisition Agreement with CytoDyn of New Mexico. In a separate
proceeding, in Ventura County, California, captioned CytoDyn, Inc., et al. v.
Amerimmune, Inc. et al., Case number SC039250, Allen D. Allen is our
co-plaintiff. Please see the discussion entitled "Legal Proceedings" in Part I,
Item 3. Our Articles of Incorporation and by-laws provide that we will indemnify
____________________________
1 The shares constituted a portion of the shares issued to CytoDyn of New
Mexico, Inc.
41
directors, officers, and enumerated others against certain liabilities and
expenses arising because of the indemnitee's corporate status or relationship.
We have not determined whether we have an obligation to indemnify Messrs. Allen,
McMahon, Tropp and Strickland and Ms. Allen with respect to any liability that
may arise under the Cross-Complaint. We have, however, assumed responsibility
for the payment of the legal fees and costs of counsel who jointly represent us
and any of Messrs. Allen, McMahon, Tropp and Strickland and Ms. Allen in the Los
Angeles County proceeding. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Note Given and Debt Owed to Allen D. Allen. In January 2004 we issued
to Allen D. Allen, our president, chief executive officer and the chairman of
our board of directors, a non interest bearing promissory note, payable on
demand, in the original principal amount of $22,788. The note reflects advances
made to us by Mr. Allen during the years ending on May 31, 2003 and May 31,
2004. In addition, we owe the sum of $10,000 to Mr. Allen, who advanced that
amount to CytoDyn of New Mexico for further payment to Rexray Corporation in
connection with the acquisition of the assets of CytoDyn of New Mexico. The sum
owed does not bear interest and is payable on demand. During the May 31, 2005
debt owed to Allen D. Allen by an additional $12,000. The total debt owed to Mr.
Allen is $44,787.
Notes Given to Corinne Allen. In January 2004, we issued to Corinne E.
Allen, our vice president of business development, secretary, treasurer and
director, two non interest bearing promissory notes, each payable on demand, in
the original principal amounts of $50,000 and $38,906. The notes reflected
advances made to us by Ms. Allen during the years ending on May 31, 2003 and May
31, 2004. The $50,000 note was paid in full in February, 2004. The $38,906 note
remains outstanding and does not bear interest.
Transactions With Promoters. James B. Wiegand was the promoter of
Rexray Corporation and served as its president from the time of incorporation
until its acquisition of the assets of CytoDyn of New Mexico. Rexray was
incorporated on May 2, 2002, under the laws of Colorado as a "blank check"
company. 800,000 shares of its common stock were issued to Mr. Wiegand in
exchange for organizational services provided and valued by him at $8,000. By
virtue of a one-for-two reverse stock split effected in October, 2003, Mr.
Wiegand's common stock ownership was reduced to 400,000 shares. We were party to
the following additional direct or indirect transactions with Mr. Wiegand:
o Compensation for Services. In October 2003, we paid $15,000 and gave a
promissory note in the original principal amount of $30,000 to Mr.
Wiegand. Interest accrued on the unpaid principal amount of the note
at the rate of 5% per annum. The note was paid in full in February
2004. The cash payment and note were given in consideration of
services provided to us by Mr. Wiegand, principally in connection with
the acquisition of the assets of CytoDyn of New Mexico. Mr. Wiegand
determined the value of his services.
42
o Rent of Office Space. From May 2, 2002 through September 30, 2002, we
rented office space located in Mr. Wiegand's home from Amery Coast
Corporation at the rate of $100 per month. The rental rate was based,
according to him, upon then current comparable rents. Amery Coast
Corporation was controlled by Mr.Wiegand.
o Contributions of Office Space. From October 1, 2002 through May 31,
2003, Amery Coast Corporation contributed office space to us. The
rental value of the office space was deemed to be $100 per month,
based on the previous rental rate determined by Mr. Wiegand.
o Contributions of Time, Fee and Cash. Mr. Wiegand contributed services
during the year ended May 31, 2003, which he valued at $2,970. In
addition, during the year ended May 31, 2003, he paid, on our behalf,
$1,645 for professional services rendered to us, and during the six
month period ending November 30, 2003, he contributed $2,500 to us. The
contribution of services and the payments were treated as contributions
to capital.
o Contributions of Cash. Mr. Allen contributed $ in additional paid in
capital during the year ended May 31, 2005.
Item 13. Exhibits
Incorporated by Reference
---------- ---------------------------------------------- -------- --------- -------------
Exhibit Exhibit Description Form Exhibit Filing Date
Number Number
---------- ---------------------------------------------- -------- --------- -------------
3.i Articles of Incorporation 10SB 3.1 7/11/2002
---------- ---------------------------------------------- -------- --------- -------------
3.i.2 Amendment to Articles of 8K 3.i.2 11 /12/2003
Incorporation
---------- ---------------------------------------------- -------- --------- -------------
3.ii Bylaws 10SB 3.2 7/11/2002
---------- ---------------------------------------------- -------- --------- -------------
10.i Acquisition Agreement 8K/A 10.i 1/12/2004
Between Rexray Corporation
and CytoDyn of NM, Inc. dated
October 28, 2003
---------- ---------------------------------------------- -------- --------- -------------
10.ii Patent License Agreement between CytoDyn of 10KSB 10.2 9/14/04
New Mexico, Inc and Allen D. Allen and
Amendment to Patent License Agreement
---------- ---------------------------------------------- -------- --------- -------------
10.iii Personal Services Agreement between Allen 10KSB 10.3 9/14/04
D. Allen and CytoDyn, Inc
---------- ---------------------------------------------- -------- --------- -------------
10.iv Personal Services Agreement Between 10KSB 10.4 9/14/04
Wellington A. Ewen and CytoDyn, Inc.
---------- ---------------------------------------------- -------- --------- -------------
43
---------- ---------------------------------------------- -------- --------- -------------
10.v Personal Services Agreement between Corinne 10KSB 10.5 9/14/04
E. Allen and CytoDyn, Inc
---------- ---------------------------------------------- -------- --------- -------------
10.vi Financial Representative Agreement between 10KSB 10.6 9/14/04
J.P. Turner & Company, LLC and CytoDyn, Inc
---------- ---------------------------------------------- -------- --------- -------------
10.vii Change of Control Agreement between Allen 10KSB 10.7 9/14/04
D. Allen and CytoDyn, Inc.
---------- ---------------------------------------------- -------- --------- -------------
10.viii Change of Control Agreement between Corinne 10KSB 10.8 9/14/04
E. Allen and CytoDyn, Inc.
---------- ---------------------------------------------- -------- --------- -------------
10.ix Proprietary Information between Corinne E. 10KSB 10.9 9/14/04
Allen and CytoDyn
---------- ---------------------------------------------- -------- --------- -------------
10.x Proprietary Information between Wellington 10KSB 10.10 9/14/04
A. Ewen and CytoDyn, Inc.
---------- ---------------------------------------------- -------- --------- -------------
10.xi Proprietary Agreement between Allen D. 10KSB 10.11 9/14/04
Allen and CytoDyn, Inc.
---------- ---------------------------------------------- -------- --------- -------------
10.xii Specimen of Common Stock Certificate SB-2 4 6/01/04
---------- ---------------------------------------------- -------- --------- -------------
10.xiii Subscription Agreement SB-2 99.1 6/01/04
---------- ---------------------------------------------- -------- --------- -------------
10.xiv Office Lease Agreement SB-2/A 10.3 10/21/04
---------- ---------------------------------------------- -------- --------- -------------
10.xv Conditional License Agreement and Court SB-2/A 10.4 10/21/04
Order for Its Termination
---------- ---------------------------------------------- -------- --------- -------------
10.xvi Master Agreement for Professional Services SB-2/A 10.3 10/21/04
with Symbion
---------- ---------------------------------------------- -------- --------- -------------
10.xvii Amendment No. 1 to Agreement Dated SB-2/A 10.2 1/13/05
September 30, 2003
---------- ---------------------------------------------- -------- --------- -------------
10.xviii Buy-Sell Agreement SB-2/A 10.5.2 1/13/05
---------- ---------------------------------------------- -------- --------- -------------
10.xix Amendment to Patent License Agreement SB-2/A 10.6.1 3/21/05
---------- ---------------------------------------------- -------- --------- -------------
14 Code of Ethics 10KSB 14 9/14/04
---------- ---------------------------------------------- -------- --------- -------------
Filed Herewith
---------- ----------------------------------------------
21 Subsidiaries of the Company:
None
---------- ----------------------------------------------
31.1: Section 302 Certification of Allen D. Allen
---------- ----------------------------------------------
31.2 Section 302 Certification of Wellington A.
Ewen
---------- ----------------------------------------------
32.1 Section 906 Certification of Allen D. Allen
---------- ----------------------------------------------
32.2 Section 906 Certification of Wellington A.
Ewen
---------- ----------------------------------------------
44
Item 14. Principal Accountant Fees and Services
Approval of Services
The Board of Directors has resolved to establish an audit committee composed of
our chief financial officer, Wellington Ewen, Corinne Allen, a director and our
vice president of Business Development, and an independent member when that
person is identified. The audit committee does not yet have a charter. Pending
proper establishment of the audit committee, the Board of Directors pre-approves
all engagements for audit and non-audit services provided by the Company's
principal accounting firm, Cordovano and Honeck, P.C.
Audit Fees
The aggregate fees billed during the fiscal years ended May 31, 2005 and 2004
for professional services rendered by our principal accounting firm, Cordovano
and Honeck, P.C., for the audit of the financial services included in Form
10-KSB, and for the review of the interim condensed financial statements
included in Form 10-QSB, were approximately $4,030 and $2,500, respectively.
Included here are fees associated with the review by Cordovano and Honeck, P.C.
of a registration statement filed with the SEC and the related issuance of
independent accountant consent letters.
Audit Related Fees
The aggregate fees billed during the fiscal years ended May 31, 2005 and 2004
for assurance and related services rendered by our principal accounting firm,
Cordovano and Honeck, P.C., were approximately $5,750 and $3,000 respectively.
Assurance and related service fees include the audit of employee benefit plan
financial statements and audit-related due diligence assistance on potential
acquisitions.
Tax Compliance/Preparation Fees
The aggregate fees billed during the fiscal years ended May 31, 2005 and 2004
for professional services rendered by our principal accounting firm, Cordovano
and Honeck, P.C., for tax compliance, tax advice, and tax planning were
approximately and $0, respectively. Tax compliance services include the
preparation of income tax returns filed with the Internal Revenue Service. Tax
advice and planning services included assistance with implementation of tax
planning strategies and consultation on other tax matters.
All Other Fees
The aggregate fees billed during the fiscal years ended May 31, 2005 and 2004
for all other professional services rendered by our principal accounting firm,
Cordovano and Honeck, P.C., were approximately $896 and $0, respectively. Other
services consisted of assistance with the interpretation of new accounting
standards and other related services.
45
Chart of Fees Paid to Independent Auditing Firm For Past Two Fiscal Years
----------------------------- ----------------------------------------------
For fiscal years ended May 31,
----------------------------- ----------------------------------------------
Type of Service 2005 % not 2004 % not
pre- pre-
approved(1) approved(1)
----------------------------- -------- ------------- --------- -------------
Audit fees $ N/A $ N/A
----------------------------- -------- ------------- --------- -------------
Audit-related fees 9,780 5,500 100%
----------------------------- -------- ------------- --------- -------------
Tax fees
----------------------------- -------- ------------- --------- -------------
Tax compliance 750
----------------------------- -------- ------------- --------- -------------
Tax advice & planning
----------------------------- -------- ------------- --------- -------------
Total tax fees
----------------------------- -------- ------------- --------- -------------
All other fees 896 100%
----------------------------- -------- ------------- --------- -------------
Total fees $10,676 $ 6,250
----------------------------- -------- ------------- --------- -------------
1 These percentages reflect services for which the pre-approval
requirement is waived under applicable accounting rules.
46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CytoDyn, Inc.
By: /s/ Allen D. Allen
---------------------------------------------
Allen D. Allen, Chief Executive Officer
Date: September 9, 2005
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Allen D. Allen Date: September 9, 2005
--------------------------------------------
Allen D. Allen, President, Chief Executive
Officer, Director
/s/ Wellington A. Ewen Date: September 9, 2005
--------------------------------------------
Wellington A. Ewen, Chief Financial Officer
/s/ Corinne E. Allen Date: September 9, 2005
--------------------------------------------
Corinne E. Allen, Vice President of Business
Development, Secretary, Treasurer, Director
/s/ Peggy C. Pence Date: September 9, 2005
--------------------------------------------
Peggy C. Pence, Director
/s/ Daniel M. Strickland Date: September 9, 2005
--------------------------------------------
Daniel M. Strickland, Director
/s/ Ronald J. Tropp Date: September 9, 2005
--------------------------------------------
Ronald J. Tropp, Director
47
Page
----
Report of Independent Registered Public Accounting Firm....................F-2
Balance Sheet at May 31, 2005..............................................F-3
Statements of Operations for the years ended May 31, 2005 and 2004.........F-4
Statement of Changes in Shareholders' Deficit for the two year period
from June 1, 2003 through May 31, 2005................................F-5
Statements of Operations for the years ended May 31, 2005 and 2004.........F-6
Notes to Financial Statements..............................................F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
CytoDyn, Inc.:
We have audited the accompanying balance sheet of CytoDyn, Inc. (a development
stage company) as of May 31, 2005, and the related statements of operations,
changes in shareholders' deficit, and cash flows for the years ended May 31,
2005 and May 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CytoDyn, Inc. as of May 31,
2005, and the results of its operations and its cash flows for the years ended
May 31, 2005 and May 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered significant operating losses since
inception, which raises a substantial doubt about its ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Cordovano and Honeck, LLP
Denver, Colorado
August 29, 2005
F-2
CYTODYN, INC.
(A Development Stage Company)
Balance Sheet
May 31, 2005
Assets
Current Assets:
Cash ...................................................... $ 930
Prepaid expenses .......................................... 41,341
-----------
Total current assets ........................ 42,271
Furniture and equipment, less accumulated
depreciation of $1,069 (Note 2) ......................... 2,533
Intangible asset, less accumulated
amortization of $806 (Note 3) ........................... 2,094
Deposit ..................................................... 495
-----------
$ 47,393
===========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable .......................................... $ 74,336
Accrued liabilities ....................................... 99,350
Accrued interest payable .................................. 1,441
Notes payable (Note 4) .................................... 121,000
Indebtedness to related parties (Note 5) .................. 511,029
-----------
Total current liabilities ................... 807,156
Commitments and contingencies (Note 8) ...................... --
Shareholders' deficit (Note 6):
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,
8,069,307 shares issued and outstanding ................ 1,916,334
Additional paid-in capital ................................ 40,942
Accumulated deficit ....................................... (1,601,912)
Deficit accumulated during development stage .............. (1,115,127)
-----------
Total shareholders' deficit ................. (759,763)
-----------
$ 47,393
===========
See accompanying notes to financial statements
F-3
CYTODYN, INC.
(A Development Stage Company)
Statements of Operations
For the Year Ended
May 31,
--------------------------
2005 2004
----------- -----------
Operating expenses:
General and administrative (Note 10) ...... $ 385,270 $ 325,550
Research and development .................. 362,342 --
Legal fees, related party (Note 5) ........ 25,900 20,050
Depreciation .............................. 1,671 204
----------- -----------
Total operating expenses... 775,183 345,804
----------- -----------
Operating loss ............ (775,183) (345,804)
Interest income ............................... 234 343
Interest expense .............................. (2,134) (453)
----------- -----------
Loss before income taxes... (777,083) (345,914)
Income tax provision (Note 7) ................. -- --
----------- -----------
Net loss .................. $ (777,083) $ (345,914)
=========== ===========
Basic and diluted loss per share .............. $ (0.12) $ (0.05)
=========== ===========
Basic and diluted weighted average
common shares outstanding ................. 6,557,362 6,335,973
=========== ===========
See accompanying notes to financial statements
F-4
CYTODYN, INC.
(A Development Stage Company)
Statements of Changes in Shareholders' Deficit
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
----------- ----------- ----------- ----------- -----------
Balance at June 1, 2003 ......................... -- $ -- 5,362,640 $ 1,417,792 $ 23,502
October 28, 2003, stock issued to acquire the
net assets of Rexray Corporation (Note 1)... -- -- 890,000 7,542 --
----------- ----------- ----------- ----------- -----------
Balance at October 28, 2003, following
recapitalization ............................ -- -- 6,252,640 1,425,334 23,502
February through April 2004, sale of
common stock less offering costs of
$54,000 ($.30/share) (Note 6) ............... -- -- 1,800,000 486,000 --
February 2004, shares issued to former officer
as payment for working capital advance
($.30/share) (Note 5) ....................... -- -- 16,667 5,000 --
Net loss, year ended May 31, 2004 ............... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at May 31, 2004 ......................... -- -- 8,069,307 1,916,334 23,502
July 2004, capital contribution by an
officer ..................................... -- -- -- -- 512
November 2004, common stock warrants
granted (Note 6) ............................ -- -- -- -- 11,928
February 2005, capital contribution by an
officer ..................................... -- -- -- -- 5,000
Net loss, year ended May 31, 2005 ............... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at May 31, 2005 ......................... -- $ -- 8,069,307 $ 1,916,334 $ 40,942
=========== =========== =========== =========== ===========
Deficit
Accumulated
During
Accumulated Development
Deficit Stage Total
----------- ----------- -----------
Balance at June 1, 2003 ......................... $(1,594,042) $ -- $ (152,748)
October 28, 2003, stock issued to acquire the
net assets of Rexray Corporation (Note 1)... -- -- 7,542
----------- ----------- -----------
Balance at October 28, 2003, following
recapitalization ............................ (1,594,042) -- (145,206)
February through April 2004, sale of
common stock less offering costs of
$54,000 ($.30/share) (Note 6) ............... -- -- 486,000
February 2004, shares issued to former officer
as payment for working capital advance
($.30/share) (Note 5) ....................... -- -- 5,000
Net loss, year ended May 31, 2004 ............... (7,870) (338,044) (345,914)
----------- ----------- -----------
Balance at May 31, 2004 ......................... (1,601,912) (338,044) (120)
July 2004, capital contribution by an
officer ..................................... -- -- 512
November 2004, common stock warrants
granted (Note 6) ............................ -- -- 11,928
February 2005, capital contribution by an
officer ..................................... -- -- 5,000
Net loss, year ended May 31, 2005 ............... -- (777,083) (777,083)
----------- ----------- -----------
Balance at May 31, 2005 ......................... $(1,601,912) $(1,115,127) $ (759,763)
=========== =========== ===========
See accompanying notes to financial statements
F-5
CYTODYN, INC.
(A Development Stage Company)
Statements of Cash Flows
For the Year Ended
May 31,
------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net loss ....................................... $ (777,083) $ (345,914)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation ............................. 1,671 204
Stock-based compensation (Note 6) ........ 11,928 --
Changes in current assets and liabilities:
Increase in prepaid expenses ........... (25,039) (16,302)
Increase in deposits ................... -- (495)
Increase/decrease in accounts payable
and accrued liabilities ............. 93,844 (2,258)
---------- ----------
Net cash used in
operating activities ....... (694,679) (364,765)
---------- ----------
Cash flows from investing activities:
Equipment purchases ............................ (3,167) (3,335)
---------- ----------
Net cash provided by (used in)
investing activities ....... (3,167) (3,335)
---------- ----------
Cash flows from financing activities:
Capital contributions by officer ............... 5,512 --
Proceeds from notes payable issued to
related parties (Note 5) .................... 385,300 115,826
Proceeds from notes payable issued to
individuals (Note 4) ........................ 121,000 (50,000)
Proceeds from the sale of common stock (Note 6) -- 540,000
Payment of offering costs (Note 6) ............. -- (54,000)
---------- ----------
Net cash provided by
financing activities ....... 511,812 551,826
---------- ----------
Net change in cash ......... (186,034) 183,726
Cash, beginning of period .......................... 186,964 3,238
---------- ----------
Cash, end of period ................................ $ 930 $ 186,964
========== ==========
Supplemental disclosure of cash flow information:
Income taxes ................................... $ -- $ --
========== ==========
Interest ....................................... $ 234 $ 453
========== ==========
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 (Note 5) ... $ -- $ 5,000
========== ==========
See accompanying notes to financial statements
F-6
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
Organization and Basis of Presentation
CytoDyn, Inc. (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".
The Company plans to develop therapeutic agents for use against the disease
associated with Human Immunodeficiency Virus ("HIV"). The Company intends to
develop and obtain FDA approval for the use of monoclonal antibodies to treat
patients with HIV by protecting the cells of the body's immune system that are
otherwise killed by the disease. The Company is continuing the research and
development of a treatment for HIV, using technology licensed to it by the
Company's president, and may either repeat Phase I trials, if necessary for
non-clinical reasons, or with FDA approval, conduct a Phase II/III pivotal
study. The Company has not derived any revenues from the licensed technology,
but the Company is planning to pursue further clinical trials.
On October 27, 2003, Rexray changed its name to CytoDyn, Inc.
Acquisition Agreement
---------------------
On October 28, 2003, Rexray, the former Securities and Exchange Commission
("SEC") Registrant, entered into an Acquisition Agreement (the "Agreement") with
CytoDyn of New Mexico, Inc. ("CytoDyn NM"), a company incorporated under the
laws of New Mexico on June 4, 1994. Under the terms of the Agreement, Rexray
agreed to acquire some of the assets of CytoDyn NM in exchange for 5,362,640
shares of its common stock. Following the acquisition, the former shareholders
of CytoDyn NM held approximately 85.8 percent of the Company's outstanding
common stock, resulting in a change in control. However, for accounting
purposes, the acquisition has been treated as a recapitalization of CytoDyn NM,
with Rexray the legal surviving entity. Since Rexray had minimal assets and no
operations, the recapitalization has been accounted for as the sale of 890,000
shares of CytoDyn NM common stock for the net assets of Rexray. Therefore, the
historical financial information prior to the date of the reverse business
acquisition is the financial information of CytoDyn NM.
Prior to the Agreement, both Rexray and CytoDyn NM had insignificant operations
and were not devoting efforts to establishing a business. Following the
Agreement, the Company began devoting substantially all efforts to establishing
a new business, but planned principal operations have not yet commenced. As a
result, the Company's inception into the development stage has been established
at October 28, 2003 and, in accordance with SFAS No. 7, the accompanying
financial statements report cumulative financial information from the date of
its inception into the development stage.
Under the terms of the Agreement, CytoDyn NM:
o Assigned the patent license agreement between CytoDyn NM and
Allen D. Allen covering United States patent numbers 5424066,
5651970, and 6534057, and related foreign patents and patents
pending, for a method of treating HIV disease with the use of
monoclonal antibodies;
o Assigned its trademarks, CytoDyn and Cytolin, and related
trademark symbol; and
o Paid $10,000 in cash
F-7
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
In consideration for the above, the Registrant:
o Effected a one-for-two reverse split of its common stock;
o Issued 5,362,640 shares of its common stock to the shareholders
of CytoDyn NM;
o Amended its Articles of Incorporation to change its name to
CytoDyn, Inc.; and
o Accepted $161,578 in liabilities related to the assigned assets
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 assets and 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.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles 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 at May 31, 2005.
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 3 to 7 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.
F-8
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109). SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Research and Development
Research and development costs are expensed as incurred. Per the Buy-Sell
agreement with Symbion Research International, the Company expensed the amount
the Phase 1 data and Phase II protocol were purchased for, $362,342.
Earnings (Loss) per Common Share
Basic earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if potentially dilutive common shares had been issued.
At May 31, 2005, there was no variance between basic and diluted loss per share
as there were no potentially dilutive common shares outstanding.
Financial Instruments
At May 31, 2005, the fair value of the Company's financial instruments
approximate fair value due to the short-term maturity of the instruments.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123. SFAS 123 requires the fair value based method of
accounting for stock issued to non-employees in exchange for services.
Companies that elect to use the method provided in APB 25 are required to
disclose pro forma net income and pro forma earnings per share information that
would have resulted from the use of the fair value based method. The Company has
elected to continue to determine the value of stock-based compensation
arrangements under the provisions of APB 25. Pro forma disclosures are included
in Note 6.
F-9
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Recent accounting pronouncements
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB Opinion No. 29." This Statement eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect application of SFAS No. 153 to have a material affect on its financial
statements.
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based
Payment." This Statement supercedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and its related implementation guidance. It establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. This Statement does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement No. 123 as originally issued and EITF
Issue No. 96-18. This Statement is effective for public entities that file as
small business issuers as of the beginning of the first fiscal period that
begins after December 15, 2005. The Standard provides for a prospective
application. Under this method, the Company will begin recognizing compensation
cost for equity based compensation for all new or modified grants after the date
of adoption. In addition, the Company will recognize the unvested potion of the
grant date fair value of awards issued prior to the adoption based on the fair
values previously calculated for disclosure purposes.
(2) Property and Equipment
Property and equipment are as follows at May 31, 2005:
Equipment ...................... $ 1,880
Furniture ...................... 1,722
---------
Total ........................ 3,602
Less accumulated depreciation... (1,069)
---------
Net property and equipment... $ 2,533
=========
Depreciation expense for 2005 was $1,671.
(3) Intangible Assets
Intangibles are as follows at May 31, 2005:
Website
---------
Cost ........................... $ 2,900
Less accumulated amortization... (806)
---------
Net intangibles .............. $ 2,094
=========
F-10
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Estimated annual amortization expense at May 31, 2005:
Fiscal year ended
------------------------------
5/31/2006 $ 967
5/31/2007 967
5/31/2008 160
Amortization expense for 2005 was $806.
(4) Notes Payable
On October 28, 2003, the Company issued a $30,000 promissory note to its former
president as payment for services related to the CytoDyn NM Acquisition
Agreement. The note carried a five percent interest rate and was due on January
27, 2004. The Company repaid the $30,000 note, and $442 in accrued interest, in
February 2004.
The Company has seven unsecured notes payable to individuals, totaling $121,000.
The notes were issued in February and March 2005, bear interest at 5%, and
mature one year from the date of the note. Accrued interest payable on the notes
totaled $1,394 at May 31, 2005.
(5) Related Party Transactions
During February 2004, the Company issued 16,667 shares of its common stock as
payment for a $5,000 advance from a former officer ($.30 per share).
At May 31, 2004, the Company owed two officers a total of $71,694 in unpaid
promissory notes. During the year ended May 31, 2005, the officer advanced the
Company an additional $14,908. The loans do not carry an interest rate and are
due on demand. The balance due of $86,502 is included in the accompanying
financial statements as Indebtedness to related parties.
A director has provided legal services to the Company and CytoDyn NM over the
past several years. During the years ended May 31, 2005 and May 31, 2004, the
value of services totaled $29,500 and $20,050, respectively. As of May 31, 2005,
the Company owed the director $87,185 for legal services, which is included in
the accompanying financial statements as Indebtedness to related parties. As of
May 31, 2005, no arrangements had been made for the Company to repay this
obligation. The Company anticipates that the director will continue to provide
legal services in the future.
The Company's 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.
F-11
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
- The Company will grant 83,122 non-qualified stock options with an exercise
price of $.75 per share that will vest immediately and be 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.
In the event the Company's shareholders do not approve the Company's option plan
by December 31, 2005, the Company will pay Symbion $62,342.
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.
(6) Shareholders' Equity
Preferred Stock
The Board of Directors is authorized to issue shares of preferred stock in
series and to fix the number of shares in such series as well as the
designation, relative rights, powers, preferences, restrictions, and limitations
of all such series. The Company had no preferred shares issued and outstanding
at May 31, 2005.
Common Stock Sales
From February 2004 through April 2004, the Company sold 1,800,000 shares of its
common stock at $.30 per share for net proceeds totaling $486,000, after
deducting offering costs of $54,000. The Company relied upon exemptions from
registration believed by it to be available under federal and state securities
laws in connection with the sales.
The Company has filed a Registration Statement on Form SB-2 with the SEC to
offer for sale 450,000 common shares at a price of $.75 per share. The SEC
declared the Form SB-2 effective June 17, 2005 (see Note 11).
Stock Options - Employees
During May 2004, the Company granted 150,000 common stock options to an officer
with exercise prices ranging form $.50 to $1.50 per share. The Company's common
stock had no traded market value on the date of grant. The market value of the
stock was determined to be $.30 per share base on contemporaneous sales of
common stock to unrelated third party investors. The weighted average exercise
price and weighted average fair value of these options as of May 31, 2004 were
$1.00 and $.-0-, respectively. 50,000 options vest on May 10, 2005, an
additional 50,000 options vest on May 1, 2006, and the final 50,000 options vest
on May 1, 2007.
The Company has no other formal plan to grant stock options.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 as if the Company had accounted for its granted stock options under the
fair value method of that Statement. The fair value for the options granted
during the fiscal year ended May 31, 2004 was estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
F-12
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Risk-free interest rate...................................... 3.00%
Dividend yield............................................... 0.00%
Volatility factor............................................ 0.00%
Weighted average expected life............................... 3 years
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. Although the above options were
determined to have $-0- fair value, the Company has presented the pro forma net
loss and pro forma basic and diluted loss per common share using the assumptions
noted above.
For The Years Ended
May 31,
--------------------------
2005 2004
----------- -----------
Net loss, as reported .................. $ (777,083) $ (345,914)
=========== ===========
Pro forma net loss ..................... $ (777,083) $ (345,914)
=========== ===========
Basic and diluted net loss per common
share, as reported .................. $ (0.12) $ (0.05)
=========== ===========
Pro forma basic and diluted net loss
per common share .................... $ (0.12) $ (0.05)
=========== ===========
Stock Warrants - Financial Representative
During the year ended May 31, 2004, the Company committed to grant to its
financial representative, J.P. Turner & Co. and Max O. Gould, an employee of
J.P. Turner & Co., warrants to purchase 426,000 shares of the Company's common
stock. The warrants carry an exercise price of $.30 per share, vest on the date
of grant and expire after five years from the date of grant. The warrants were
granted on November 25, 2004. No warrants have yet been exercised.
The Company's common stock had no traded market value on the date of grant. The
market value of the stock was determined to be $.30 per share based on
contemporaneous sales of common stock to unrelated third party investors. The
weighted average exercise price and weighted average fair value of these
warrants as of November 30, 2004 were $0.30 and $0.028, respectively.
The fair value for the warrants granted during the year ended May 31, 2005 was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
F-13
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Risk-free interest rate............................... 3.00%
Dividend yield........................................ 0.00%
Volatility factor..................................... 0.00%
Weighted average expected life........................ 3.years
The following schedule summarizes the changes in the Company's outstanding stock
awards:
Options Outstanding and Exercisable
------------------------------------- Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
---------------- ---------------- ----------------
Balance at May 31, 2004....... 150,000 $0.50 to $1.50 $1.00
Awards granted............. 426,000 $0.30 $0.30
Awards exercised........... - $0.00 $ -
Awards cancelled/expired... - $0.00 $ -
---------------- ----------------
Balance at May 31, 2005....... 576,000 $0.30 to $1.50 $0.48
================
(7) Income Taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate is as follows:
2005 2004
---------- ----------
U.S. statutory federal graduated rate.... 34.00% 34.00%
State income tax rate,
net of federal benefit................. 3.06% 3.17%
Net operating loss for which no tax
benefit is currently available........ (37.06%) (37.17%)
---------- ----------
0.00% 0.00%
========== ==========
At May 31, 2005, federal and state deferred tax assets consisted of a net tax
asset of $287,954, which was fully allowed for in the valuation allowance of
$287,954. The valuation allowance offsets the net deferred tax asset for which
there is no assurance of recovery. The change in the valuation allowance for the
years ended May 31, 2005 and 2004 totaled $287,954 and $141,840. The current tax
benefits also totaled $287,954 and $141,840 for the years ended May 31, 2005 and
2004. The net operating loss carryforward expires through the year 2025.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation,
which could reduce or defer the utilization of these losses.
F-14
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(8) Commitments and Contingencies
The Company has signed Personal Service Agreements with three officers that
cover the two years ended May 31, 2005 and 2006. Under the terms of the
agreements, if an officer is terminated by the Company without cause or
terminates service for good cause within three months of a change in control,
the Company is required to pay the officer the balance of the base salary for
the term of the agreement and for an additional 12 months after the expiration
of the term.
9) Financial Information - Development Stage
Following is the Statement of Operations for the period in which the Company has
been in the development stage as required by SFAS No. 7.
October 28, 2003 Through May 31, 2005
Operating expenses:
General and administrative (Note 9)... $ 702,950
Research & Development ............... 362,342
Legal fees, related party (Note 2) ... 45,950
Depreciation ......................... 1,875
-----------
Total operating expenses ........... 1,113,117
-----------
Operating loss ..................... (1,113,117)
Interest income ........................ 577
Interest expense ....................... (2,587)
-----------
Loss before income taxes ........... (1,115,127)
Income tax provision (Note 5) .......... --
-----------
Net loss ........................... $(1,115,127)
===========
Following is the Statement of Cash Flows for the period in which the Company has
been in the development stage as required by SFAS No. 7.
F-15
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
October 28, 2003 Through May 31, 2005
Cash flows from operating activities:
Net loss ......................................... $(1,115,127)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation .................................. 1,875
Stock-based compensation ...................... 11,928
Changes in current assets and liabilities:
Increase in prepaid expenses ................ (41,341)
Increase in deposits ........................ (495)
Increase in accounts payable and
accrued liabilities ...................... 91,586
-----------
Net cash used in
operating activities ........... (1,051,574)
-----------
Cash flows from investing activities:
Equipment purchases .............................. (6,502)
-----------
Net cash used in
investing activities ........... (6,502)
-----------
Cash flows from financing activities:
Capital contributions by CEO ..................... 5,512
Proceeds from notes payable issued to
related parties (Note 2) ....................... 496,494
Repayment of notes payable to related
parties (Note 2) ............................... 71,000
Proceeds from the sale of common stock (Note 4)... 540,000
Payment of offering costs (Note 4) ............... (54,000)
-----------
Net cash provided by
financing activities .............. 1,059,006
--------
Net change in cash .................. 930
Cash, beginning of period .......................... --
-----------
Cash, end of period ................................ $ 930
===========
Supplemental disclosure of cash flow information:
Income taxes .................................... $ --
===========
Interest ........................................ $ 687
===========
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 (Note 2) ...... $ 5,000
===========
F-16
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(10) General and Administrative Expenses
General and administrative expenses consist of the following:
For The Years Ended
May 31,
-----------------------
2005 2004
---------- ----------
Salaries and payroll taxes...... $ 154,879 $ 96,102
Legal .......................... 128,729 137,731
Consulting ..................... -- 25,000
Other professional fees ........ 35,117 16,059
Patent fees .................... 18,299 20,919
Insurance ...................... 36,234 --
Office, travel, and other ...... 12,012 29,739
---------- ----------
$ 385,270 $ 325,550
========== ==========
(11) Litigation
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. has 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".
Mr. Lewis alleges, among other things, misrepresentations or failure to make
disclosures related to Cytolin and its development, approval and marketing;
interference with Amerimmune's attempt to complete clinical research related to
Cytolin and Mr. Lewis' actual or prospective business relationships; and libel
and slander of Mr. Lewis.
Currently the Cross-Complaint asserts causes of action for fraud, interference
with prospective business interests, libel and slander. The requested relief
includes damages (alleged to range from $3 million to $20 million or more),
punitive damages, costs and other "just and proper" relief.
The outcome of litigation is uncertain. Management believes that an unfavorable
result is unlikely with respect to the claims raised by the Complaint, and that
the claims raised by the Cross-Complaint are without merit and are retaliatory.
The defendants have retained new counsel which is the same attorney's that
represented us in the following case that was decided in our favor.
Mr. Lewis recently filed a motion to include CytoDyn, Inc. as a defendant in the
cross-complaint. We are opposing this motion, which is scheduled to be heard
September 2005.
Trial is scheduled for October 2005.
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
-------------------------------------------------------------------
Pharmaceuticals, Inc. v. Biovest International, Inc.
----------------------------------------------------
F-17
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
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"), has sought to intervene in
the case, alleging a competing right to the Cell-Bank. The Court recently heard
oral argument on Maya's Motion to Intervene and has taken the Motion under
advisement. If Maya's Motion to Intervene is denied, the Cell-Bank will be
transferred to the Company and Allen, and the litigation will be concluded
(absent an appeal). Alternatively, if Maya's Motion to Intervene is granted, the
Cell-Bank will not be transferred to any person or entity pending a
determination by the Court of the parties' respective rights to the Cell-Bank.
The Company's Response:
----------------------
The Company has a superior right to the Cell-Bank, and the Company intends to
litigate the matter vigorously if Maya does indeed intervene.
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, Cytodyn 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. Cytodyn will correct the
inventorship and assignee in these applications.
F-18
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
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 technology developed during its relationship with
Amerimmune to Symbion. This technology is the subject matter of the patent
applications filed by the former employees of ex-licensee Amerimmune.
(11) Subsequent Events
The Company completed its public offering on July 31, 2005. The Company sold
450,000 shares of its common stock for net proceeds of $296,834 after deducting
offering costs totaling $ 40,666.
On August 31, 2005 the Company extinguished $120,083 of its outstanding
promissory notes payable with some of the proceeds of the public offering.
F-19