UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB AMENDED
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: February 28, 2006 Commission File Number 000-49908
----------------- ---------
CYTODYN, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 75-3056237
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
227 E. Palace Avenue, Suite M, Santa Fe, New Mexico 87501
(Address of principal executive offices) (Zip code)
(505) 988-5520
(Registrant's telephone number, including area code)
200 W. DeVargas Street, Suite 1, Santa Fe, New Mexico 87501
(Former address, changed sine last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, no par value 8,757,664
Class Number of shares outstanding at April ___, 2006
Transitional Small Business Disclosure Format: Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes No X
--- ---
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet, February 28, 2006 (unaudited).................. 3
Condensed Statements of Operations, nine months ended
February 28, 2006 (unaudited) and 2005 (unaudited)................... 4
Condensed Statements of Changes in Shareholders' Deficit, nine
months ended February 28, 2006 (unaudited)........................... 5
Condensed Statements of Cash Flows, nine months ended
February 28, 2006 (unaudited)........................................ 6
Notes to condensed financial statements (unaudited)..................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation...... 14
Item 3. Controls and Procedures........................................ 20
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 20
Item 2. Changes in Securities and Small Business Issuer Purchases of
Equity Securities........................................... 21
Item 3. Defaults Upon Senior Securities................................ 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Item 5. Other Information.............................................. 22
Item 6. Exhibits....................................................... 22
Signatures................................................................ 22
2
Part I, Item 1. Financial Statements
CYTODYN, INC.
(A Development Stage Company)
Condensed Balance Sheet
(Unaudited)
February 28, 2006
Assets
Current assets:
Cash ...................................................... $ 91,347
Prepaid expenses (Note 5) ................................. 229,228
-----------
Total current assets ........................ 320,575
Furniture and equipment, less accumulated
depreciation of $1,957 .................................... 2,581
Intangible asset, less accumulated
amortization of $1,531 .................................... 1,369
Deposit ....................................................... 495
-----------
$ 325,020
===========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable .......................................... $ 70,454
Accrued liabilities ....................................... 121,036
Notes payable, net (Note 3) ............................... 17,903
Indebtedness to related parties (Note 2) .................. 490,802
-----------
Total current liabilities ................... 700,195
-----------
Shareholders' deficit:
Preferred stock, no par value; 5,000,000 shares authorized,
-0- shares issued and outstanding ...................... --
Common stock, no par value; 25,000,000 shares authorized,
8,757,664 shares issued and outstanding ................ 2,505,067
Additional paid-in capital ................................ 263,442
Accumulated deficit ....................................... (1,601,912)
Deficit accumulated during development stage .............. (1,541,772)
-----------
Total shareholders' deficit ................. (375,175)
-----------
$ 325,020
===========
See accompanying notes to condensed financial statements
3
CYTODYN, INC.
(A Development Stage Company)
Condensed Statements of Operation
(Unaudited)
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Operating expenses:
General and administrative (Note 7) ............ $ 229,764 $ 89,435 $ 379,445 $ 320,785
Stock-based compensation:
Financial consulting services (Note 5) ...... 24,723 -- 24,723 11,928
Depreciation ................................... 589 460 1,613 1,211
Research and Development ....................... -- 362,342 -- 362,342
----------- ----------- ----------- -----------
Total operating expenses ....... 255,076 452,237 405,781 696,266
----------- ----------- ----------- -----------
Operating loss ................. (255,076) (452,237) (405,781) (696,266)
Interest income .................................... 2 3 100 230
Interest expense:
Interest on convertible debt (Note 3) .......... (895) -- (895) --
Discount on convertible debt (warrants) (Note 3) (10,374) -- (10,374) --
Discount on convertible debt
(beneficial conversion) (Note 3) ............ (7,529) -- (7,529) --
Other .......................................... (162) (92) (2,166) (422)
----------- ----------- ----------- -----------
Loss before income taxes ....... (274,034) (452,326) (426,645) (696,458)
Income tax provision (Note 4) ...................... -- -- -- --
----------- ----------- ----------- -----------
Net loss ....................... $ (274,034) $ (452,326) $ (426,645) $ (696,458)
=========== =========== =========== ===========
Basic and diluted loss per share ................... $ (0.03) $ (0.06) $ (0.05) $ (0.09)
=========== =========== =========== ===========
Basic and diluted weighted average
common shares outstanding ...................... 8,542,032 8,069,307 8,542,032 8,069,307
=========== =========== =========== ===========
See accompanying notes to condensed financial statements
4
CYTODYN, INC.
(A Development Stage Company)
Condensed Statement of Changes in Shareholders' Deficit
(Unaudited)
Preferred Stock Common Stock
------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance at June 1, 2005 ................... -- $ -- 8,069,307 $ 1,916,334
June through July 2005, sale of common
stock less offering costs of $27,867
($.75/share) (Note 5) ................. -- -- 289,890 189,551
August 2005, common shares issued to
extinguish promissory notes payable and
related interest ($.75/share) (Note 3) -- -- 160,110 120,082
November 2005, 94,500 warrants exercised
($.30/share) (Note 5) ................. -- -- 94,500 28,350
January through February 2006, common
shares issued for services (Note 5) ... -- -- 143,857 250,750
January through February 2006, warrants
issued with convertible debt (Note 3) . -- -- -- --
Beneficial conversion on convertible
debt (Note 3) ......................... -- -- -- --
Net loss, period ended November 30, 2005 .. -- -- -- --
----------- ----------- ----------- -----------
Balance at November 30, 2005 .............. -- $ -- 8,757,664 $ 2,505,067
=========== =========== =========== ===========
Deficit
Accumulated
Additional During
Paid-in Accumulated Development
Capital Deficit Stage Total
----------- ----------- ----------- -----------
Balance at June 1, 2005 ................... $ 40,942 $(1,601,912) $(1,115,127) $ (759,763)
June through July 2005, sale of common
stock less offering costs of $27,867
($.75/share) (Note 5) ................. -- -- -- 189,551
August 2005, common shares issued to
extinguish promissory notes payable and
related interest ($.75/share) (Note 3) -- -- -- 120,082
November 2005, 94,500 warrants exercised
($.30/share) (Note 5) ................. -- -- -- 28,350
January through February 2006, common
shares issued for services (Note 5) ... -- -- -- 250,750
January through February 2006, warrants
issued with convertible debt (Note 3) . 128,929 -- -- 128,929
Beneficial conversion on convertible
debt (Note 3) ......................... 93,571 -- -- 93,571
Net loss, period ended November 30, 2005 .. -- -- (426,645) (426,645)
----------- ----------- ----------- -----------
Balance at November 30, 2005 .............. $ 263,442 $(1,601,912) $(1,541,772) $ (375,175)
=========== =========== =========== ===========
See accompanying notes to condensed financial statements
5
CYTODYN, INC.
(A Development Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
Nine Months Ended
February 28,
------------------------
2006 2005
---------- ----------
Net cash used in
operating activities .............. $ (315,921) $ (194,361)
---------- ----------
Cash flows from investing activities:
Property and equipment purchases ....................... (936) (3,167)
---------- ----------
Net cash used in
investing activities .............. (936) (3,167)
---------- ----------
Cash flows from financing activities:
Capital contributions by president (Note 2) ............ -- 5,512
Proceeds from notes payable issued to
related parties (Note 5) ............................ 5,197 5,000
Proceeds from notes payable issued to others (Note 3) .. 222,500 85,000
Payment of notes payable to related parties (Note 2) ... (38,324) --
Proceeds from sale of common stock ..................... 217,418 --
Proceeds from exercise of common stock warrants ........ 28,350 --
Payments for offering costs ............................ (27,867) --
---------- ----------
Net cash provided by
financing activities .............. 407,274 95,512
---------- ----------
Net change in cash ................ 90,417 (102,016)
Cash, beginning of period .................................. 930 186,964
---------- ----------
Cash, end of period ........................................ $ 91,347 $ 84,948
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ........................................ $ -- $ --
========== ==========
Interest ............................................ $ 138 $ 375
========== ==========
Noncash investing and financing transactions:
Common stock issued to extinguish promissory
notes payable and related interest (Note 3) ...... $ 120,082 $ --
========== ==========
See accompanying notes to condensed financial statements
6
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The condensed financial statements presented herein have been prepared by the
Company in accordance with the instructions for Form 10-QSB and the accounting
policies in its Form 10-KSB filed for the year ended May 31, 2005 and should be
read in conjunction with the notes thereto.
In the opinion of management, the accompanying condensed financial statements
contain all adjustments (consisting only of normal recurring adjustments) which
are necessary to provide a fair presentation of operating results for the
interim periods presented. The results of operations presented for the period
ended February 28, 2006 are not necessarily indicative of the results to be
expected for the year.
The Company is in the development stage in accordance with Statements of
Financial Accounting Standards (SFAS) No. 7 "Accounting and Reporting by
Development Stage Enterprises".
Financial data presented herein are unaudited.
Note 2: Related Party Transactions
As of May 31, 2005, the Company owed two officers promissory notes totaling of
$86,502. The notes are due on demand and carry no interest rate. On June 2,
2005, an officer advanced the Company an additional $5,000 for working capital;
on July 13, 2005, the Company repaid an officer $38,324; on August 31, 2005, an
officer advanced the Company $197; and on January 4, 2006, an officer advanced
the company $18,000. Management plans to repay the notes through cash payments,
issuance of the Company's common stock, or a combination thereof. The balance
due of $71,375 remained unpaid at February 28, 2006 and is included in the
accompanying condensed financial statements as "Indebtedness to related
parties".
A director has provided legal services to the Company over the past several
years. As of May 31, 2005, the Company owed the director $87,185 for legal
services. During the nine months ended February 28, 2006, the Company repaid the
director $5,000. The remaining balance of $82,185 is included in the
accompanying financial statements as "Indebtedness to related parties". As of
February 28, 2006, no arrangements had been made for the Company to repay the
balance of this obligation. The Company anticipates that the director will
continue to provide legal services in the future.
The Company's former director, Peggy C. Pence, PhD., is the President and Chief
Executive Officer of Symbion Research International, Inc. ("Symbion"). On
January 5, 2005, the Company entered into a buy-sell agreement to purchase
certain intellectual property owned by Symbion. The agreement describes the
intellectual property in detail which summarized, is the Phase I clinical data
and the protocol for the Phase II study. This intellectual property is necessary
to obtain approval for, and to conduct, further FDA clinical tests of Cytolin.
Cytolin is a potential new drug being developed by the company for the treatment
of Human Immunodeficiency Virus ("HIV").
Under the terms of this agreement:
7
- The Company may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
studies for Cytolin.
- The Company 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. Symbion and the
Company have agreed to extend the payment due. The options due to Symbion were
granted on March 20, 2006 by the Board of Directors.
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 $337,242 is included in the accompanying
financial statements as "Indebtedness to related parties".
Note 3: Notes Payable
As of May 31, 2005, the Company had seven unsecured notes payable to
individuals, totaling $121,000. The notes were issued in February and March
2005, carried a 5% interest rate, and matured one year from the date of the
note. On August 29, 2005, the Company extinguished the outstanding promissory
notes and related accrued interest with the issuance of 160,110 shares of its
common stock and payment of $3,189 representing $3,172 in principal and accrued
interest and $17 in lieu of fractional shares.
During quarter ended February 28, 2006, the Company issued convertible
promissory notes and warrants to purchase common stock to individuals in
exchange for proceeds totaling $222,500. The notes bear interest at five percent
per annum and mature in January and February 2007. Principal and accrued
interest are payable in any combination of cash and common stock of the Company
at the option of the lender. The Company can repay principal and accrued
interest with common stock at a rate of $1.25 per share. Accrued interest
payable on the notes totaled $895 at February 28, 2006.
The warrants to purchase common stock which accompanied the convertible
promissory notes are exercisable at $2.50 per share, vest immediately, and
expire in October 2010. Pursuant to APB No. 14, the Company valued the warrants
at their relative fair value of $128,929. To recognize the relative fair value
of the warrants, the Company discounted the notes and increased additional paid
in capital in the condensed financial statements. The discount is amortized over
one year. During the quarter ended February 28, 2006, the Company amortized
$10,374 of the discount.
In accordance with EITF 98-5 and EITF 00-27, the Company valued the intrinsic
value of the imbedded beneficial conversion feature related to the option for
conversion into the Company's common stock at $93,571. To recognize the
beneficial conversion feature, the Company discounted the notes and increased
additional paid-in capital in the accompanying consolidated financial
statements. The discount is amortized over one year. During the quarter ended
February 28, 2006, the Company amortized $7,529 of the discount.
8
Following is a schedule of the convertible notes payable net of discount at
February 28, 2006:
Notes Payable $ 222,500
Warrants discount (118,555)
Beneficial conversion discount (86,042)
---------
$ 17,903
=========
Note 4: Income Taxes
The Company records its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". The Company incurred net operating losses for all
periods presented resulting in a deferred tax asset, which was fully allowed for
by a valuation allowance; therefore, the net benefit and expense resulted in
$-0- income taxes.
Note 5: Shareholders' Equity
Common Stock Sales
The Company filed a Registration Statement on Form SB-2 with the SEC to offer
450,000 common shares for sale at a price of $.75 per share. The SEC declared
the Form SB-2 effective June 17, 2005. The Company completed its public offering
on July 31, 2005. The Company sold 289,890 shares of its common stock for net
proceeds of $189,551, after deducting offering costs totaling $27,867.
Common Stock for Services
During the nine months ended February 28, 2006, the Company issued 1,000
restricted common shares to an individual for services performed in September
2005. The Company valued the stock at the price it sold its shares at its public
offering. During the nine months ended February 28, 2006, the Company issued
142,857 restricted common shares to a public relations company in accordance
with an agreement to perform services over the following year. The Company
valued the shares at the bid price on the date the agreement was executed in the
amount of $250,000, of which $23,973 was recognized as stock-based compensation
and $226,027 is included in prepaid expenses.
Common Stock Awards
On September 22, 2005, an investor exercised warrants to purchase 94,500 shares
of the Company's common stock at $.30 per share. The Company received proceeds
of $28,350. The following schedule summarizes the changes in the Company's
outstanding stock awards:
Awards Outstanding and Exercisable
---------------------------------- Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
--------------- ---------------- ----------------
Balance at May 31, 2005........ 576,000 $0.30 to $1.50 $ 0.48
Awards granted.............. 178,000 $2.50 $ 2.50
Awards exercised............ (94,500) $0.30 $ 0.30
Awards cancelled/expired.... -- $0.00 $ -
--------------- ----------------
Balance at February 28, 2006... 659,500 $0.30 to $1.50 $ 1.05
===============
9
Note 6: Commitment and Contingency
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.
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn of
New Mexico, Inc., (predecessor company) Allen D. Allen, Corinne E. Allen, Ronald
J. Tropp, Brian J. McMahon , Daniel M. Strickland, M.D. and unknown others
designated as "Does 101-150".
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
In connection with that settlement, Mr. Lewis and Maya LLC were awarded by the
Los Angeles Superior Court attorneys' fees in the amount of approximately
$150,000. We have appealed the Court's order. The matter has not yet been
briefed. Management believes it is reasonably possible that we will not prevail
on appeal.
Note 7: General and Administrative Expenses
General and administrative expenses consist of the following:
For The Nine Months Ended
February 28,
-------------------------
2006 2005
---------- ----------
Salaries and payroll taxes ............. $ 143,372 $ 116,033
Legal .................................. 98,425 119,331
Other professional fees and services ... 43,779 9,214
Patent fees ............................ 19,197 11,129
Insurance .............................. 36,757 36,952
Office, travel, and other .............. 37,915 28,126
---------- ----------
$ 379,445 $ 320,785
========== ==========
Note 8: 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.
10
October 28, 2003 Through February 28, 2006
Operating expenses:
General and administrative ............................. $ 1,082,395
Stock-based compensation (consultants) ................. 24,723
Legal fees, related party .............................. 45,950
Depreciation ........................................... 3,488
Research and development ............................... 362,342
-----------
Total operating expenses ............................ 1,518,898
-----------
Operating loss ...................................... (1,518,898)
Interest income ............................................ 677
Interest expense:
Interest on convertible debt ........................... (895)
Discount on convertible debt (warrants) ................ (10,374)
Discount on convertible debt (beneficial conversion) ... (7,529)
Other .................................................. (4,753)
-----------
Loss before income taxes ............................ (1,541,772)
Income tax provision ....................................... --
-----------
Net loss ............................................ $(1,541,772)
===========
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.
11
October 28, 2003 Through February 28, 2006
Net cash used in
operating activities ............. $(1,367,495)
-----------
Cash flows from investing activities:
Equipment purchases ............................. (7,438)
-----------
Net cash used in
investing activities ............. (7,438)
-----------
Cash flows from financing activities:
Capital contributions by officer ................ 5,512
Proceeds from notes payable issued to
related parties ............................... 501,691
Repayment of notes payable to related
parties ....................................... (88,324)
Proceeds from notes payable issued to
individuals ................................... 343,500
Proceeds from the sale of common stock .......... 757,418
Proceeds from exercised common stock warrants ... 28,350
Payment of offering costs ....................... (81,867)
-----------
Net cash provided by
financing activities ............. 1,466,280
-----------
Net change in cash ............... 91,347
Cash, beginning of period .......................... --
-----------
Cash, end of period ................................ $ 91,347
===========
Supplemental disclosure of cash flow information:
Income taxes .................................... $ --
===========
Interest ........................................ $ 825
===========
Non-cash investing and financing transactions:
Net assets acquired in exchange for common
stock in CytoDyn/Rexray business
combination ................................ $ 7,542
===========
Common stock issued to former officer to
repay working capital advance .............. $ 5,000
===========
Common stock issued to extinguish promissory
note payable and related interest .......... $ 120,082
===========
Note 9: Litigation
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn of
New Mexico, Inc., (predecessor company) Allen D. Allen, Corinne E. Allen, Ronald
J. Tropp, Brian J. McMahon , Daniel M. Strickland, M.D. and unknown others
designated as "Does 101-150".
12
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
In connection with that settlement, Mr. Lewis and Maya LLC were awarded by the
Los Angeles Superior Court attorneys' fees in the amount of approximately
$150,000. We have appealed the Court's order. The matter has not yet been
briefed. Management believes we have a strong basis to appeal.
Rex Lewis and Maya LLC filed a complaint against CytoDyn, Inc., CytoDyn of New
Mexico, Inc., Allen D. Allen and Corinne Allen in the Los Angeles Superior
Court. The complaint sought monetary damages and contains causes of action
against us. We and the other defendants have demurred and moved to strike many
of the allegations contained in the causes of actions. The Court has not yet
ruled on the demurrer or the motion to strike. Neither party has conducted any
discovery at this time as it is not clear what claims will be at issue. No trial
date has been set.
13
Part I. Item 2. Management's Discussion and Analysis or Plan of Operation
Plan of Operation
During the next 12 months, our objectives are
Cytolin (AIDS Drug)
* to mount further FDA clinical trials in needed to get Cytolin to U.S.
markets;
* to begin development of Cytolin(r) in China through joint venture with
Timeway International;
* to continue our efforts to protect our technology by obtaining
additional patents in The United Kingdom, the European Union and Hong
Kong;
* to enforce court judgments that have been awarded to us and Symbion
Research International, Inc.; and
* To acquire complimentary drugs for our drug pipeline through a
strategic alliance with UTEK(r).
Formaxycin(tm)( Cancer Drug)
* to negotiate for a contract manufacturer; and
* to begin preclinical studies.
Operations
* 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;
* to explore other national or international joint venture or licensing
arrangements including through, Charkit Chemical Corporation and
OmniChem;
* to appoint additional independent directors; and
* to expand our Scientific Advisory Board.
Clinical Trials on Cytolin(r)
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. The results of the
Phase I clinical trials were awarded to Symbion by the Superior Court of
California due to a breach of contract on the part of Amerimmune.
Projected costs to complete our research and development and to obtain FDA
approval Phase II clinical trials:
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 study is approved by the FDA, we expect it, together
with the pre-Phase II 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.
14
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 hope to do within the next two months, we cannot be certain what
additional studies, assuming that Phase II study supports the efficacy and
safety of Cytolin, will be required to receive marketing approval.
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
2009.
Risks and uncertainties associated with completing development within reasonable
period of time and if products are not completed on a timely basis:
Even if we are able to complete the development within a reasonable period of
time our competitors could still come out with something competitive to our
product. Toxicity in the product could go undetected until Phase IV Safety
Surveillance after drug approval. We may have to continue to litigate to protect
technology, or challenges to patents that have not yet expired, etc. The medical
community may lack of acceptance of our product. There may be an inability to
secure 3rd party payees such as if Medicare would cover costs. Post registration
manufacturing problems or downturn of economy or industry could also be risks.
If we are unable to complete clinical trials on a timely basis, with favorable
results, our costs will increase significantly and we may not have enough
capital to support further research and development and continue in business.
Also, if we incur significant delays in being able to market our product, even
if we are ultimately able to do so, we will be delayed in earning revenues and
probably will require additional financing to continue in business.
Development of Cytolin(r) in China.
- -----------------------------------
We signed a letter of intent with Timeway International to form a joint venture
for the purpose of developing, manufacturing and distributing Cytolin(r) in
China. As of the date of this filing, Timeway is reviewing the data from our FDA
IND ( Investigative New Drug Application) and negotiations should commence
following the completion of Timeway's due diligence.
Other Products in Pipeline
- --------------------------
Formaxycin(tm): Our CEO, Allen D. Allen acquired the intellectual property
rights from Dr. Vera Stecher for a cancer treatment which he will license to us
as part of his portfolio of intellectual property. We are in the preclinical
stage as a treatment for cancerous and pre-cancerous cells. We applied for a
U.S. trademark, Formaxycin(tm) for the cancer treatment. We are in the process
of looking for a manufacturer for the preclinical work. and have executed a
Confidentiality Agreement with Charkit Chemical to assist us in this matter, as
well as with overseas licensing matters.
15
Projected costs to manufacture and complete the necessary pre-clinical testing
cannot be estimated until a manufacturing agreement has been executed.
Timing and anticipated completion dates for research and development cannot be
estimated until a manufacturing agreement has been executed.
The date we expect to begin benefiting from the product could be anywhere from
two years to eight years depending upon the method of extraction of a
nonsynthetic antineoplastic agent and licensing, if any.
Risks and uncertainties
There can be no assurance that Formaxycin will be approved as a drug nor
acceptable as a nutraceutical nor that a patent will be issued and enforceable.
Competing products could adversly impact the demand for Formaxycin even if a
stage is reached where we could market it.
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 patents worldwide.
We have applied for the trademark name Formaxycin(tm) as the name of its cancer
treatment in the preclinical stages.
Litigation
For a thorough discussion of our pending litigation, please see the section
entitled "Legal Proceedings."
Establishing a Market and Obtaining Funding
- -------------------------------------------
On June 17, 2005 5:00pm EST, the Securities and Exchange Commission declared our
public registration prospectus effective. 450,000 shares were then sold at $0.75
per shares and the offering was closed July 31, 2005. The proceeds from the
public offering 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 not be able to pay our expenses for more
than six 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.
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On January 3, 2006 we entered into a Financial Representative Agreement
("Agreement") with J.P Turner & Company LLC. Under the Agreement, J.P Turner's
investment banking division will on a best efforts basis attempt to find
investors to complete an offering to raise capital to fund our operations. The
amount of capital has not yet been decided. In return JP Turner will receive 10%
commission in cash and warrants to purchase a number of our restricted common
shares equal to 10% of the gross proceeds of the offering. The strike price of
the warrants shall be the lesser of the closing bid price of our stock on the
day prior to the Closing or the price paid by the investors. The warrants vest
immediately and may be exercised over five years. Warrants have customary
anti-dilution provisions for stock dividends, splits, mergers and sale of
substantially all of the assets. There is a cashless exercise provision. JP
Turner played a similar role in our original private placement. Past performance
does not guarantee future success. The term of the agreement is for one year.
All terms for the investment shall be satisfactory to us.
In January and February 2006, we issued Convertible Notes totaling $222,500. The
terms are:$1.25 Conversion price for stock and an equal amount in warrants were
also assigned. The notes carry 5% interest and are due in 1 year. The exercise
price of the warrants is $2.50.
The NASD assigned us the ticker symbol CYDY.OB and we were cleared to trade on
the Over-The-Counter-Bulletin Board (OTCBB) on November 18, 2005. We intend to
apply for a listing on a national stock exchange such as the NASDAQ within the
next 12 months.
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 study on Cytolin(r). We have not yet determined what
additional capital will be needed to develop Formaxycin(tm) at the date of this
filing. Those amounts will also need to be raised.
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.
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 were to 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.
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Symbion has agreed to amend the agreement to allow an extension of time for us
to pay Symbion the remaining balance due. The options due to Symbion were
granted on March 20, 2006 by the Board of Directors.
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.
JP Turner Financial Representative Agreement
On January 3, 2006 we entered into a Financial Representative Agreement with J.P
Turner & Company LLC. Under this agreement, J.P Turner's investment banking
division will on a best efforts basis attempt to find investors to complete an
offering to raise capital to fund our continuing operations.
Letter of Intent with Timeway International for Chinese Joint Venture:
We have executed a Letter of Intent with Timeway International, Inc in February
2006. Timeway is a Hong Kong Limited Liability Company with business
headquarters in Beijing, Peoples Republic of China. Timeway will invest its
market resources and capital into the joint venture. We will invest our drug
pipelines, technology license and know how and restricted stock at a discount
commensurate to funding or working capital invested by Timeway. We will control
51% of the Chinese joint venture. There is no guarantee that the joint venture
will be created. The parties are performing due diligence and negotiating
possible terms of an agreement.
Consulting Agreement with Huey Hua
We have entered into a consulting agreement with Huey Hua in March 2006. Mr. Hua
will use his efforts to help us with our Chinese ventures in exchange for
$15,000 and restricted stock. The amount of stock is yet to be determined but
will vest monthly over 5 years.
Consulting Agreement with Don Donchuanchom
We have entered into a consulting agreement with Don Donchuanchom in January
2006. He will use his efforts to help us with disseminating public information
to our investors and the investment community in exchange for $5,000 a month and
restricted stock. The amount of stock is yet to be determined but will vest
monthly over 5 years.
Contract with Wall St. Direct
We have entered into an agreement with Wall St. Direct January 2006 wherein Wall
St. Direct agrees to provide investor relations and advertising services in
exchange for 142,857 shares of common stock.
Contract with Financial News USA
We have entered into an agreement with Financial News USA wherein Financial News
USA agrees to provide financial consulting services including analyst coverage
at the price of $3,500.
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Contract with UTEK(r)
We have entered into an agreement with UTEK(r) in March 2006 wherein UTEK(r)
agrees to identify and present new technology and company acquisition
opportunities for CytoDyn in exchange for 40,000 unregistered shares of common
stock. 1/12th of the shares (3,333) shall vest each month during the term of
the12 month agreement.
UTEK(r) is a leading, market-driven technology transfer company that enables
companies to rapidly acquire innovative technologies from universities and
research laboratories worldwide. UTEK facilitates the identification and then
finances the acquisition of external technologies for clients in exchange for
their equity securities. This unique process is called U2B(r). In addition to
its U2B(r) service, UTEK offers both large and small capitalization companies
the tools to search, analyze and manage university intellectual properties. UTEK
has operations in the United States, United Kingdom and Israel. For more
information about UTEK, please visit its website at www.utekcorp.com.
Contract with Ajinomoto OmniChem
We have entered into a nondisclsoure agreement with Ajinomoto OmniChem April 7,
2006 to explore a business opportunity of mutual interest to manufacture our
cancer therapy Formaxycin(tm).
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 currently have 6 employees. We will continue to add staff as funds become
available. We hired 3 additional employees, two full-time and one part-time this
last quarter. We may hire an additional two to three financial, medical or
business experts in the near future.
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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.
Part I. Item 3. Controls and Procedures -
- ------- -----------------------
(a) Evaluation of disclosure controls and procedures
------------------------------------------------
We maintain controls and procedures designed to ensure that information
required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation
of those controls and procedures performed as of the end of the period
covered by this report, our chief executive officer and the chief
financial officer concluded that our disclosure controls and procedures
were adequate.
(b) Changes in internal controls
----------------------------
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of the evaluation of those controls by the chief executive
officer and chief financial officer.
Part 2. Other Information
- ------- -----------------
Item 1 - Legal Proceedings.
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn of
New Mexico, Inc., (predecessor company) Allen D. Allen, Corinne E. Allen, Ronald
J. Tropp, Brian J. McMahon , Daniel M. Strickland, M.D. and unknown others
designated as "Does 101-150".
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
In connection with that settlement, Mr. Lewis and Maya LLC were awarded by the
Los Angeles Superior Court attorneys' fees in the amount of approximately
$150,000.
We have appealed the Court's order. The matter has not yet been briefed.
Management believes we have a strong basis to appeal.
Rex Lewis and Maya LLC filed a complaint against CytoDyn, Inc., CytoDyn of New
Mexico, Inc., Allen D. Allen and Corinne Allen in the Los Angeles Superior
Court. The complaint sought monetary damages and contains causes of action
against us. We and the other defendants have demurred and moved to strike many
of the allegations contained in the causes of actions. The Court has not yet
ruled on the demurrer or the motion to strike. Neither party has conducted any
discovery at this time as it is not clear what claims will be at issue. No trial
date has been set.
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Item 2 - Changes in Securities and Small Business Issuer Purchases of Equity
Securities.
In January and February 2006, we issued Convertible Notes totaling $222,500. The
principal balance of each note is convertible at the option of the holder into
shares of our common stock based upon a conversion price of $1.25 per share. In
connection with this offering we also issued warrants in an equal amount with an
exercise price of $2.50 per share.
We recently entered into an agreement with Wall St. Direct wherein Wall St.
Direct agrees to provide investor relations and advertising services. In
connection with services rendered, on January 26, 2006 we issued Wall St. Direct
142,857 shares of our restricted common stock.
We have entered into an agreement with UTEK(r) wherein UTEK(r) agrees to
identify and present new technology and company acquisition opportunities for
CytoDyn in exchange for 40,000 unregistered shares of our common stock.
Item 3 - Defaults Upon Senior Securities.
No response required.
Item 4 - Submission of Matters to a Vote of Security Holders.
An annual meeting of the shareholders was held January 31, 2006 . A definitive
proxy was filed and solicited. Matters voted on were as follows:
PROPOSAL NO. 1 ELECTION OF DIRECTORS For 5,597,336 Against 0 Abstain 0
Director and Nominees for Director Our Board of Directors currently consists of
five persons, all of whom are standing for reelection at the Annual Meeting. In
the event that any person nominated as a director becomes unavailable or
declines to serve as a director at the time of the Annual Meeting, the proxy
holders will vote the proxies in their discretion for any nominee who is
designated by the current Board of Directors to fill the vacancy. It is not
expected that any of the nominees will be unavailable to serve. The name of the
nominees for election to the Board of Directors at the Annual Meeting, age as of
the Record Date, and certain information are set forth below.
Name Age Principal Occupation
- ---- --- --------------------
Allen D. Allen 69 Chief Executive Officer, CytoDyn
Corinne E. Allen 38 Vice President Business Development,
Secretary, Treasurer, CytoDyn
Daniel M. Strickland, MD 60 Physician specializing in reproductive
endocrinology
Vera Stecher, Phd. 55 Medical Director, Pfizer Global Pharmaceuticals
Wellington A. Ewen 65 Chief Financial Officer CytoDyn
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PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM Approval of Services.
For 5,597,336 Against 0 Abstain 0
PROPOSAL NO. 3 APPROVAL OF 2005 STOCK INCENTIVE PLAN
For 5,597,336 Against 0 Abstain 0
Item 5 - Other Information.
No response required.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
1. 31.1: Certification by the CEO
2. 31.2: Certification by the CFO
3. 32.1: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO
4. 32.2: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO
(b) Reports on Form 8-K:
On January 6, 2006 we filed an8K disclosing a Financial Representative
agreement entered into with JP Turner & Co., LLC. Under the Agreement,
J.P Turner's investment banking division will on a best efforts basis
attempt to find investors to complete an offering to raise capital.
SIGNATURES
The financial information furnished herein has not been audited by an
independent accountant; however, in the opinion of management, all adjustments
(only consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations for the three months ended February 28, 2006 have
been included.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTODYN, INC.
(Registrant)
DATE: May 1, 2006 BY: /s/ Allen D. Allen
--------------- -----------------------
Allen D. Allen
President and CEO
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