UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
Nevada 76-0484097
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification or organization No.)
3100 WILCREST, SUITE 140, HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)
Issuer’s telephone number, including area code: 713-789-0070
Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK WITH $.001 PAR VALUE
(Title of Class)
Indicate by check mark if the Registrant is a well known seasoned issuer as defined in Rule 405 of the securities Act. Yes |_| No |X| Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_|
Accelerated Filer |X|
Non-accelerated filer | | Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2007 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $56,265,584. The number of outstanding shares of the Registrant’s Common Stock as of the close of business on March 17, 2008was 146,660,968.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the definitive Proxy Statement of CytoGenix, Inc., which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2007, are incorporated by reference in Part III of this form 10-K.
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CYTOGENIX, INC.
FORM 10-K INDEX
PART I
&nbs p; Page
Item 1.
Description of Business ……………………………………….................................................................................................................... 5
Item 1A.
Risk Factors ……………………………......................................................................................................……………………………. 18
Item 1B.
Unresolved Staff Comments …………….......................................................................................................…………………………… 25
Item 2.
Description of Property ………………………………......................................................................................................……………… 25
Item 3.
Legal Proceedings …………………………......................................................................................................……………………….... 25
Item 4.
Submission of Matters to a Vote of Security Holders ……….........................................................................................................………. 26
PART II
Item 5.
Market for Common Equity and Related Stockholder Matters ……........................................................................................................… 27
Item 6.
Selected Financial Data ………………………………………….....................................................................................................…… 29
Item 7.
Management’s Discussion and Analysis of Financial Conditions and
Results of Operations ……………………………………….....................................................................................................………… 29
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk …….........................................................................................................….. 37
Item 8.
Financial Statements ………………………………………….....................................................................................................………. 37
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ………………………………….....................................................................................................………………. 60
Item 9A.
Controls and Procedures …………………………………………....................................................................................................…... 60
Item 9B.
Other Information ………………………………………………….....................................................................................................…. 60
PART III
Item 10.
Directors and Executive Officers of the Registrant ……………........................................................................................................…….. 61
Item 11.
Executive Compensation ………………………��…………….....................................................................................................…….. 63
Item 12.
Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters …………………………….....................................................................................................……… 64
Item 13.
Certain Relationships and Related Transactions …….......................................................................................................……………….. 64
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Item 14.
Principal Accountant Fees and Services …………….......................................................................................................………………. 64
PART IV
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K…........................................................................................................ 64
Signatures ………………………………………………………....................................................................................................…… 66
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PART I
ITEM 1.
DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
CytoGenix, Inc. (“CytoGenix” or “the Company”) is a biopharmaceutical company whose primary focus is the development and commercialization of its proprietary technologies for identifying and silencing disease causing genes, expressing proteins for applications such as vaccines and isolating novel nucleic acid-based anti-microbial compounds. The Company’s three technologies include: i) gene silencing techniques (ssDNA) applicable to genes from pathogenic organisms or selected genes from a patient to prevent the expression of harmful proteins, thereby preventing or ameliorating disease; ii) a novel, cell free process to produce large quantities of DNA (synDNA™) for use in its own products and for sale to other biopharmaceutical or life science companies; and iii) a methodology to isolate and characterize novel DNA-based drugs (Oligogenix™) to which harmful bacteria have not developed immunity. The Company seeks to generate revenues and improve the health and well-being of humans, animals and plants by utilizing its technology to produce molecular therapies. In addition to development and commercialization of therapeutic compounds, the Company seeks to provide the service of custom DNA manufacturing as well as to sell and/or license its technology to other research facilities and companies seeking to research or regulate a specific gene function and to consumers of plasmid DNA.
The Company was formed in 1995 as a biomedical research and development company. The original name of the Company was Cryogenic Solutions, Inc., until the Company changed its name to CytoGenix, Inc. in January 2000. Equity funding has been the primary source of operational, research and commercialization working capital since the Company’s inception. The Company made a transition to research and development of its present technologies in 1998. Since then, the Company has dedicated itself to engineering DNA-based molecules for therapeutic and drug target identification purposes. The Company’s expertise in nucleic acid technology enables it to focus on the development of new types of nucleic acid-based therapeutics.
GENE EXPRESSION AND HUMAN DISEASE
Widely published scientific studies conducted over the last 20 years by leading universities, government research laboratories such as the National Institutes of Health and the National Cancer Institute, and private research laboratories, have established that most diseases are the result of malfunctioning genes in an organism’s genome, or the activities of genes expressed by pathogens such as viruses, bacteria or fungi. This genetic activity causes the production of harmful proteins that lead to the symptoms and destructive results of diseases. Examples of diseases caused by the production of such harmful proteins include cancer, herpes, sepsis (blood poisoning) and a host of others. To produce a protein, a cell first makes a positive copy (messenger RNA) of the DNA code containing the information necessary to produce the protein. This messenger RNA (mRNA) is called the “sense” molecule. This message-carrying molecule then moves to
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another part of the cell where it participates in the assembly of the biochemical components to produce proteins.
In many instances it is possible to inhibit the production of these harmful proteins by introducing or producing small molecules of specific genetic material into the cells themselves. This genetic activity can be interrupted and controlled at three levels with the introduction of multiple copies of a specific sequence of single stranded DNA (“ssDNA”) into the cells at the level of the genomic DNA itself, interfering with the transcription of the messenger RNA (“mRNA”) or by directly binding to a protein to disable it.
CYTOGENIX GENE SILENCING TECHNOLOGY
CytoGenix owns patented intracellular expression system technology to produce desired sequence-specific, ssDNA molecules in individual cells for the purpose of triplex, antisense, catalytic DNA, and aptamer applications.
1.
Triplex: As mRNA is transcribed and the DNA strands are still separated, a single strand of complementary DNA is inserted into the gap forming a triple helix (triplex) structure, thus preventing the future production of mRNA from that segment.
2.
Antisense: Messenger RNA is intercepted en route by a complementary ssDNA sequence that it binds to and results in the destruction of the mRNA by enzymes within the cell, thus preventing the mRNA from producing the undesired protein.
3.
Catalytic DNA: Similar to antisense, an ssDNA sequence containing sequence regions binds to the mRNA, but also contains a unique sequence region that acts to cut and destroy the mRNA, thus preventing it from producing the undesired protein.
4.
Aptamer: The ssDNA binds to the protein itself in the cell and causes the undesired protein to become inactivated or dysfunctional.
The key to success with these genetic interventions is to insure that sufficient quantities of the ssDNA molecules ultimately are produced in targeted cells or induced from external sources. CytoGenix has invented a compound that functions as a tiny biological “factory” and after its introduction into the cell, actually produces many copies of specific ssDNA molecules in the cell. A major element of CytoGenix’s business is to refine this technology and apply it to the delivery of various patented DNA molecules for the development of effective therapeutic drugs.
DEVELOPMENTS TO DATE (RESEARCH AND DEVELOPMENT)
The ssDNA expression vector technology originated with the work of Dr. Charles Conrad, which he developed while at InGene, Inc. The original expression cassette technology is protected by issued United States Patent No. 6,054,299 entitled, “Methods and Compositions for Producing Single-stranded cloned DNA in eukaryotic cells.” In
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1999, CytoGenix purchased the rights to Dr. Conrad’s patent as well as other proprietary information from InGene, and has since instituted a broad research and development program to advance single stranded DNA expression technology. Applications to protect
subsequent improvements and therapeutic applications of this technology have since been filed to expand the protection of this technology in both the US and foreign markets. As of December 31, 2007 CytoGenix holds a patent portfolio of approximately 13 granted and 2 allowances with approximately 55 additional foreign or US pending patent applications claiming methods and materials in connection with our platform technologies. This assertive approach for protection of the Company’s technology has enabled CytoGenix to expand and refine the development of therapeutics for human, animal and agricultural use. The Company currently holds thirteen granted patents covering the early ssDNA expression technology in US and foreign markets, and one US and one foreign allowance for our Herpes therapeutic.
These patents are important to the Company because they help form the basis of the technology needed for the production of the Company’s complementary technology and other products. The technology has been proven in numerous laboratory and animal experiments and has been widely published as set forth below. It has been reported in scientific literature, such as in Reuters Business Insight 2000 publication, Antisense Therapy: Technical Aspects and Commercial Opportunities by Prof. Dr. K.K. Jain, M.D. that other molecule delivery methods have failed to provide sufficient quantities to be therapeutically effective except in limited applications. Laboratory cell culture studies have demonstrated that the Company’s ssDNA expression vector can adequately deliver sequence specific DNA molecules in sufficient quantities in virtually all cell types, thereby overcoming many of the challenges previously experienced. As described under “CytoGenix Gene Silencing Technology” above, the Company’s technology is not limited to only antisense applications, but can target and enzymatically cleave target mRNA using DNA enzyme formulations. As described above, the technology can also be used to (i) generate triplex forming oligonucleotides that bind to specific sites in the genome itself to inhibit expression by the gene at that site, (ii) generate ssDNA that bind to specific, targeted proteins to neutralize them and (iii) competitively inhibit genetic expression/transcription of targeted genes. The Company has successfully extended the results achieved in cell cultures to cells in live animals.
The genomics field has vastly expanded the number of potential drug targets. The Company has utilized its ssDNA expression technology to develop a library screening technique for gene target identification and validation. The CytoGenix proprietary gene neutralization system is a powerful tool in confirming gene target function. The screening library technique enables efficient testing of multiple oligonucleotide sequences. When a sequence silences a targeted gene, the construct for introducing the identified sequence in cellular and animal experiments is readily produced. Use of the screening library has led to the discovery of sequences that have been useful in several of the Company’s products under development.
The Company has developed a novel screening library technique to identify oligonucleotides with specific activity against bacteria in a given culture. This technology platform is called Oligogenix™ and has been used to produce compounds with activity against bacteria using mimetic oligonucleotides as sequences to silence targeted bacterial genes. Targeted genes include those necessary for the bacteria’s
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survival, reproduction and/or for the expression of various toxins. Animal studies using these compounds have demonstrated cytotoxic activity against bacterial species including echerichia coli, methicillin resistant and vancomycin resistant Staphylococcus aureus.
The Company has also developed a novel cell-free large scale DNA synthesis technique (synDNA™) for producing therapeutic DNA which bypasses the bacteria-based fermentation process. The cell-free synthesis of DNA has various advantages: CytoGenix’s DNA is virtually free of bacterial endotoxins, as well as bacterial DNA, RNA and proteins which must be removed from DNA manufactured using traditional fermentation process using live bacteria. CytoGenix’s process does not require the use of antibiotic markers and does not require genetic sequences comprising the usual backbone of plasmid DNA. Elimination of the plasmid backbone enables production of DNA constructs that are approximately 3 kilobase pairs smaller than the equivalent plasmid DNA. More importantly, the synDNA™ technology can produce therapeutic DNA’s more rapidly and with fewer complications than in the traditional fermentation methods.
Using its expanding technological base, the Company is seeking to develop drugs that address significant and unmet medical needs. The Company is conducting research and/or preclinical development with product candidates in the following areas: infectious disease (anti-virals and anti-bacterials), inflammation, cancer and vaccines.
PRODUCTS UNDER DEVELOPMENT:
INFECTIOUS DISEASE PROGRAM
ANTI-VIRAL: Our herpes therapeutic, SIMPLIVIR™, is an anti-herpes topical compound which will potentially address the needs of 70 million infected Americans. Today’s marginally effective products have revenues in excess of $1 billion. The most likely methods of use include prophylactic and neonatal applications. The Company’s proprietary plasmid DNA sequences are believed to turn-off the expression of the HSV ICP4 and ICP47 genes. Found in HSV-1, -2, Herpes Zoster, and other viruses in that family, the ICP4 gene is critical for the replication of the virus in the host cell. The ICP47 gene produces a protein that assists the virus in interfering with a host’s immune system in recognizing the virus and eliminating it. Pre-clinical, in vitro studies have shown a 100-fold reduction in HSV viral load in test cells containing the Company’s proprietary plasmid DNA coded with an ICP4 knockdown sequence. Mouse trials have been conducted and additional studies with cotton rats are planned. Pre-clinical toxicology, absorption, distribution, metabolism and excretion (ADME) studies are being designed and will enable the filing of an Investigational New Drug (IND) application with the Food & Drug Administration (FDA) in the near future.
ANTI-MICROBIALS: Using its proprietary technique (Oligogenix™), the Company has developed and tested compounds against methicillin and vancomycin resistant Staphylococcus aureaus (MRSA and VRSA). Additional studies to determine dosages and minimum inhibitory concentrations are planned. These anti-bacterial compounds also require ADME studies.
DNA VACCINES: Using the synDNA™ process, the Company is developing DNA vaccines for use in humans and animals.
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HUMAN VACCINES:
DNA vaccines against both seasonal influenza as well as the highly pathogenic and potentially pandemic humanized avian influenza virus (H5N1) are being developed and tested in choice animal models (mice and ferrets). Together with ADME and toxicology studies, additional pre-clinical studies have been planned in order to analyze the immune response triggered as well as optimize the immunization regimen.
ANIMAL VACCINES:
Poultry: Utilizing the knowledge and experience gathered from the development of DNA vaccines against human influenza, studies on developing vaccines for use in poultry against avian flu are under development. Potential collaborators in both academic and industry settings are being approached.
Aquaculture: In other extramural collaborations, the Company is developing DNA vaccines for use in fish. Focus has been given to fish species of high economic impact such grouper, salmon and Cobia. The Company has identified target viral diseases and it is determining the optimal course of action to generate and test various DNA constructs.
Cattle: Finally, in collaboration with the United States Department of Agriculture, the Company is engaged in a project to develop a synDNA™ based vaccine against brucellosis, a zoonotic disease which is easily transmitted from animals to humans and is consequently of global importance. Tests using various DNA vaccines developed by the Company as well as various combinatory formulas have been completed in a laboratory animal model. Ongoing analysis of the data gathered should provide information as to the next course of action to be taken.
CANCER PROGRAM
The Company has sponsored research with scientists at Albert Einstein College of Medicine/Montefiore Medical Center for preclinical experiments using the Company’s ssDNA expression vector technology to silence a gene that has been shown to cause malignant transformation of tumor cells.
synDNA™ PROCESS
As briefly noted above, the Company has developed a novel method for producing large amounts of high quality therapeutic DNA (synDNA™) with reductions in residual contaminants compared to traditional fermentation methods. Specifically, the Company has identified and developed a method for in vitro DNA synthesis and amplification for the production of good manufacturing practice-grade (GMP) drug substances.
Cell-free amplification of DNA sequences has many important benefits beginning with the size and composition of the therapeutic compound. Under this system, there is no need for bacterial replication genes or selection markers such as antibiotic resistant genes found on most plasmid vectors. In most cases, this will reduce the size and weight of the therapeutic DNA by at least 3,000 base pairs or a molecular weight of approximately
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2,000 kilo Daltons (kDa). The Dalton is a measure of molecular weight or mass. The total absence of bacteria and growth media assures that there is no need to employ mechanical or chemical purification methods to extract cell or animal proteins, RNA, genomic DNA and backbone molecules. This feature allows the designer more control of coding for non-specific and specific immune responses.
Robust biological activity
The Company’s experiments have shown that the biological response to this material (devoid of vector backbone) is similar to traditional plasmids. Experiments conducted in several animal models have shown that linear DNA prepared with the CytoGenix synDNA™ process triggers a robust biological response (immune or physiological, depending on the application) in treated groups similar to plasmid DNA -treated animals.
Low risk, competitive cost, universal accessibility and fast cycle time.
The entire process is bench-scale and requires little equipment, space or human intervention in comparison to bioprocess or bacterial fermentation manufacturing facilities. This process easily lends itself to liquid-handling automation, and a skilled technician can synthesize multi-gram quantities of this material within a few weeks, while working in a compact room-size facility. Unlike PCR, this process requires only basic laboratory equipment and is therefore accessible to many facilities around the world, especially field facilities in rural settings where access to specialized equipment is limited and often prohibitive.
Improved regulatory profile
The benefits of using this cell-free DNA manufacturing technology are significant from a regulatory agency review and compliance perspective. Product cGMP manufacturing procedures detailing methods for cell collection, processing and cell culture conditions are no longer necessary and therefore reduces the level of risk, amount of documentation, amount of required space, as well as QA/QC and compliance costs.
CytoGenix is carrying out a multi-pronged strategy to continue commercializing this technology. The following summarizes the Company’s activities and plans:
o
PROCESS OPTIMIZATION AND SCALE-UP: The Company is conducting continued experimentation to achieve yield optimization, efficiency and reduced costs. The process has progressed from manufacture of milligram quantities to producing gram quantities consistently. The Company has conducted animal studies comparing synDNA™ compounds with various plasmids to verify that the synDNA™ based compounds exert bioactivity equal to or greater than plasmids produced via traditional methods. These studies have analyzed various Company produced DNA vaccines and compounds for expressing specific proteins.
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DEVELOP REAGENT SUPPLIERS AND SOURCING: The Company entered into an Agreement with General Electric Healthcare Bio-Science Corporation (“GEHBC”) to provide necessary enzymes and reagents for large-scale production of DNA using the synDNA™ process for therapeutic applications. GEHBC is the Company’s largest supplier of enzymes and reagents, however other sources are available for the Company’s research purposes.
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BUSINESS DEVELOPMENT, the Company is currently evaluating options for industry partnership for continued development of the process including contract manufacturing.
The Company is currently supporting the following Sponsored Research Agreements (SRA):
1.
Dr. Cy Stein’s laboratory at Montefiore Medical Center is using CytoGenix’s proprietary gene silencing DNA technology against a gene found in melanoma cells that produces a protein known to counteract the effect of several chemotherapeutic agents in difficult to treat cancers. This project is completed and scientific papers summarizing study results are being prepared.
2.
Dr. Jeffrey Actor’s laboratory at University of Texas Health Science Center in Houston is conducting animal trials to determine efficacies of CytoGenix’s antimicrobial oligodeoxynucleotides (ODN) compounds.
3.
Dr. David Weiner’s laboratory at University of Pennsylvania has conducted animal trials to determine efficacies of CytoGenix’s synDNA™ vaccines against Smallpox and HIV. This project is completed and scientific papers summarizing study results are being prepared.
4.
Dr. Slobodan Paessler at the University of Texas Medical Branch at Galveston is conducting animal trials to test CytoGenix’s synDNA™ vaccine against avian flu (H5N1). Several challenge rounds have been conducted exposing vaccinated mice to lethal doses of the Vietnam strain of avian flu. A significant majority of vaccinated mice survived the exposure. All animals in the control groups died. These experiments are continuing with the use of ferrets as a second animal model. The collaboration with Dr. Paessler has been extended for development of DNA vaccines with veterinary applications.
COOPERATIVE AGREEMENTS
The Company is currently working under a cooperative research and development agreement (CRADA) with the United States Department of Agriculture to develop and test a DNA vaccine against brucellosis.
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The Company is currently working under a CRADA with the United States Army Medical Research Institute for Infectious Diseases to develop and test DNA vaccines for strains of ebola and equine encephalitis.
The Company has entered into a collaborative Agreement with Taiwan Cobia, Inc., a Taiwanese aquaculture company, to develop DNA vaccines against fish viruses.
In addition to the industry and government agency relationships disclosed above, the Company is actively seeking out-licensing opportunities in the application of the Company’s core technologies in the following areas:
1. infectious diseases;
2. inflammation;
3. cancer; and
4. animal health.
There can be no assurance the Company will be able to enter into licensing arrangements and thereby generate licensing revenues.
PUBLICATIONS
The Company and its cooperating university scientists have published a number of scientific papers and presented at scientific meetings. These publications include:
1.
Kendirgi, F., Nadezda E. Yun, N.E, Linde, N.S., Zacks, M.A, Smith, J.N., Smith, J.K., McMicken, H., Chen, Y.*, & Paessler, S. Novel linear DNA vaccines induce protective immune responses against lethal infection with influenza virus type A/H5N1 (under review).
2.
Benimetskaya, L., Ayyanar, K. Kornblum, N., Castanotto, D., Rossi, J., Wu, S., Lai, J., Brown, B., Popova, N., Miller, P., McMicken, H., Chen, Y. & Stein, C. Bcl-2 protein in 518A2 melanoma cells in vivo and in vitro. Clinical Cancer Research, 12:4940-4948, 2006.
3.
Xing-Xin Tan & Yin Chen, Discovery of Novel Antibiotics By screening of an Oligodeoxynucleotide Expression Library, (invited review article, submitted) “New Research on Antisense Elements (Genetics).” Frank Columbus, Editor-in-Chief, Nova Science Publishers, Inc.
4.
Tan, X. & Chen, Y., A novel genomic approach identifies bacterial DNA-dependent RNA polymerase as the target of an antibacterial oligodeoxynucleotide, RBL-1 Biochemistry, 44:6708-6714, 2005.
5.
Tan, X., Actor, J.K., & Chen, Y., PNA antisense oligomer as a therapeutic strategy against bacterial infection: proof of principle using mouse peritonitis model, Antimicrobial Agent and Chemotherapy, 49: 3203-3207, 2005.
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Tan, X., & Chen, Y., Discovery of novel antibiotics using cell-based screening (Review), Current Drug Discovery, pp. 21-23, April, 2004.
7.
Tan, X., Knesha, R., Margolin, W. and Chen, Y., DNA enzyme generated by a novel single-stranded DNA expression vector inhibits expression of the essential bacterial cell division gene ftsZ, Biochemistry, 43:1111-1117, 2004.
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8.
McMicken, H., Bates, P. and Chen, Y., Antiproliferative activity of G-quartet-containing oligonucleotides generated by a novel single-stranded DNA expression system, Cancer Gene Therapy, 10(12):867-869, 2003.
9.
Chen, Y. and McMicken, H., Intracellular production of DNA enzyme by a novel single-stranded DNA expression vector, Gene Therapy, 10:1776-1780, 2003.
10.
Chen, Y., Ji, Y. and Conrad, C., Expression of single-stranded DNA in mammalian cells, Biotechniques, 34:167-171, 2003.
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Chen, Y., Novel Technologies for target validation, Genetic Engineering News, 23(11):7-9, 2003.
12.
Chen, Y., A novel single-stranded DNA (ssDNA) expression vector (Review), Expert Opinion on Biological Therapy, 2:735-740, 2002.
13.
Chen, Y., Meeting highlights, 10th International conference on gene therapy of cancer, Expert Opinion on Biological Therapy, 2:443-445, 2002.
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Chen, Y., Growth of oligo-based drugs, Genomics & Proteomics, October, 2002.
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Datta, H. and Glazer, P., Intracellular generation of single-stranded DNA for chromosomal triplex formation and induced recombination, Nucleic Acid Research, 29:5140-5147, 2001. A marvel of biochemical engineering means cells can produce DNA enzyme to attach cancer, New Scientist, January, 2001.
16.
Chen, Y., Ji, Y., Roxby, R. and Conrad, C., In vivo expression of single-stranded DNA in mammalian cells with DNA enzyme sequences targeted to c-raf, Antisense & Nucleic Acid Drug Development, 10:415-422, 2000.
BUSINESS STRATEGY
The goal and the focus of the Company are to leverage its proprietary technology to maximize shareholder value. The Company is developing anti-viral and anti-bacterial products based on its proprietary technologies including: topical compounds for herpes infections, DNA vaccines, and compounds against methicillin and vancomycin resistant bacteria. Upon initiation of clinical trials, the Company intends to seek license and distribution agreements with domestic and foreign pharmaceutical companies. To this end:
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The Company will pursue partnerships with pharmaceutical or biotechnology companies to develop DNA expression-based therapeutics.
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The Company will seek to maintain and expand its patent portfolio and proprietary technology. The Company aggressively pursues patent protection to maintain worldwide rights relating to the development, manufacture and sale of oligodeoxynucleotide mediated therapeutics and services and products related to the manufacture of synDNA™ and ssDNA.
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The Company intends to leverage its oligonucleotide expertise through licensing, process development and pilot manufacturing. The Company believes that it has established one of the leading nucleic acid chemistry groups that can provide medicinal chemistry, process development and manufacturing to others in need of this expertise. The Company believes that
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it will be able to capitalize on its continuing investment in oligonucleotide and nucleic acid technology by entering into licensing, process development and pilot manufacturing arrangements with collaborators to generate revenues, while retaining this capability for its own drug development.
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The Company plans to expand its customer base of non-competitors for uses of synDNA™ as it advances the ability to amplify and purify diverse sequences. The sales will come from excess capacity above the material the Company needs for its own product development. The Company will seek strategic partners to expand the production and distribution of synDNA™ based products.
MARKETING STRATEGY
The Company plans to market initial products, when developed, and for which it will obtain regulatory approval, through marketing arrangements or other licensing arrangements with pharmaceutical companies. Implementation of this strategy will depend on many factors, including the market potential of any products the Company develops, and its financial resources. To market products that will serve a large, geographically diverse patient population, we expect to enter into licensing, distribution, or partnering agreements with pharmaceutical companies that have large, established sales organizations. The timing of the Company’s entry into marketing arrangements or other licensing arrangements with large pharmaceutical companies will depend on successful product development and regulatory approval within the regulatory framework established by the Federal Food, Drug and Cosmetics Act, as amended, and regulations promulgated there under. Although the implementation of initial aspects of the Company’s marketing strategy may be undertaken before this process is completed, the development and approval process typically is not completed in less than three to five years after the filing of an Investigational New Drug (“IND”) application and its marketing strategy therefore may not be implemented for several years. See “Drug Approval Process and Other Governmental Regulation” below.
INTELLECTUAL PROPERTY RIGHTS
The Company has developed or acquired a comprehensive body of intellectual rights. The proprietary nature of, and protection for, the Company’s technology, processes and know-how are important to its business. The Company plans to prosecute and aggressively defend its patents and proprietary technology. Our policy is to seek patent protection for technologies, inventions, and improvements that are considered important to the development of our business. The Company also depends upon trade secrets, know-how, and continuing technological innovation to develop and maintain its competitive position.
CytoGenix currently holds 13 granted and 2 allowances with approximately 55 additional foreign or US pending patent applications claiming methods and materials in connection with these platform technologies. The Company intends to protect its proprietary technology with additional filings as appropriate.
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DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The system of reviewing and approving drugs in the United States is considered the most rigorous in the world. Estimates of the upper range of costs to bring a single product from research through market approval and launch into commerce range from $800 million (Pharmaceutical Research and Manufacturers Association) to $1.7 billion in 2000 through 2002 (FDA), with the timing to do so typically ranging between 10 and 15 years. The Pharmaceutical Research and Manufacturers Association estimates that of every 5,000 medicines tested, on average, only five are tested in clinical trials, and only one of those is approved for human use. These estimates may vary depending on the nature of the drug and the mechanism by which it works.
DRUG DISCOVERY
The drug discovery process can take several years. Once a company locates a screening lead, or starting point for drug development, isolation and structural determination may begin. The development process results in numerous chemical modifications to the screening lead in an attempt to improve its drug properties. After a compound emerges from the above process, the next steps are to conduct further preliminary studies on the mechanism of action, further in vitro (test tube) screening against particular disease targets and, finally, some in vivo (animal) screening. If the compound passes these barriers, the toxic effects of the compound, if any, are analyzed by performing preliminary exploratory animal toxicology. If the results are positive, the compound emerges from the basic research mode and moves into the pre-clinical phase.
Preclinical Testing
During the pre-clinical testing stage, laboratory and animal studies are conducted to show biological activity of the compound against the targeted disease, and the compound is evaluated for safety, stability, biodistribution (where the drug goes in the body) and genomic integration (where the DNA is incorporated in any of the body’s cell’s genome).
Investigational New Drug Application
During the pre-clinical testing, an Investigational New Drug Application (“IND”) is filed with the FDA to seek permission to begin human testing of the drug. The IND becomes active if not rejected by the FDA within 30 days. The IND must indicate the results of previous experiments, how, where and by whom the studies were conducted, the chemical structure of the compound, the method by which it is believed to work in the human body, any toxic effects of the compound found in the animal studies and how the compound is manufactured. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA.
Phase I Clinical Trials
After an IND becomes active, Phase I human clinical trials may begin. These tests, involving usually between 20 and 80 patients or healthy volunteers, typically take approximately one year to complete and cost between $300,000 and $500,000 per trial. The Phase I clinical studies also determine how a drug is absorbed, distributed,
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metabolized and excreted by the body, and the duration of its action. Phase I trials are not normally conducted for anticancer product candidates. A Phase Ib study involves patients with the targeted disease cancer and is focused on safety.
Phase II Clinical Trials
In Phase II Clinical trials, controlled studies are conducted on approximately 100 to 300 volunteer patients with the targeted disease. The preliminary purpose of these tests is to evaluate the effectiveness of the drug on the volunteer patients as well as to determine if there are any side effects. These studies generally take approximately two years and cost between $500,000 and $4 million per trial. In addition, Phase I/ II clinical trials may be conducted to evaluate not only the efficacy of the drug on the patient population, but also its safety.
Phase III Clinical Trials
This phase typically lasts about three years, usually involves 1,000 to 3,000 patients and costs between $5 million and $50 million per trial. During the Phase III clinical trials, physicians monitor the patients to determine efficacy and to observe and report any reactions that may result from long-term use of the drug.
New Drug Application
After the completion of the requisite three phases of clinical trials, if the data indicate that the drug has an acceptable benefit to risk assessment and it is found to be safe and effective, a New Drug Application (“NDA”) is filed with the FDA. The requirements for submitting an NDA are defined by the FDA. These applications are comprehensive, including all information obtained throughout all clinical trials as well as all data pertaining to the manufacturing and testing of the product. In general, these filings can far exceed 100,000 pages. With the implementation of the Prescription Drug Users Fee Act (PDUFA), review fees are provided at the time of NDA filing. In 2007, each NDA with clinical data must be accompanied by an $896,200 review fee. If the NDA is assessed as unacceptable in the initial 30 day review, it is returned to the submitter, with 50% of the fee. The historical average review time for a New Molecular Entity (NME) has remained static at approximately 16 months, however, a new NME can be approved in as little as six months.
Marketing Approval
If the FDA approves the NDA, the drug becomes available for physicians to prescribe. Periodic reports must be submitted to the FDA, including descriptions of any adverse reactions reported. The FDA may request additional studies (Phase IV) to evaluate long-term effects.
Phase IV Clinical Trials and Post Marketing Studies
In addition to studies requested by the FDA after approval, these trials and studies are conducted to explore new indications. The purpose of these trials and studies and related
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publications is to broaden the application and use of the drug and its acceptance in the medical community.
COMPETITION
The pharmaceutical and biotechnology industries are highly competitive. The Company faces competition from biotechnology and pharmaceutical companies using more traditional approaches to treating human diseases. The Company’s competitors may develop safer, more effective or less costly gene-based therapeutics. In addition, the Company faces and will continue to face competition from other companies for corporate collaborations with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to proprietary technology, including intellectual property.
Many of the Company’s competitors and potential competitors have substantially greater product development capabilities and financial, scientific, manufacturing, managerial and human resources than the Company. There can be no assurance that research and development by others will not render the Company’s products, or the products developed by corporate partners using its licensed technologies obsolete, or non-competitive, or that any product the Company or its corporate partners develop will be preferred to any existing or newly developed technologies. In addition, there can be no assurance that the Company’s competitors will not develop safer, more effective or less costly cardiovascular therapies, gene delivery systems, gene therapeutics, non-gene therapies, or other therapies, achieve superior patent protection or obtain regulatory approval of product commercialization earlier than the Company, any of which could have a material adverse effect on its business, financial condition or results of operations.
RESEARCH AND DEVELOPMENT
The Company expensed $2,106,746, $4,970,410, and $1,724,317 on research and development activities during the years ended December 31, 2007, 2006, and 2005, respectively. Research and development (R&D) expenses include related salaries and other share based compensation, contractor fees, materials, and utilities.
R&D expenses also consist of independent R&D costs and costs associated with collaborative development arrangements with other companies and research institutions. Research and development costs are expensed as incurred.
EMPLOYEES
As of December 31, 2007, the Company has 8 employees, 6 of whom hold advanced degrees. None of the Company’s employees are covered by collective bargaining agreements, and the Company considers relations with its employees to be good.
HOW YOU CAN FIND ADDITIONAL INFORMATION
The Company is a reporting company and files annual, quarterly and current reports, proxy statements and other information with the SEC. For further information with respect to the Company, you may read and copy its reports, proxy statements and other
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information, at the SEC public reference rooms at 100 F. Street, N.E., Washington, D.C. 20549, as well as at the SEC’s regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661 and at 233 Broadway, New York, NY 10279. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms. The Company’s SEC filings are also available at the SEC’s web site at http://www.sec.gov. In addition, you can read and copy the Company’s SEC filings at the office of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 2006.
Copies of CytoGenix’s Annual Reports on Form 10K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are all available on its website (www.cytogenix.com) or by sending a request for a paper copy to: CytoGenix, Inc. 3100 Wilcrest, Suite 140, Houston, TX 77042, attn. Investor Relations.
ITEM 1A.
RISK FACTORS
RISKS AFFECTING FUTURE OPERATING RESULTS
The Company does not provide forecasts of its future financial performance. While the Company is optimistic about its long-term prospects, the following factors should be considered in evaluating its outlook. If the possibilities described as risks below actually occur, the Company’s operating results and financial condition would likely suffer and the trading price of its common stock may fall, causing a loss of some or all of an investment in its common stock.
There is substantial doubt about CytoGenix’s ability to continue as a going concern.
CytoGenix has had negligible revenues since inception and only approximately $144,000 in the last two years. The Company has incurred losses totaling $37,726,040 from inception through December 31, 2007. Because of these conditions, CytoGenix will require additional working capital to develop business operations which it can in no way be assured of doing.
There are no assurances that CytoGenix will be able to achieve a level of revenue adequate to generate sufficient cash flow from operations or obtain additional financing necessary to support CytoGenix’s working capital requirements. To the extent that funds generated from any private placements, public offerings and/ or bank financing are insufficient, CytoGenix will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to CytoGenix. If adequate working capital is not available, CytoGenix may not increase its operations.
CytoGenix’s products are in the pre-clinical stage of development and may not be determined to be safe or effective.
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The Company is in the pre-clinical stages of development with its biopharmaceutical products. The Company has devoted almost all of its time to research and development of its technology and products, protecting its proprietary rights and establishing strategic alliances. The Company’s proposed products are in the pre-clinical stages of development and will require significant further research, development, clinical testing and regulatory clearances. The proposed products are subject to development risks. These risks include the possibilities that any of the products could be found to be ineffective or toxic, or could fail to receive necessary regulatory clearances. The Company has not received any significant revenues from the sale of products, and the Company may not successfully develop marketable products that will increase sales and, given adequate margins, make it profitable. Competitors may develop superior or equivalent, but less expensive, products. The Company has incurred net losses since its inception, and the Company may not achieve or sustain profitability.
The Company incurred a net loss of $ 6.26 million in 2007, $8.40 million in 2006 and $3.53 million in 2005. As of December 31, 2007, total shareholder’s deficit was $1,210,188. Losses have resulted principally from expenses incurred in research and development of technology and products, and general and administrative expenses that the Company has incurred while building its business infrastructure. The Company expects to continue to incur significant operating losses in the future as it continues its research and development efforts and seeks to obtain regulatory approval of its products. The Company’s ability to achieve profitability depends on its ability to raise additional capital, complete development of its products, obtain regulatory approvals and market those products. It is uncertain when, if ever, the Company will become profitable.
If the Company fails to attract significant additional capital, the Company may be unable to continue to successfully develop its products.
Since the Company began operations, the Company has obtained operating funds primarily by selling common stock. Based on its current plans, the Company does not believe that current cash balances will be sufficient to meet its operating and capital needs throughout 2008. Furthermore, the actual amount of funds that will be needed will be determined by many factors, some of which are beyond the Company’s control. These factors include the success of its research and development efforts, the status of its pre-clinical and clinical testing, costs relating to securing regulatory approvals and the costs and timing of obtaining new patent rights, regulatory changes, competition and technological developments in the market. The Company may need funds sooner than currently anticipated.
If necessary, potential sources of additional funding could include strategic relationships, public or private sales of shares of common stock or debt or other arrangements. The Company may not obtain additional funding when the Company needs it on terms that will be acceptable to it or at all. If the Company raises funds by selling additional shares of common stock or securities convertible into common stock, the ownership interest of existing shareholders will be diluted. If the Company is unable to obtain financing when needed, its business and future prospects could be materially adversely affected.
If the Company fails to receive necessary regulatory approvals, the Company will be unable to commercialize its products. All of the Company’s products are subject to
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extensive regulation by the United States Food and Drug Administration, or FDA, and by comparable agencies in other countries. The FDA and comparable agencies require new pharmaceutical products to undergo lengthy and detailed clinical testing procedures and other costly and time-consuming compliance procedures. The Company does not know when or if it will be able to submit its products for regulatory review. Even if the Company submits a new drug application, there may be delays in obtaining regulatory approvals, if the Company obtains them at all. Sales of the Company’s products outside the United States will also be subject to regulatory requirements governing clinical trials and product approval. These requirements vary from country to country and could delay introduction of products in those countries. The Company cannot provide assurance that any of its products will receive marketing approval from the FDA or comparable foreign agencies.
The Company may fail to compete effectively, particularly against larger, more established pharmaceutical companies, causing its business to suffer.
The biotechnology industry is highly competitive. The Company competes with companies in the United States and abroad that are engaged in the development of similar pharmaceutical technologies and products. They include: biotechnology, pharmaceutical, chemical and other companies; academic and scientific institutions; governmental agencies, and public and private research organizations.
Many of these companies and many other competitors have significantly greater financial and technical resources as well as superior production and marketing capabilities than the Company does. The biopharmaceutical industry is characterized by extensive research and development and rapid technological progress. Competitors may successfully develop and market superior or less expensive products which render the Company’s products less valuable or unmarketable.
The Company has limited operating experience.
The Company has engaged solely in the development of biopharmaceutical technology. Although some members of the Company’s management team have experience in biotechnology operations, the Company has limited experience in manufacturing or selling biopharmaceutical products. The Company also has only limited experience in negotiating and maintaining strategic relationships, and in conducting clinical trials and other later-stage phases of the regulatory approval process. The Company may not successfully engage in some or all of these activities.
The Company has limited manufacturing capability.
While the Company believes that it can produce materials for clinical trials and produce products for human use at its synDNA™ production suite, the Company may need to expand its commercial manufacturing capabilities for products in the future if the Company elects not to or cannot successfully partner with others to manufacture its products. This expansion may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not obtained regulatory approvals for any production facilities for its products, nor can the Company assure investors that it will be able to do so.
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If the Company loses key personnel or is unable to attract and retain additional, highly skilled personnel required for its activities, its business will suffer.
Competition for qualified personnel in the biopharmaceutical industry is intense, and the Company’s success will depend on its ability to attract and retain highly skilled personnel. The Company is not aware of any key personnel who plan to retire or otherwise leave the Company in the near future other than Malcolm Skolnick who has expressed his desire to retire after the Company identifies a new Chief Executive Officer.
Asserting, defending and maintaining the Company’s intellectual property rights could be difficult and costly, and failure to do so will harm its ability to compete.
The Company’s success will depend on existing patents and licenses, and its ability to obtain additional patents in the future. The purpose of our patent portfolio of approximately 70 domestic and foreign patents and patent applications is to protect the Company’s technologies.
The Company cannot assure investors that its pending patent applications will result in patents being issued in the United States or foreign countries. In addition, the patents which have been or will be issued may not afford meaningful protection for its technology and products. Competitors may develop products similar to the Company’s which do not conflict with its patents. Others may challenge the Company’s patents and, as a result, the patents could be narrowed or invalidated. The patent position of biotechnology firms generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. No consistent policy has emerged from the United States Patent and Trademark Office (USPTO), or the courts regarding the breadth of claims allowed, or the degree of protection afforded under biotechnology patents. In addition, there is a substantial backlog of biotechnology patent applications at the USPTO and the approval or rejection of patents may take several years.
CytoGenix’s success will also depend partly on its ability to operate without infringing upon the proprietary rights of others, as well as its ability to prevent others from infringing on its proprietary rights. The Company may be required at times to take legal action to protect its proprietary rights and, despite its best efforts, the Company may be sued for infringing on the patent rights of others. The Company has not received any communications or other indications from owners of related patents or others that such persons believe the Company’s products or technology may infringe their patents. Patent litigation is costly and, even if the Company prevails, the cost of such litigation could adversely affect its financial condition. If the Company does not prevail, in addition to any damages the Company might have to pay, the Company could be required to stop the infringing activity or obtain a license. Any required license may not be available to the Company on acceptable terms, or at all. If the Company fails to obtain a license, its business might be materially adversely affected.
To help protect its proprietary rights in unpatented trade secrets, the Company requires its employees, consultants and advisors to execute confidentiality agreements. However, such agreements may not provide the Company with adequate protection if confidential information is used or disclosed improperly. In
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addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom the Company’s employees, consultants or advisors have prior employment or consulting relationships. Furthermore, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the Company’s trade secrets.
If CytoGenix’s strategic relationships are unsuccessful, its business could be harmed.
The Company’s strategic relationships with its collaborators and partners are important to its success. The development, improvement and marketing of many of its key therapeutic products are or will be dependent, in part, on the efforts of the Company’s strategic partners. For example, under the GE Healthcare relationship, the Company may fail to achieve product development milestones; GE Healthcare may fail to perform its obligations under the agreement, such as failing to produce an adequate supply of sufficient quality raw materials to produce synDNA™; and the agreement with GE Healthcare may be subject to termination in the event of a breach. The Company may not be commercially successful in its effort to produce and/or sell synDNA™. The transactions contemplated by its agreements with strategic partners, including equity purchases and cash payments, are subject to numerous risks and conditions. The occurrence of any of these events could severely harm CytoGenix’s business.
The Company’s near-term strategy is to develop its own products as well as co-develop products with strategic partners, or to license the marketing rights for its products to pharmaceutical partners after the Company completes one or more Phase II clinical trials. In this manner, the extensive costs associated with late-stage clinical development and marketing will be shared with, or will be the responsibility of, the Company’s strategic partners.
To fully realize the potential of its products, including development, production and marketing, the Company may need to establish other strategic relationships.
The Company has limited sales capability and may not be able to successfully commercialize its products.
The Company has been engaged solely in the development of biopharmaceutical technology. Although some of its management have experience in biotechnology company operations, the Company has limited experience in manufacturing or selling pharmaceutical products. The Company also has only limited experience in negotiating and maintaining strategic relationships, and in conducting clinical trials and other later-stage phases of the regulatory approval process. To the extent the Company relies on strategic partners to fully commercialize its products, the Company will be dependent on their efforts. The Company may not successfully engage in any of these activities.
The Company may be subject to product liability lawsuits and its insurance may not be adequate to cover damages.
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The Company believes it carries adequate insurance for the product development research it currently conducts. In the future, when the Company has products available for commercial sale and use, the use of its products will expose it to the risk of product liability claims. Although the Company intends to obtain product liability insurance coverage, product liability insurance may not continue to be available to it on acceptable terms and its coverage may not be sufficient to cover all claims. A product liability claim, even one without merit or for which the Company has substantial coverage, could result in significant legal defense costs, thereby increasing expenses, lowering earnings and, depending on revenues, potentially resulting in additional losses.
Continuing efforts of government and third party payers to contain or reduce the costs of health care may adversely affect the Company’s revenues and future profitability.
In addition to obtaining regulatory approval, the successful commercialization of its products will depend on the Company’s ability to obtain reimbursement for the cost of the product and treatment. Government authorities, private health insurers and other organizations, such as health maintenance organizations are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States, the growth of healthcare organizations such as HMOs, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reducing demand for products. The cost containment measures that healthcare providers are instituting and any healthcare reform could affect the Company’s ability to sell its products and may have a material adverse effect on operations. Reimbursement in the United States or foreign countries may not be available for any of the Company’s products, any reimbursement granted may be reduced or discontinued, and limits on reimbursement available from third-party payers may reduce the demand for, or the price of, its products. The lack or inadequacy of third-party reimbursements for its products could have a material adverse effect on the Company’s operations. Additional legislation or regulation relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future that adversely affects the Company’s products and its business.
If the Company fails to establish strategic relationships with larger pharmaceutical partners, its business may suffer.
The Company does not intend to conduct late-stage (Phase III) human clinical trials on its own. The Company anticipates entering into relationships with larger pharmaceutical companies to conduct later trials and to market its products. The Company also plans to continue to use contract manufacturing for late stage clinical and commercial quantities of its products. The Company may be unable to enter into corporate partnerships which could impede its ability to bring its products to market. Any such corporate partnerships, if entered into, may not be on favorable terms and may not result in the successful development or marketing of the Company’s products. If the Company is unsuccessful in establishing advantageous clinical testing, manufacturing and marketing relationships, it is not likely to generate significant revenues and become profitable.
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RISKS RELATED TO SHARE OWNERSHIP
CytoGenix’s right to issue preferred stock and/or its classified Board of Directors may delay a takeover attempt and prevent or frustrate any attempt to replace or remove the then current management of the Company by shareholders.
Authorized capital consists of 300,000,000 shares of common stock and 50,000,000 shares of preferred stock. The Company’s board of directors, without any further vote by the shareholders, has the authority to issue preferred shares and to determine the price, preference, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of shares of common stock may be affected by the rights of holders of any preferred shares that the board of directors may issue in the future. For example, the board of directors may allow the issuance of preferred shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the shares of common stock or special rights to elect directors.
The Company has a “classified” board of directors, which means that only one-third of its directors are eligible for election each year. Therefore, if shareholders wish to change the composition of the Board of Directors, it could take at least two years to remove a majority of the existing directors or three years to change all directors. Having a classified board of directors may, in some cases, delay mergers, tender offers or other possible transactions which may be favored by some or a majority of the Company’s shareholders and may delay or frustrate action by shareholders to change the then current Board of Directors and management.
CytoGenix’s stock price is volatile and may fluctuate due to factors beyond its control.
Historically, the market price of the Company’s stock has been highly volatile as reflected in the table in Part II, Item 5 of this report. The following types of announcements could have a significant impact on the price of the Company’s common stock: positive or negative results of testing and clinical trials by the Company or its competitors; delays in entering into corporate partnerships; technological innovations or commercial product introductions by the Company or its competitors; changes in government regulations; developments concerning proprietary rights, including patents and litigation matters; public concern relating to the commercial value or safety of any of the Company’s products; financing or other corporate transactions; or general stock market conditions.
Further, the stock market experiences significant price and volume fluctuations. These fluctuations have particularly affected the market prices of equity securities of many biopharmaceutical companies that are not yet profitable. Often, the effect on the price of such securities is unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may adversely affect the ability of a shareholder to dispose of his or her shares at a price equal to or above the price at which the shares were purchased.
The significant number of the Company’s shares of Common Stock eligible for future sale may cause the price of its common stock to fall.
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The Company has 146,309,719 shares of common stock outstanding as of December 31, 2007 and substantially all are eligible for sale under Rule 144 or are otherwise freely tradable.
CytoGenix’s employees have been granted options to buy a total of 24,286,000 shares of common stock as of December 31, 2007. The options granted have exercise prices between $.185 and $1.01 per share. The shares of common stock granted in the options under the stock option plan have not been registered as of December 31, 2007.
The Company may issue options to purchase up to an additional 11,714,000 shares of common stock as of December 31, 2007 under its stock option plans.
Sales of substantial amounts of shares into the public market could lower the market price of the common stock.
The Company does not expect to pay dividends in the foreseeable future.
The Company has never paid dividends on its shares of common stock and does not intend to pay dividends in the foreseeable future. Therefore, an investment should only be made with the expectation of realizing a return through capital appreciation. An investment should not be made with the expectation of dividend income.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
On August 9, 2007, the Company received a letter from the SEC with comments regarding it filings on Form 10-K for the fiscal year ended December 31, 2006 and on its Form 10-Qs for the fiscal quarters ending March 31, 2007, June 30, 2007 and September 31, 2007. The Company responded to the letter and entered into discussions with the staff regarding its filings and subsequently restated its filings for the indicated periods. The Company believes there are no unresolved staff comments but the staff may provide further comments regarding its 10-K/A and 10-Q/As.
ITEM 2.
DESCRIPTION OF PROPERTY
The Company’s corporate executive offices are located at 3100 Wilcrest, Suite 140, Houston, Texas 77042. The Company has occupied approximately 6000 square feet of executive office and laboratory space since December 2003. The facility is in reasonable condition and is adequate for the Company’s current operations. Rent on the facility averages to be $5,701 per month with a lease term ending September 2009. The Company believes it’s current and contracted for facilities are suitable and adequate for its present and immediately foreseeable future operational requirements.
ITEM 3.
LEGAL PROCEEDINGS
WILLIAM B. WALDROFF AND APPLIED VETERINARY GENOMICS, INC. V. CYTOGENIX, INC.
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Waldroff and Applied Veterinary Genomics, Inc. - Litigation initiated in March 2004 over the validity of license agreements between CytoGenix (licensor) and William Waldroff (licensee) for use of CytoGenix ssDNA expression technology in shrimp and horse therapeutic applications. AVGI, as sublicensee, was a third party in this action. A jury trial held in February 2005 resulted in entry of a judgment against CytoGenix requiring performance on the contracts and payment of attorney fees. CytoGenix subsequently appealed this decision and in December 2006 the 1st Court of Appeals reversed the trial court's judgment, finding no need for CytoGenix to perform on the contracts and no need for either party to pay the opposing party's attorney fees. Waldroff and Applied Veterinary Genomics filed a motion for a rehearing and CytoGenix filed a timely response to that motion.On March 3, 2007, the Court of Appeals denied Waldroff/AVGI’s Motion forRehearing. Waldroff filed a petition for review by the Supreme Court of Texas which was denied. The Supreme Court directed the Court of appeals to issue a Mandate to finalize the action. The Mandate was issued and the Company recovered its appeal bond and the matter was finalized.
DEFAMATORY ACTIONS
The Company has actively pursued legal action against various parties involved in the posting of defamatory comments about the Company and several of its officers on public investor chat-room websites. A settlement was reached with a poster who published an apology on Investor’s Hub (www.investorshub.com) in March 2007.
EMPLOYMENT ACTIONS
In November of 2006, the former Chief Financial Officer (CFO), Lawrence Wunderlich, and the former Chief Operations Officer (COO), Frank Vazquez, resigned from the Company. The Company and former officers are currently pursuing arbitration to resolve claims by Messrs Vazquez and Wunderlich and counterclaims by the Company. In conjunction with the former officers’ resignations, the former CFO filed a SOX Whistleblower Complaint with the Department of Labor in January of 2007. The action is against the Company and the Chief Executive Officer, Malcolm Skolnick. The SEC has requested information from the Company addressing the allegations and the Company has responded in compliance with that request. The Company’s Board of Directors instituted a special committee of independent directors who appointed an independent, outside counsel to conduct an independent investigation. The investigation was completed and the investigator’s report found that the allegations made in the SOX complaint had no merit. This matter is set for arbitration in May 2008. Depositions have been taken of the parties and Management intends to vigorously defend its position.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securities holders during the fourth quarter of our fiscal year ended December 31, 2007.
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PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Authorized capital stock consists of 300,000,000 shares of common stock, par value $0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share. There were 146,660,968 shares of common stock and no shares of preferred stock outstanding as of March 31, 2008. The Company’s common stock is traded on the NASDAQ, OTC Bulletin Board under the ticker symbol CYGX.OB.
The high and low bid prices for the Company’s common stock for each quarter within the last two fiscal years, as quoted by the OTC Bulletin Board, were as follows. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Fiscal Year Ending December 31, 2005
High
Low
Quarter 1
$0.95
$0.43
Quarter 2
$0.79
$0.46
Quarter 3
$0.67
$0.34
Quarter 4
$1.15
$0.44
Fiscal Year Ending December 31, 2006
Quarter 1
$1.54
$0.73
Quarter 2
$1.54
$0.85
Quarter 3
$1.09
$0.67
Quarter 4
$0.88
$0.56
Fiscal Year Ending December 31, 2007
Quarter 1
$0.66
$0.37
Quarter 2
$0.56
$0.30
Quarter 3
$0.40
$0.23
Quarter 4
$0.35
$0.11
Quarter 1 to March 17, 2008
$0.16
$0.06
STOCKHOLDERS
As of March 31, 2008 there were approximately 649 shareholders of record of Common Stock, one of which is Cede & Co., a nominee for Depository Trust Company (or DTC). All of the shares of Common Stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are considered to be held of record by Cede & Co. as one shareholder. The Company has not paid any dividends on its Common Stock and the Board does not intend to declare any dividends in the foreseeable future.
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PERFORMANCE GRAPH
The Company’s common stock began trading on the OTC Bulletin Board in August 2001. The following graph depicts the Company’s total return to stockholders from August 2001 through December 31, 2007, relative to the performance of the Amex Biotech Index and NASDAQ Composite Index. All of the cumulative total returns are computed assuming the value of the investment in Common Stock and each indexed as $100.00 on August 16, 2001 and the reinvestment of dividend at the frequency with which dividends were paid during applicable years.
| Base | INDEXED RETURNS | |||||||
| Period | Years Ending | |||||||
| Company/Index | 24-Aug-01 | 31-Dec-01 | 31-Dec-02 | 31-Dec-03 | 31-Dec-04 | 31-Dec-05 | 31-Dec-06 | 31-Dec-07 |
| CYTOGENIX, INC…………………. | 100 | 77 | 39 | 308 | 308 | 435 | 231 | 46 |
| AMEX BIOTECH INDEX………… | 100 | 106 | 61 | 89 | 99 | 124 | 137 | 143 |
| NASDAQ COMPOSITE INDEX…… | 100 | 102 | 70 | 105 | 113 | 115 | 126 | 138 |
CHANGES IN SECURITIES
All of the Company’s securities sold during 2007 have been either previously reported on its Form 10-Qs and Form 8-Ks filed with the Securities and Exchange Commission.
On November 30, 2007, the Company completed a private placement of 4,441,000 shares (4,389,750 shares issued as of December 31, 2007, 101,250 issued subsequent to December 31, 2007) of restricted common stock at $0.16 per share for gross proceeds of $718,560. The difference between the selling price and the market value on the date the shares were sold was approximately $0.09 per share ($399,690). In 2007 the Company issued 1,256,008 shares for services; approximately 333,336 were issued each to TMS Investments, Inc., Harris Forbes, Inc., and Chasseur Corporation; approximately 156,000 were issued to
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directors; and approximately 100,000 shares were issued to Fusion Capital Fund II, LLC. In 2007 and in 2006, there were no shares issued for debt.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis or Plan of Operation” and Item 8. “Financial Statements.”
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements regarding the Company’s plans, expectations, estimates and beliefs. Actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company has based these forward-looking statements largely on its expectations. Forward-looking statements in this report include, but are not necessarily limited to, those relating to the Company’s:
o
intention to introduce new products,
o
receipt of any required FDA or other regulatory approval for its products,
o
expectations about the markets for its products,
o
acceptance of its products, when introduced, in the marketplace,
o
future capital needs, and
o
success of its patent applications.
Forward-looking statements are subject to risks and uncertainties, certain of which are beyond the Company’s control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in the Company’s other Securities and Exchange Commission filings, including among others:
o
the effect of regulation by the FDA and other governmental agencies,
o
delays in obtaining, or its inability to obtain, approval by the FDA or other regulatory authorities for its products,
o
research and development efforts, including delays in developing, or the failure to develop, its products,
o
the development of competing or more effective products by other parties,
o
the results of pre-clinical and clinical testing,
o
uncertainty of market of acceptance of its products,
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o
problems that it may face in manufacturing, marketing, and distributing its products,
o
inability to raise additional capital when needed,
o
delays in the issuance of, or the failure to obtain, patents for certain of its products and technologies, and
o
problems with important suppliers and business partners.
Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “Risk Factors” section and elsewhere in this report.
OVERVIEW
From its inception in 1995, the Company has devoted its resources primarily to fund its research and development efforts. The Company has been unprofitable since inception and, other than limited interest and grant revenue, has had minimal revenues from the sale of products and other sources. The Company expects to continue to incur losses for the foreseeable future as it continues to expand its research and development efforts and enter additional collaborative efforts. As of December 31, 2007, the Company’s accumulated deficit was $37,726,040.
RESULTS OF OPERATIONS
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
For the year ended December 31, 2007, the Company reported a net loss of $6,266,075, or less than $0.04 per share, and $66,043 of revenue as compared with a net loss of $8,401,911, or less than $0.07 per share, and $76,993 of revenue for the twelve months ended December 31, 2006.
Research and Development Expenses. Research and development expenses decreased to $2,106,746 for the twelve months ended December 31, 2007 compared to $4,970,410 for the same period in 2006 primarily due to declines in compensation in the research and development department for non-cash stock option compensation expense and decreases in the number of employees.
General and Administrative Expenses. General and administrative expenses decreased to $2,531,807 for the twelve months ended December 31, 2007 compared to $3,069,945 for the same period in 2006. This decline was due to a decrease in personnel costs by approximately 781,000 most of which is attributable to non-cash stock-based compensation from the Company’s 2003 and 2005 employee stock option plans. Additional decreases included approximately $26,000 in personnel costs, approximately $30,000 in investor relations costs and approximately $26,000 in travel and entertainment costs. These decreases were offset by increases of approximately $21,000 in accounting fees; approximately $43,000 in insurance costs; and approximately $293,000 in legal fees primarily due to the cost of the Company’s ongoing arbitration with two of its former executive officers.
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Consulting Expenses. Consulting expenses increased to $415,258 for the twelve months ended December 31, 2007 compared to $345,937 for the same period in 2006. Approximately $60,000 of this increase is attributed to the services of a construction management firm to oversee and manage the Company’s abandoned construction project.
Depreciation and Amortization Expense. Depreciation and amortization expenses increased to $64,879 for the twelve months ended December 31, 2007 compared to $48,754 for the same period in 2006 primarily due to equipment purchased to expand the lab to accommodate synDNA™ sales production.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
For the year ended December 31, 2006, the Company reported a net loss of $8,401,911, or less than $0.07 per share, and $76,993 of revenue as compared with a net loss of $3,533,125, or less than $0.03 per share, and no revenue for the twelve months ended December 31, 2005.
Research and Development Expenses. Research and development expenses increased approximately $3,246,093 to $4,970,410 for the twelve months ended December 31, 2006 compared to $1,724,317 for the same period in 2005 primarily due to non-cash stock option compensation expense for employees in the research and development department. Additional increase came from increased research activity and consultant assistance in obtaining communications with several federal agencies of the US Government. Approximately $310,660 of the additional amount results from the increased activity costs of antibacterial and DNA vaccine research and the remaining $164,171 of the increase were additional costs incurred for R&D consultants.
General and Administrative Expenses. General and administrative expenses increased to $3,069,945 for the twelve months ended December 31, 2006 compared to $1,495,454 for the same period in 2005. Non-cash stock compensation from stock options accounted for $1,535,115 of the increase. Additional increase of $39,376 is due primarily to the increased costs in accounting fees for Sarbanes-Oxley compliance.
Consulting Expenses. Consulting expenses increased to $345,637 for the twelve months ended December 31, 2006 compared to $290,000 for the same period in 2005. This increase is primarily attributed to the services of Jacobs Engineering relating to the then proposed construction of an office and manufacturing facility that we abandoned in 2008. Other costs included commissions paid for synDNA™ sales referrals and consulting costs used to evaluate development of existing research platforms and business directives for the Company. In 2006 the Company issued 320,000 shares of common stock valued at $0.86 per share for services for preparing and coordinating with the Company and others in the development of business plans, investor presentations, and financial models, which represents $275,200 of the $345,637. In 2005, the Company issued 500,000 shares of common stock valued at $0.58 per share for services for preparing and coordinating with the Company and others in the development of business plans, investor presentations, and financial models, which represents the entire $290,000.
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Depreciation and Amortization Expense. Depreciation and amortization expenses increased to $48,754 for the twelve months ended December 31, 2006 compared to $25,391 for the same period in 2005 primarily due to equipment purchased to expand the lab to accommodate synDNA™ sales production. In 2006, the Company also installed a new server to optimize security and data retention.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through equity sales totaling approximately $18,000,000, and from grants and contract research funding of $200,000 from various sources. The Company expects to continue to incur losses as it expands its research and development activities and related regulatory work and increases its collaborative efforts. For 2008, the Company expects expenditures for operations, including its collaborative efforts to be approximately $3 to $4 million. The increase compared to 2007 expenditures is expected to result from additional production staff and expansion of preclinical product development efforts. However, if need be in 2008, the Company could reduce its expenditures because the vast majority of its costs are variable. Those estimated expenditures include amounts necessary to fulfill its obligations under various collaborative, research and licensing agreements during 2008.
On December 4, 2006, Lawrence Wunderlich, the Company’s former Chief Financial Officer and a former director, and Frank Vazquez, the Company’s former chief operating officer and a former director, filed a complaint with the American Arbitration Association to recover over $800,000 in severance payments that they allege the Company owes them. In the event Messrs. Wunderlich and Vazquez are successful in their claims against the Company, it will have a material adverse impact on the liquidity of the Company. See Part I, Item 3, Legal Proceedings for a more detailed description of this dispute.
Because of the cost (up to $1.7 billion) and timeframe (up to 15 years) traditionally associated with developing a potential drug or pharmaceutical product to FDA approval for human sales is received, the Company’s business strategy is to develop its products to initial Phase I or II clinical trials and look for third parties to fund completion of development of the product and market the product through strategic partnerships, license agreements or other relationships. The Company also looks for collaborative and other efforts utilizing its technology to increase shareholder value. The Company currently uses this strategy to limit the potential cost the Company would incur in developing a product. The Company’s expected costs under our various contracts and for various drug development products can be estimated for the next year or two, but not much beyond that due to the uncertainty of clinical trial and research results. Because of the various factors noted above and the expectation that, until the Company establishes revenue sources, the Company will license to, or jointly develop its prospective products with, strategic partners, the Company reviews, at least annually, each research program and clinical trial, based on results and progress during the prior year and estimates its needs for that program or trial for the coming year, making adjustments based on the progress of the program during the year. The Company does not set long-term development budgets or development schedules for bringing its products to market or track its research costs on a product basis.
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Cash and cash equivalents were $162,042 at December 31, 2007, compared with $2,854,197 at December 31, 2006. The decrease of $2,692,155 was due to the result of operations for the year. See “Results of Operations” above.
To fund operations in 2008 and beyond the Company will need to raise additional capital. The Company will continue to look for opportunities to finance its ongoing activities and operations through accessing corporate partners or the equity markets, as the Company currently has no credit facility, nor does the Company currently intend to seek one.
CONTRACTUAL PAYMENT OBLIGATIONS
The Company’s off-balance sheet arrangements are limited to rents on its primary facility. These off-balance sheet arrangements are expensed as incurred. A summary of contractual commitments and obligations as of December 31, 2007 is as follows:
PAYMENTS DUE BY PERIOD
CONTRACTUAL
OBLIGATION
Total
2008
2009
Operating leases
$ 153,584
$ 76,792
$ 76,792
On March 20, 2008, the Company received notice of termination of the GSL Earnest Money Contract due to an alleged default by the Company and as such does not believe it has any ongoing contractual obligation with regard to this contract. Approximately $1,201,160 previously paid was forfeited.
The Company’s future expenditures and capital requirements depend on numerous factors, most of which are difficult to project beyond the short term, including, without limitation, the progress of research and development programs, the progress of pre-clinical and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, its ability to establish collaborative arrangements and the terms of any such arrangements, and the costs associated with commercialization of its products. Cash requirements are expected to continue to increase each year as the Company expands its activities and operations. There can be no assurance, however, that the Company will ever be able to generate product revenues or achieve or sustain profitability.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS No. 157 will have on the Company’s financial position, results of operations, and cash flows.
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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB statement No. 115.” This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. If an entity elects the fair value option for a held-to-maturity or available-for-sale security in conjunction with the adoption of this Statement, that security shall be reported as a trading security under Statement 115, but the accounting for a transfer to the trading category under paragraph 15(b) of Statement 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. This statement is effective as of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the effects of SFAS 159 but does not expect its implementation will have a significant impact on the Company's financial condition or results of operations.
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 Accounting for Uncertainly in Income Taxes – An Interpretation of FASB Statement No. 109. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006, and the provisions of FIN 48 will be applied to all positions upon the adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. Management is currently evaluating the impact of FIN 48 on the financial statements but does not believe that its adoption will have a material effect on the Company’s financial position, results of operations, or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a Company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in
34
retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006, and will be adopted by the Company in the first quarter of 2007. The Company does not expect the adoption of this interpretation to have an impact on its financial position or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company’s financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to valuation of investments, long-lived assets, and revenue recognition. The Company bases their estimates on historical experience and on various other assumptions. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies and the related judgments and estimates affect the preparation of its financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, temporary cash investments having original maturity dates of three months or less. For reporting purposes, such cash equivalents are stated at cost plus accrued interest which approximates fair value.
Accounts Receivable
The company’s accounts receivable primarily consist of trade receivables. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The company includes any accounts receivable balances that are determined to be uncollectible in its allowance for doubtful accounts. As of December 31, 2007 and 2006 the allowance for doubtful accounts is zero.
Inventory
Inventory includes raw materials (liquid buffers and enzyme mix) that are used to produce enzymatically synthesized DNA (synDNA(TM)). Inventory is stated at the lower of cost or market, cost being determined using the first-in, first out ("FIFO") method. Reserves are established for excess or obsolete inventories. Inventory is included in the cost of revenue when sold.
Property and Equipment
Property and equipment is recorded at cost and depreciation is computed using the straight-line method over the useful lives of the assets. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations.
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Impairment of Long-lived Assets
CytoGenix performs reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets, sets forth guidance as to when to recognize an impairment of long-lived assets and how to measure such impairment. The standards require certain assets be reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable.
Revenue Recognition
CytoGenix’s revenues are primarily derived from selling synDNA™. CytoGenix recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable.
Research and Development
Internal research and development costs are expensed as incurred. Research and development costs include salaries and personnel-related costs, supplies and materials, facility costs, depreciation of facility property, and outside services required to conduct the preclinical development.
Income Taxes
The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. CytoGenix records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
Earnings Per Common Share
Basic and diluted net loss per share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding for the period presented
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R) we accounted for stock option grant in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees," and accordingly, recognized compensation expense for stock option grants using the intrinsic value method.
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Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). For all quarters after the first quarter of fiscal 2006, compensation costs recognized will include compensation costs for all share-based payments granted based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As of December 31, 2007 no options have been exercised.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 2007 the 1st Court of Appeals issued a Mandate in favor of the Company. Shortly after issuance, the $115,500 CD previously held as a security for the Waldroff litigation matter as previously discussed was released to the Company.
ITEM 8.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of CytoGenix, Inc.
We have audited CytoGenix, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CytoGenix, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Assessment of the Effectiveness of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following deficiencies which, together, constitute a material weakness, have been identified and included in management’s assessment:
·
The Company has inadequate segregation of duties within its cash disbursement control design.
·
The Company’s physical inventory controls are not operating effectively and inventory is prone to misstatement.
·
The Company lacks procedures to properly account for non-routine or complex accounting issues and for evaluating alternative accounting treatments for significant transactions that are documented and approved by management.
·
The Company lacks procedures for the identification of other financial disclosure items such as related parties, subsequent events, and contingent transactions.
·
There was an inadequate time period between the formation of some of the controls and the testing period to determine whether the policies and procedures were adequate and effective.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 financial statements, and this report does not affect our report dated April 4, 2008 on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, CytoGenix, Inc. has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as of December 31, 2007 and 2006, and the related statements of income, stockholders’ equity (deficit), and cash flows of CytoGenix, Inc. for each of the years in the three years ended December 31, 2007, and our report dated April 4, 2008 expressed an unqualified, but modified for going concern, opinion thereon.
/s/ LBB & ASSOCIATGES LTD, LLP
LBB & ASSOCIATES LTD., LLP
Houston, Texas
April 4, 2008
39
Management’s Report on Internal Control Over Financial Reporting
Board of Directors and Shareholders of CytoGenix, Inc.
The Management of CytoGenix, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U. S. generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with U. S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, Therefore, even those systems determined to be effective may not prevent or detect misstatements.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
Management’s assessment included an evaluation of such elements as the design and operational effectiveness of key financial reporting controls, process documentation, accounting policies overall control environment and information systems control environment.
A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We identified the following deficiencies which together constitute a material weakness in our assessment of the effectiveness of internal control over financial reporting as of December 31, 2007:
·
The Company has inadequate segregation of duties within its cash disbursement control design.
·
The Company’s physical inventory controls are not operating effectively and inventory is prone to misstatement.
·
The Company lacks procedures to properly account for non-routine or complex accounting issues and for evaluating alternative accounting treatments for significant transactions that are documented and approved by management.
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·
The Company lacks procedures for the identification of other financial disclosure items such as related parties, subsequent events, and contingent transactions.
·
There was an inadequate time period between the formation of some of the controls and the testing period to determine whether the policies and procedures were adequate and effective.
Because of the aforementioned deficiencies, which together constitute a material weakness, the Company’s management has concluded that the Company’s internal control over financial reporting as of December 31, 2007 was ineffective.
The Company is continuing the process of remediating its control deficiencies. However, the material weakness in internal control over financial reporting that has been identified will not be remediated until numerous internal controls are implemented and operate for a period of time, are tested, and the Company is able to conclude that such internal controls are operating effectively. The Company cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements. The Company cannot make assurances that it will not identify additional material weaknesses in its internal control over financial reporting in the future.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by LBB & Associates Ltd., LLP (“LBB”), an independent registered public accounting firm. LBB’s report on internal control over financial reporting is included in this Annual Report on Form 10-K.
CytoGenix, Inc.
/s/ MALCOLM SKOLNICK
Malcolm Skolnick
PRESIDENT & CEO (PRINCIPAL EXECUTIVE OFFICER)
/s/ GREG S. TAYLOR
Greg S. Taylor
CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CytoGenix, Inc.:
We have audited the accompanying balance sheets of CytoGenix, Inc. (Company) as of December 31, 2007 and 2006, and the related statements of operations, shareholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2007. 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 audits.
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 CytoGenix, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company's absence of significant revenues, recurring losses from operations, and its need for additional financing in order to fund its projected loss in 2008 raise substantial doubt about its ability to continue as a going concern. The 2007 financial statement do not include any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 4, 2008, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ LBB & Associates LTD, LLP
LBB & ASSOCIATES LTD., LLP
Houston, TX
April 4, 2008
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| CYTOGENIX, INC. | |||||
| BALANCE SHEETS | |||||
| December 31, 2007 | December 31, 2006 | ||||
| (Restated) | |||||
| ASSETS | |||||
| Current Assets: | |||||
| Cash | $ 162,042 | $ 2,854,197 | |||
| Receivables and other current assets | 44,292 | 16,874 | |||
| Inventory | 252,144 | 421,957 | |||
| Total Current Assets | 458,478 | 3,293,028 | |||
| Property and equipment, net | 237,354 | 261,793 | |||
| Deposits | 6,399 | 481,971 | |||
| Long-term investments - restricted | 53,402 | 172,892 | |||
| Total Assets | $ 755,633 | $ 4,209,684 | |||
| LIABILITIES AND STOCKHOLERS' EQUITY (DEFICIT) | |||||
| Current Liabilities: | |||||
| Long-term debt, current portion | $ 27,678 | $ 25,153 | |||
| Accounts payable | 388,463 | 309,874 | |||
| Accrued expenses | 1,532,344 | 927,889 | |||
| Total Current Liabilities | 1,948,485 | 1,262,916 | |||
| Long-term debt, less current portion | 17,336 | 45,015 | |||
| Total Liabilities | 1,965,821 | 1,307,931 | |||
| COMMITMENTS AND CONTINGENCIES | |||||
| STOCKHOLDERS' EQUITY (DEFICIT): | |||||
| Preferred stock, $.001 par value; 50,000,000 share authorized, | |||||
| no shares issued and outstanding | - | - | |||
| Common stock, $.001 par value; 300,000,000 share authorized, | |||||
| 146,309,719 and 140,663,961 share issued and outstanding as of | |||||
| December 31, 2007 and 2006, respectively | 146,310 | 140,664 | |||
| Additonal paid-in capital | 36,999,514 | 34,851,026 | |||
| Treasury stock | (629,972) | (629,972) | |||
| Accumulated deficit | (37,726,040) | (31,459,965) | |||
| Total Stockholders' Equity (Deficit) | (1,210,188) | 2,901,753 | |||
| Total Liabilities and Stockholders' Equity (Deficit) | $ 755,633 | $ 4,209,684 | |||
| The accompanying notes are an integral part of these financial statements. | |||||
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| CYTOGENIX, INC. | |||||||
| STATEMENTS OF OPERATIONS | |||||||
| Year Ended December 31, | |||||||
| 2007 | 2006 | 2005 | |||||
| (Restated) | |||||||
| REVENUES | $ 66,043 | $ 76,993 | $ - | ||||
| COSTS OF REVENUES | 23,539 | 45,547 | - | ||||
| GROSS MARGIN | 42,504 | 31,446 | - | ||||
| COSTS AND EXPENSES: | |||||||
| Research and development | 2,106,746 | 4,970,410 | 1,724,317 | ||||
| General and administrative | 2,531,807 | 3,069,945 | 1,495,454 | ||||
| Consulting expense | 415,258 | 345,637 | 290,000 | ||||
| Depreciation and amortization | 64,879 | 48,754 | 25,391 | ||||
| Impairment Expenses | 1,201,160 | - | - | ||||
| LOSS FROM OPERATIONS | (6,277,346) | (8,403,300) | (3,535,162) | ||||
| OTHER INCOME(EXPENSE): | |||||||
| Interest income, net | 18,410 | 1,976 | 2,405 | ||||
| Other | (7,139) | (587) | (368) | ||||
| NET LOSS | $ (6,266,075) | $ (8,401,911) | $ (3,533,125) | ||||
| Net loss per share: | |||||||
| Basic and diluted net loss per share | $ (0.04) | $ (0.07) | $ (0.03) | ||||
| Weighted average shares outstanding: | |||||||
| Basic and diluted | 141,452,405 | 127,366,388 | 114,181,072 | ||||
| The accompanying notes are an integral part of these financial statements. | |||||||
44
| CYTOGENIX, INC. | ||||||
| STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
| Common Stock | Additional | Total | ||||
| Paid -in | Treasury | Accumulated | Stockholders’ | |||
| Shares | Amounts | Capital | Stock | Deficit | Equity (Deficit) | |
| BALANCE, December 31, 2004 | 109,204,339 | $109,204 | $19,530,637 | ($629,972) | ($19,524,929) | ($515,060) |
| Shares issued for cash, net fundraising | 13,928,967 | 13,929 | 3,571,151 | - | - | 3,585,080 |
| Shares issued for debt | 647,701 | 648 | 541,478 | - | - | 542,126 |
| Shares issued for services | 679,963 | 680 | 327,820 | - | - | 328,500 |
| Net loss | - | - | - | - | (3,533,125) | (3,533,125) |
| BALANCE, December 31, 2005 | 124,460,970 | 124,461 | 23,971,086 | (629,972) | (23,058,054) | 407,521 |
| Shares issued for cash, net fundraising | 15,882,991 | 15,883 | 6,298,683 | - | - | 6,314,566 |
| Shares issued for services | 320,000 | 320 | 274,880 | - | - | 275,200 |
| Stock based compensation | - | - | 4,306,377 | - | - | 4,306,377 |
| Net loss | - | - | - | - | (8,401,911) | (8,401,911) |
| BALANCE, December 31, 2006 (Restated) | 140,663,961 | $ 140,664 | $ 34,851,026 | $ (629,972) | $ (31,459,965) | $ 2,901,753 |
| Shares issued for cash, net fundraising | 4,389,750 | 4,390 | 714,170 | - | - | 718,560 |
| Shares issued for services | 1,256,008 | 1,256 | 344,087 | - | - | 345,343 |
| Stock based compensation | - | - | 1,090,231 | - | - | 1,090,231 |
| Net loss | - | - | - | - | (6,266,075) | (6,266,075) |
| BALANCE, December 31, 2007 | 146,309,719 | $ 146,310 | $ 36,999,514 | $ (629,972) | $ (37,726,040) | $ (1,210,188) |
The accompanying notes are an integral part of these financial statements.
45 | ||||||
| CYTOGENIX, INC. | |||||||||
| STATEMENTS OF CASH FLOWS | |||||||||
| Year Ended December 31, | |||||||||
| 2007 | 2006 | 2005 | |||||||
| (Restated) | |||||||||
| OPERATING ACTIVITIES: | |||||||||
| Net loss | $ (6,266,075) | $ (8,401,911) | $ (3,533,125) | ||||||
| Adjustments to reconcile net loss to net cash | |||||||||
| used in operating activities: | |||||||||
| Deprecation and amortization | 64,879 | 48,754 | 25,391 | ||||||
| Impairment Expenses | 1,201,160 | - | - | ||||||
| Stock-based compensation expenses | 1,090,231 | 4,306,377 | - | ||||||
| Loss (gain) on disposal of property and equipment | (1,150) | 587 | 368 | ||||||
| Gain on long-term investments - restricted | 3,991 | (4,987) | (2,405) | ||||||
| Stock issued for services | 345,343 | 275,200 | 328,500 | ||||||
| Changes in assets and liabilities: | |||||||||
| Accounts receivable | (13,423) | (2,577) | - | ||||||
| Inventory | 169,813 | (421,957) | - | ||||||
| Prepaid expenses | (13,994) | 7,095 | (21,392) | ||||||
| Accounts payable | 78,588 | 51,379 | 20,662 | ||||||
| Accrued expenses | 304,454 | 83,956 | 584,138 | ||||||
| Net cash used in operation activities | (3,036,183) | (4,058,084) | (2,597,863) | ||||||
| INVESTING ACTIVITIES: | |||||||||
| Purchase of property and equipment | (39,290) | (254,846) | (16,987) | ||||||
| Deposit on building contract | (425,588) | (475,572) | |||||||
| Change in long-term investments - restricted | 115,500 | (50,000) | (115,500) | ||||||
| Net cash used in investing activities | (349,378) | (780,418) | (132,487) | ||||||
| FINANCING ACTIVITIES: | |||||||||
| Proceeds from notes payable | - | 80,000 | - | ||||||
| Payment on notes payable | (25,154) | (9,832) | - | ||||||
| Proceeds from sale of common stock | 718,560 | 6,314,566 | 3,585,080 | ||||||
| Net cash provided by financing activities | 693,406 | 6,384,734 | 3,585,080 | ||||||
| NET CHANGE IN CASH | (2,692,155) | 1,546,232 | 854,730 | ||||||
| CASH, beginning of period | 2,854,197 | 1,307,965 | 453,235 | ||||||
| CASH, end of period | $ 162,042 | $ 2,854,197 | $ 1,307,965 | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||
| Interest paid | $ 5,672 | $ 1,272 | $ - | ||||||
| Income taxes paid | $ - | $ - | $ - | ||||||
| NONCASH TRANSACTIONS: | |||||||||
| Common stock issued for debt | $ - | $ - | $ 542,126 | ||||||
|
The accompanying notes are an integral part of these financial statements. | ||||||||
46
CYTOGENIX, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES
Nature of Business
CytoGenix, Inc. (“CytoGenix”) was incorporated on February 10, 1995 in Nevada. CytoGenix is a biotechnology company focusing on controlled cellular processes. CytoGenix has acquired the rights for application to a specialized expression vector capable of producing single stranded DNA (ssDNA) in both eukaryotes and prokaryotes.
Basis of Presentation
These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, temporary cash investments having original maturity dates of three months or less. For reporting purposes, such cash equivalents are stated at cost plus accrued interest which approximates fair value.
Accounts Receivable
The Company’s accounts receivable primarily consist of trade receivables. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The company includes any accounts receivable balances that are determined to be uncollectible in its allowance for doubtful accounts. As of December 31, 2007 and 2006 the allowance for doubtful accounts is zero.
Inventory
Inventory includes raw materials (liquid buffers and enzyme mix) that are used to produce enzymatically synthesized DNA (synDNA™). Inventory is stated at the lower of cost or market, cost being determined using the first-in, first out ("FIFO") method. Reserves are established for excess or obsolete inventories. Inventory is included in the cost of revenue when sold.
47
Inventory detail is as follows:
| December 31, 2007 |
| December 31, 2006 |
|
|
|
|
Inventory |
|
|
|
Raw materials | $241,790 |
| $421,957 |
Finished goods | 10,354 |
| - |
Total Inventory | $252,144 |
| $421,957 |
Property and Equipment
Property and equipment is recorded at cost and depreciation is computed using the straight-line method over the useful lives of the assets. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations.
Impairment of Long-lived Assets
CytoGenix performs reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets, sets forth guidance as to when to recognize an impairment of long-lived assets and how to measure such impairment. The standards require certain assets be reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable.
Revenue Recognition
CytoGenix’s revenues are primarily derived from selling synDNA™. CytoGenix recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable.
Research and Development
Internal research and development costs are expensed as incurred. Research and development costs include salaries and personnel-related costs, supplies and materials, facility costs, depreciation of facility property, and outside services required to conduct the preclinical development.
Income Taxes
The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. CytoGenix records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
48
Earnings Per Common Share
Basic and diluted net loss per share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding for the period presented.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R) we accounted for stock option grant in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees," and accordingly, recognized compensation expense for stock option grants using the intrinsic value method.
Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). For all quarters after the first quarter of fiscal 2006, compensation costs recognized will include compensation costs for all share-based payments granted based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Set forth below is a summary of the Company's net income and earnings per share as reported and pro forma as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The pro forma compensation expense may not be representative of future amounts because options vest over several years and generally expire upon termination of employment, and additional options may be granted in future years.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield $0, expected volatility of 116% -- 250%, risk-free interest rate of 4.5%, and expected lives of 10 years.
49
Segment Reporting
The Company operates in one industry segment — biotechnology research and development. The Company operates in one geographic area, being the United States of America.
FASB Statement No. 131,Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS No. 157 will have on the Company’s financial position, results of operations, and cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB statement No. 115.” This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. If an entity elects the fair value option for a held-to-maturity or available-for-sale security in conjunction with the adoption of this Statement, that security shall be reported as a trading security under Statement 115, but the accounting for a transfer to the trading category under paragraph 15(b) of Statement 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. This statement is effective as of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the effects of SFAS 159 but does not expect its implementation will have a significant impact on the Company's financial condition or results of operations.
50
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 Accounting for Uncertainly in Income Taxes – An Interpretation of FASB Statement No. 109. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006, and the provisions of FIN 48 will be applied to all positions upon the adoption of the Interpretation. The cumulative effect of this applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. Management is currently evaluating the impact of FIN 48 on the financial statements but does not believe that its adoption will have a material effect on the Company’s financial position, results of operations, or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a Company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006, and was adopted by the Company as of January 1, 2007. The adoption of this interpretation did not have an impact on its financial position or results of operations.
NOTE 2 – RESTATEMENT
In connection with the establishment of the Company’s stock option plans of 2003 and 2005, the Company did not recognize any compensation cost under SFAS 123(R). As a result of a recent letter from the staff of the SEC, we restated our financial statements (“The Restatement”) and associated disclosures to include compensation cost upon vesting of options. We understated non-cash expenses and net loss by $4,306,377 in the year ending December 31, 2006. The restatement impacted certain line items within cash flows from operations, but had no effect on total cash flows from operations and did not impact cash flows from financing or investing activities. This restatement had no impact on the balance sheets, statements of operations or the net decrease in cash and cash equivalents reported in the statements of cash flows for any periods as of or reported prior to December 31, 2005.
51
The restatement also effected Note 10
| The effect of the restatement on specific items in the balance sheet is as follows: | |||||||
| December 31, 2006 | |||||||
| As Previously | |||||||
| Reported | Adjustments | As Restated | |||||
| STOCKHOLDERS' EQUITY: | |||||||
| Additonal paid-in capital | $ 30,544,649 | $ 4,306,377 | $ 34,851,026 | ||||
| Retained earnings (deficit) | (27,153,588) | (4,306,377) | (31,459,965) | ||||
| Total Stockholders' Equity | 2,901,753 | - | 2,901,753 | ||||
| The effect of the restatement on specific items in the statement of operations is as follows: | |||||||
| December 31, 2006 | |||||||
| As Previously | |||||||
| Reported | Adjustments | As Restated | |||||
| COSTS AND EXPENSES: | |||||||
| Research and development | $ 2,199,148 | $ 2,771,262 | $ 4,970,410 | ||||
| General and administrative | 1,534,830 | 1,535,115 | 3,069,945 | ||||
| LOSS FROM OPERATIONS | 4,096,923 | 4,306,377 | 8,403,300 | ||||
| The effect of the restatement on specific items in the statement of operations is as follows: | |||||||
| December 31, 2006 | |||||||
| As Previously | |||||||
| Reported | Adjustments | As Restated | |||||
| OPERATING ACTIVITIES: | |||||||
| Net Loss | $ (4,095,534) | $ (4,306,377) | $ (8,401,911) | ||||
| Adjustments to reconcile net loss to net cash | |||||||
| Share-based compensation expense | - | 4,306,377 | 4,306,377 | ||||
| Net cash used in operation activities | (4,058,084) | - | (4,058,084) | ||||
NOTE 3 – GOING CONCERN
CytoGenix has had negligible revenues since inception and only approximately $143,000 in the last two years. The Company has incurred losses totaling $37,726,040 from inception through December 31, 2007. Because of these conditions, CytoGenix will require additional working capital to develop business operations. CytoGenix intends to raise additional working capital either through private placements, public offerings and/ or bank financing.
There are no assurances that CytoGenix will be able to achieve a level of revenue adequate to generate sufficient cash flow from operations or obtain additional financing through private placements, public offerings and/ or bank financing necessary to support CytoGenix’s working capital requirements. To the extent that funds generated from any private placements, public offerings and/ or bank financing are insufficient, CytoGenix will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to CytoGenix. If adequate working capital is not available CytoGenix may not increase its operations.
These conditions raise substantial doubt about CytoGenix’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should CytoGenix be unable to continue as a going concern.
NOTE 4 – LONG TERM INVESTMENT - RESTRICTED
The Company established a CD for $50,000 with Frost National bank which matures July 18, 2008. This CD earned interest at 4.65% and in 2007 and 2006 interest earned was $2,345 and $1,057 respectively. The CD was required by Frost National Bank to partially secure the equipment loan discussed in Note 7.
52
The Company had a restricted long-term CD investment for the Waldroff litigation matter discussed in Note 13 to the financial statements. Pending appeal of this case CytoGenix had established a long-term CD in the amount of $115,500 to comply with a court order. This CD earned interest at a rate of 3.4% annually. This CD was maintained until a mandate was issued by the 1st Court of Appeals. In 2007 the mandate was issued and the CD was released to the Company.
NOTE 5 – PROPERTY AND EQUIPMENT, NET
Property consisted of the following as of December 31:
2007
2006
Lab equipment
5-7 years
$ 338,295 $ 299,005
Office Furniture & Fixtures
3-7 years
62,592
62,592
Office Equipment
3-7 years
63,034
63,246
Leasehold Improvements
Lease Term
16,804
16,804
Less: accumulated depreciation
(243,371)
(179,854)
-----------
-----------
Net book value
$ 237,354
$ 261,793
=======
=======
Depreciation expense totaled $64,879, $48,754 and $25,391 for 2007, 2006 and 2005 respectively.
The Company’s deposits at December 31, 2007 include a deposit on the current office and lab facilities in the amount of $6,399.
Additionally, the balance includes $901,160 of payments made by the Company to a contractor under an earnest money contract relating to the construction of a new office and lab facility for the Company in Houston, Texas. The Company was notified in March 2008 of its default to the contract based on not having met the terms for additional deposits. At this time, the entire deposit balance was deemed unrecoverable by the Company and was fully impaired for financial statement purposes at December 31, 3007.
NOTE 7 – ACCRUED EXPENSES
Accrued expenses consist mainly of unpaid salaries and unpaid payroll taxes on cash compensation and stock based compensation. Total accrued payroll taxes for previously issued stock compensation as of December 31, 2007 and 2006 was $207,154. Accrued bonus compensation per employment agreements as of December 31, 2007 and 2006 was and $361,946.
NOTE 8 – DEBT
53
CytoGenix entered into an $80,000, 36 month promissory note with a bank on July 18, 2006 to finance the cost of equipment. The note requires monthly payments of $2,569 including interest at 9.51%. Interest paid for the year ended December 31, 2007 and 2006 was $5,672 and 1,272 respectively.
Annual maturities of debt during each of the years ended December 31, are as follows:
NOTE 9 – COMMON STOCK ISSUANCES
On November 30, 2007, the Company completed a private placement of 4,491,000 shares (4,389,750 shares issued as of December 31, 2007, 101,250 issued subsequent to December 31, 2007) of restricted common stock at $.16 per share for gross proceeds of $718,560. The difference between the selling price and the market value on the date the shares were sold was approximately $.09 per share ($404,190). In 2007 the Company issued 1,256,008 shares with a value of $345,343 for services.
During 2006, the Company issued 15,882,991 shares through private placement with net proceeds totaling $6,314,566, and issued 320,000 shares valued at $275,200 for services.
During 2005, the company issued 13,928,967 shares through private placement with net proceeds totaling $3,585,080, and issued 647,701 shares valued at $542,126 in settlement of debt, and 679,963 shares valued at $328,500 for services.
STOCK ISSUED FOR DEBT:
In 2007 and in 2006, there were no shares issued for debt. In 2005, 647,701 shares were issued for debt totaling $542,126.
NOTE 10 – STOCK OPTIONS AND WARRANTS
In 2004, CytoGenix issued 1,242,856 warrants as part of a private placement memorandum. The warrants are exercisable at $0.28 per share, vest immediately and expire one year from the grant date. Of these warrants 642,857 were not exercised and expired in 2005. There were no warrants outstanding as of December 31, 2007, 2006 or 2005.
On June 24, 2003, the Company adopted the 2003 Stock Option Plan (the “2003 Plan”) to provide for the granting of incentive stock options to executive officers and employees of the Company, as determined by a committee of the Company’s board of directors. Non-qualified options may also be granted under the 2003 Plan to non-employee directors and consultants of the Company.
54
A total of 18,000,000 shares of common stock have been reserved for issuance under the 2003 Plan. All stock options granted under the 2003 Plan vest, subject to a Condition Precedent, 33.3% at grant date and at each of the first and second anniversaries of the grant date and expire no later than ten years from the date of the plan on June 24, 2013. Awards granted under the Option Plan are to be determined from time to time by a compensation committee. If an option expires or is terminated, surrendered or cancelled without having been fully exercised, the unused shares covered by any such Option shall again be available for grant under the Option Plan. As of December 31, 2007, 2,925,000 common stock shares are available to be awarded under this plan. No option issued under the 2003 Plan is exercisable, even if vested, unless and until such time that the underlying shares to be issued are publicly registered with the Securities and Exchange Committee, such registration constituting the Condition Precedent. According to the terms of the Option Plan, the Company is under no obligation to register the underlying shares, nor is there any recourse by the option holder in the event their options expire or otherwise terminate prior to the Condition Precedent being met.
On June 14, 2005 the Company adopted the 2005 Stock Option Plan (the “2005 Plan”) to provide for the granting of incentive stock options to executive officers and employees of the Company, as determined by a committee of the Company’s board of directors. Non-qualified options may also be granted under the 2005 Plan to non-employee directors and consultants of the Company
A total of 18,000,000 shares of common stock have been reserved for issuance under the 2005 Plan. All stock options granted under the 2003 Plan vest, subject to a Condition Precedent, 33.3% at grant date and at each of the first and second anniversaries of the grant date and expire no later than ten years from the date of the plan on June 14, 2015. Awards granted under the Option Plan are to be determined from time to time by a compensation committee. If an option expires or is terminated, surrendered or cancelled without having been fully exercised, the unused share covered by any such Option shall again be available for grant under the Option Plan. As of December 31, 2007, 8,789,000 common stock shares are available to be awarded under this plan. No option issued under the 2005 Plan is exercisable, even if vested, unless and until such time that the underlying shares to be issued are publicly registered with the Securities and Exchange Committee, such registration constituting a Condition Precedent. According to the terms of the Option Plan, the Company is under no obligation to register the underlying shares, nor is there any recourse by the option holder in the event their options expire or otherwise terminate prior to the Condition Precedent being met.
Restatement of Stock Options
In connection with the establishment of the Company’s stock option plans of 2003 and 2005, the Company took the position that no compensation cost should be recognized by the Company until such time as the underlying shares were registered, as this constituted a performance condition under SFAS 123(R) and that such condition was not deemed probable at the time of the filing. The Company later determined that its position was incorrect and restated its financial statements and associated disclosures to include compensation costs assuming the options as exercisable as they vest. The error resulted in the understatement of non-cash expense and a corresponding understatement of net loss of $4,306,377 for the year ended December 31, 2006. The restatement impacted certain line items within the cash flows from operations but no effect on total cash flows from operations and did not impact cash flows from financing or investing activities. This restatement had no impact on the balance sheets, statements of operations or the net decrease in cash and cash equivalents reported in the statements of cash flows for any periods reported as of or prior to December 31, 2005.
55
Based on the employee stock option plans, compensation expense recorded for options fully vested as of December 31, 2007 were recorded as follows:
2006
2007
Research and development
$2,771,262
452,886
General and administrative
1,535,115
637,345
Total
$4,306,377
$1,090,231
We used the Black-Scholes option-pricing model (“Black-Scholes model”) to value our stock options with the following assumptions:
Volatility
92% to 250%
Risk-Fee Interest Rate
4.50%
Dividend Yield
0.00%
Expected Term (years)
10.00
A summary for our stock-based compensation activity is presented below:
|
|
|
| Average | Aggregated | ||||
|
|
| Average | Life | Fair | ||||
|
| Options | Price ¹ | (years)² | Value | ||||
Outstanding at December 31, 2004 | 14,550,000 | $0.20 | 8.50 | $2,969,167 | |||||
|
|
|
|
|
| ||||
| Granted | 18,450,000 | 0.70 | 10.00 | 12,615,230 | ||||
| Exercised | - | - | - | - | ||||
| Forfeited/expired | - | - | - | - | ||||
|
|
|
|
|
| ||||
Outstanding at December 31, 2005 | 33,000,000 | 0.48 | 8.40 | 15,584,397 | |||||
|
|
|
|
|
| ||||
| Granted | 2,004,000 | 1.01 | 10.00 | 1,789,644 | ||||
| Exercised | - | - | - | - | ||||
| Forfeited/expired | (12,825,000) | 0.50 | 8.40 | (6,280,191) | ||||
|
|
|
|
|
| ||||
Outstanding at December 31, 2006 | 22,179,000 | 0.52 | 7.50 | 11,093,850 | |||||
| Granted | 3,400,000 | 0.30 | 10.00 | 879,240 | ||||
| Exercised | - | - | - | - | ||||
| Forfeited/expired | (1,293,000) | 0.66 | 7.00 | (914,019) | ||||
|
|
|
|
|
| ||||
Outstanding at December 31, 2007 | 24,286,000 | 0.48 | 6.85 | 11,059,071 | |||||
|
|
|
|
|
| ||||
Exercisable at December 31, 2007 | 21,565,667 | 0.48 | 6.50 | 10,079,349 | |||||
|
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Exercisable at December 31, 2006 | 17,401,333 | 0.45 | 7.30 | 7,628,763 | |||||
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Exercisable at December 31, 2005 | 20,583,333 | 0.35 | 8.00 | 7,157,107 | |||||
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¹Weighted-average exercise price
² Weighted-average contractual life remaining
56
The associated fair value of options vested prior to December 31, 2005 was $11,891,000. This amount was not expensed at the time of vesting in accordance with the then applicable provision of APB 25. All options are issued with an exercise price equal to the market value resulting in no intrinsic value.
The unvested options fair value will be recognized over their respective vesting periods which ends August 2009.
NOTE 11 – INCOME TAXES
For the period from inception through December 31, 2007, CytoGenix has incurred net losses and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The valuation allowance increased approximately $1,726,000, $1,400,000, and $1,205,000 during the years ended December 31, 2007, 2006 and 2005, respectively. The cumulative net operating loss carry-forward is approximately $25,003,000 at December 31, 2007, and will expire in the years 2013 through 2022.
Deferred income taxes consist of the following at December 31,
2007
2006
Long-term:
Deferred tax assets
$
8,501,000
$ 6,775,000
Valuation allowance
(8,501,000)
(6,775,000)
--------------------
------------------
$ -
$ -
=============
===========
NOTE 12 – CONCENTRATIONS
The Company had gross sales of $ 66,043, $76,993, and $0 for the years ended 2007, 2006 and 2005, respectively. The Company has two customers that represent 100% of the gross sales for the year ended December 31, 2007 and three customers that represented 100% of the gross sales for the year-ended December 31, 2006. The Company has one supplier that provides all the materials necessary to generate the sales for the year ended December 31, 2007. Due to the nature of the materials, it might be difficult to find a new supplier should that be necessary.
The Company has cash balances in a single financial institution which, from time to time, exceed the federally insured limit of $100,000. As of December 31, 2007, the Company’s cash balance exceeded the federally insured limit by $62,042. No loss has been incurred related to this concentration of cash.
57
NOTE 13 – COMMITMENTS AND CONTIGENCIES
Lease
CytoGenix leases office facilities under an operating lease that expires on December 31, 2009. Rent expense was $ 76,414, $69,749, and $66,455 for 2007, 2006 and 2005, respectively. Annual future rent payments are as follows:
Over the term of the lease the rent works out to an average of $5,701 per month starting December 2003 and ending September 2009. As of December 31, 2007 and 2006 deferred rent was $18,645 and $25,981, respectively and is included in accrued expenses.
Land & Building
On October 30, 2006, the Company entered into an earnest money contract with GSL Constructors, Ltd. (“GSL”) for a design/build project located in the Westchase District of Houston for $3,796,577 and paid GSL a deposit of $474,572. On March 20, 2008, the Company received notice of termination of this contract due to an alleged default by the Company. GSL purports to have terminated the earnest money contract pursuant to the terms of Section 11 thereof, and pursuant to that section GSL would be entitled to the deposit and all payments previously made by the Company as liquidated damages. The Company has paid approximately $1,201,160 under the contract. GSL has not released the Company from any of its obligations under the contract.
Research
CytoGenix has entered into Sponsored Research Agreements (SRA) with several universities. The universities do research for CytoGenix related to CytoGenix’s proprietary technology. As work progresses, the universities invoice CytoGenix for reimbursement of expenses related to the research. The SRA’s have established budgets. As of December 31, 2007 unbilled amounts under the SRA’s totaled approximately $116,000.
Employment
Per the employment agreement of the CEO, there is a severance pay obligation for early termination for any reason other than cause, permanent disability, or if the employee voluntarily resigns following a constructive termination, (collectively a “Termination Event”) then the Company shall pay the employee base compensation for a period of twelve (12) months following termination. In addition, the Company shall also reimburse the Employee for the payment of the Employee’ COBRA or equivalent other replacement medical and dental insurance premiums for the period of twelve (12) months. The cash obligation under this arrangement if the CEO were to be terminated on January 1, 2008 could result in a cash outflow of approximately $515,000.
58
Board of Directors
There are currently four outside Directors who received $40,000 each in stock compensation for the year ending December 31, 2007
Inventory
The Company has entered an agreement with GE Healthcare Bio-Sciences Corp. whereas GEHC will provide the Company with DNA production reagents for use in the manufacture of vaccines and therapeutic compounds. The Company plans to begin the process of negotiating with GE for the optional extensions of the contract for 2008 and beyond. As of the date of this filing no agreement has been finalized.
Litigation
William B Waldroff and Applied Veterinary Genomics, Inc.
Waldroff and Applied Veterinary Genomics, Inc. (“AVGI”) - Litigation initiated in March 2004 over the validity of license agreements between CytoGenix (licensor) and William Waldroff (licensee) for use of CytoGenix ssDNA expression technology in shrimp and horse therapeutic applications. On March 3, 2007, the Court of Appeals denied Waldroff/AVGI’s Motion forRehearing bringing this matter to a final conclusion in favor of the Company.
Frank Vazquez and Lawrence Wunderlich v. CytoGenix, Inc.
In November 2006, former Chief Financial Officer (CFO), Lawrence Wunderlich, and former Chief Operations Officer (COO), Frank Vazquez, resigned from the Company. The Company and former officers are pursuing arbitration to determine obligations consistent with the circumstances surrounding the former officers’ resignations. The Company has also filed counterclaims against the former officers. Depositions have been taken and the arbitration hearing is scheduled for early May. The Company intends to vigorously defend the actions brought by the former COO and CFO.
The likelihood of an unfavorable outcome is not determinable by management or outside counsel at this time and, accordingly, no additional loss accruals have been recorded by the Company in relation to this matter.
NOTE 14 - - SUBSEQUENT EVENTS
Subsequent to the year end, the Company issued 101,250 shares as part of its November 30, 2007 private placement. See “Note 9 – Common Stock Issuances” above. Additionally, the Company issued 249,999 shares with a value of $40,000 for services rendered.
As described in Note 6, the Company was notified in March 2008 of its default under the terms of an earnest money contract it had entered into with a construction contractor for the construction of a new office and lab facility for the Company. Accordingly, the Company’s deposits were forfeited. Forfeited deposits included $901,160 made as of December 31, 2007, as well as an additional payment of $300,000 made in the first quarter of 2008.
59
NOTE 15 – UNAUDITED QUARTERLY FINANCIAL DATA
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2007
Net Sales
$ -
$ 39,459
$ 2,555
$ 24,029
Gross Profit
-
27,211
1,801
13,492
Net Loss
(1,588,538)
(1,013,232)
(1,423,420)
(2,240,885)
Basic Loss Per Share
(0.01)
(0.01)
(0.01)
(0.01)
Year Ended December 31, 2006
Net Sales
$ -
$ 37,180
$ 8,115
$ 31,698
Gross Profit
-
25,524
(11,327)
17,249
Net Loss
(3,212,522)
(1,669,680)
(1,972,616)
(1,547,093)
Basic Loss Per Share
(0.03)
(0.01)
(0.01)
(0.01)
Year Ended December 31, 2005
Net Sales
$ -
$ -
$ -
$ -
Gross Profit
-
-
-
-
Net Loss
(686,845)
(591,514)
(1,065,266)
(1189,500)
Basic Loss Per Share
(0.01)
(0.00)
(0.01)
(0.01)
The first three quarters in the year ended December 31, 2007 and in the four quarters in the period ended December 31, 2006 have been restated.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosures Controls and Procedures
In order to ensure that the information we must disclose in our filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, we have formalized our disclosure controls and procedures. Our principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2007. Based on such evaluations, such officers have concluded that, as of December 31, 2007, our disclosure controls and procedures are not effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings.
See Management’s Report on Internal Control over Financial Reporting in Item 8, which is incorporated herein by reference.
ITEM 9B.
OTHER INFORMATION
None
60
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE COMPANY AND OTHER KEY EMPLOYEES
Set forth below are the names, ages as of March 31, 2008 and titles of the persons currently serving as Director, Executive Officers and Significant Employees of the Company:
DR. MALCOLM H. SKOLNICK has been the Chief Executive Officer and President of the Company since September 1, 1999. Prior to that time and for the last 30 years Dr. Skolnick was a Professor in the University of Texas Health Sciences Center at Houston. Dr. Skolnick received M.S. and Ph.D. degrees in physics from Cornell University and a J.D. from the University of Houston. Dr. Skolnick has conducted basic science and clinical research and is a patented inventor. He is licensed to practice law in Texas and is a registered patent attorney. He has practiced intellectual property law, been active in technology transfer and licensing activities and serves on the Boards of Southwest Health Technology Foundation, Citizens League for Environmental Action Now (CLEAN), and Frank Evans Center for Conflict Resolution and Responsible Community Designs (a private company).
MR. GREG S. TAYLOR was appointed CFO effective on September 1, 2007 and holds the position of Vice President of Finance and Administration. Mr. Taylor has served as Managing Director of Monterey Capital Partners, a private equity investment firm from 1996 to the present. From 2003 to 2005, Mr. Taylor was Vice President of Finance and Business Administration, Chief Financial Officer, at the College of Biblical Studies. Previously he served as a Vice President with the investment banking division of Sumitomo Trust and Banking and with Bunker Hill Associates, a merchant-banking firm. Mr. Taylor began his career as a CPA with Ernst and Whinney, a national public accounting firm and received a Bachelor of Business Administration and a Masters of Taxation both from Baylor University
DR. YIN CHEN earned this Ph.D. in Molecular Biology & Biochemistry at the University of Maine in 1996. Subsequently, he was a post-doctoral fellow at Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School. In 1999, he joined InGene, Inc. of Kansas City, MO as senior research scientist and then CytoGenix, as chief research scientist in February 2000. He is one of co-inventors of the Company’s proprietary ssDNA expression systems. He was appointed as Chief Scientific Officer and Vice President of Research and Development on November 7, 2001 and is Executive Secretary of the Scientific Advisory Committee.
DR. CINDEE EWELL brings a combination of scientific, legal, and intellectual property experience that is critical to securing and maintaining the legal protection of the technology as well as our Company agreement with outside third parties. Dr. Ewell holds a Bachelor of Science degree from Cornell University, a Doctor of Philosophy degree from the University of Texas Health Science Center at Houston, a Juris Doctorate from South Texas College of Law, and has over seven years of post-doctoral experience working in the Department of Cell Biology at Baylor College of Medicine. Dr. Ewell initially worked in the biotechnology industry as a microbiologist and then moved on into academics where she worked more as a cellular molecular biologist. Her legal expertise includes approximately three years law firm experience where she worked with large pharmaceutical and chemical clients in the areas of patent prosecution and freedom to operate.
61
DR. XIN XING TAN joined the Company on October 1, 2002 as a Senior Research Scientist. His responsibilities and expertise lay in the areas of DNA/RNA manipulation, cDNA library screening, gene expression regulation and Photosystem II protein complexes. Dr Tan graduated from Wuhan University in Wuhan, P.R. China. He attained his doctorate in biochemistry at the Chinese Academy of Sciences. Following graduation he maintained a position as an NIH Postdoctoral Fellow at Rice University before joining CytoGenix, Inc.
DR. FREDERIC KENDIRGI is a Senior Research Scientist bringing broad experience in eukaryotic gene expression as well as developing assays for protein detection/function and expression vectors in eukaryotic systems. Dr. Kendirgi earned his M.Sc. in Virology and Immunology in 1995 from the University of Quebec/INRS-Institut Armand-Frappier, Canada, and his Ph.D. in Biochemistry and Molecular Biology in 2000 from the University of Calgary, Canada. Following 4 years of postdoctoral studies in Cell biology at Washington University and Vanderbilt University. He is co-inventor of the synDNA™ technology and oversees manufacturing operations as well as the synDNA™ vaccine platform.
SCOTT E. PARAZYNSKI, M.D. Dr. Parazynski is a graduate of Stanford University and Stanford Medical School and pursued clinical training at the Brigham and Women's Hospital (Boston, MA) and emergency medicine residency training in Denver, CO. He has published articles in the field of space physiology and has expertise in human adaptation to stressful environments. Dr. Parazynski is a member of the Aerospace Medical Association, the American Society for Gravitational and Space Biology and has received numerous special honors, including the National Institutes of Health Pre-doctoral Training Award in Cancer Biology, NASA Graduate Student Researcher's Award and Research Honors Award from Stanford Medical School. Dr. Parazynski has been an astronaut since 1992 and has logged over 262 hours in space. He first flew in 1994 on the Atmospheric Laboratory for Applications and Science (ATLAS-3) mission, which was part of an on-going program to determine the Earth's energy balance and atmospheric change over an 11-year solar cycle. During this mission, he and his crewmates also evaluated the Interlimb Resistance Device, a free-floating exercise he developed to prevent musculoskeletal atrophy in microgravity.
CY A. STEIN, M.D., PH.D. Dr. Stein is currently Professor of Medicine, Urology and Molecular Pharmacology in the Oncology Department of Albert Einstein College of Medicine, New York. In addition to his clinical and faculty activities, he is co-editor-in-chief of Oligonucleotides, sits on seven editorial advisory boards, serves on eight scientific advisory boards and is an ad hoc reviewer for numerous peer reviewed journals. He has authored 115 peer reviewed journal articles. He has written 75 book chapters, reviews and editorials, and he holds 13 patents issued and a patent pending. He attended Brown University (BA), Stanford University (PhD in Organic Chemistry), Albert Einstein College of Medicine (MD), and New York Hospital-Cornell Medical Center (Internship and Residency in Internal Medicine). Dr Stein was a Clinical Associate and Senior Staff Fellow at The National Cancer Institute, Bethesda, Maryland.
62
JOHN J. ROSSI, PH.D., Associate Director for Laboratory Research, City of Hope Comprehensive Cancer Center. Dr. Rossi began his employment with City of Hope (COH) in 1980 as an assistant research scientist in the Department of Molecular Genetics. He was promoted to chairman of the Division of Biology in 1992. In 1993, COH bestowed its highest honor upon him by naming him to its Gallery of Medical and Scientific Achievement for his pioneering work at the molecular level in the battle against AIDS and other major diseases. In 1998, Dr. Rossi was appointed as the Dean of the City of Hope Graduate School of Biological Sciences. Dr. Rossi is an expert in ribozymes (molecular scissors). One of his most notable projects is in the area of ribozyme research in AIDS. He led the research team that first suggested applying ribozymes to treat HIV. His research in molecular genetics and microbiology has resulted in eight patents being granted and has served as the basis for more than 120 scientific papers. Dr. Rossi received his bachelor's degree from the University of New Hampshire and earned his doctorate at the University of Connecticut. Prior to his working at COH, Dr. Rossi completed four years of post Ph.D. training at Brown University in Providence, Rhode Island.
RAYMOND L. OCAMPO JR. has served as President and Chief Executive Officer of Samurai Surfer LLC, a private consulting and investment company, since April 2004. Since 1997 Mr. Ocampo has been a member of the board of directors of several companies and is currently a member of the board of directors of H5 Technologies, Intraware, Inc., Keynote Systems, Inc. and PMI Group, Inc. Mr. Ocampo co-founded the Berkeley Center for Law & Technology and served as Executive Director from August 1997 through December 1999. He was Senior Vice President, General Counsel and Secretary at Oracle Corporation from September 1990 until his retirement in November 1996. Mr. Ocampo joined Oracle in July 1986 and held various senior and executive positions with Oracle until retirement. Before joining Oracle, Mr. Ocampo was in the private practice of law for ten years at several law firms in San Francisco, California. He was the 2001-02 Chair of the American Bar Association's Section of Science & Technology Law and a past chair of numerous ABA committees involving technology. He is the author and co-author, respectively, ofSurfing the Law and Technology Tsunami andNegotiating and Drafting Software Consulting Agreements. Mr. Ocampo is a graduate of UCLA and Boalt Hall School of Law at U.C. Berkeley.
The Company has adopted a Code of Ethics and Business Conduct that applies to the Company’s principal executive officers, the principal financial officer and the principal accounting officer or the controller as well as to all employees.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the Company’s Proxy Statement.
63
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Item 12 of Form 10-K is incorporated herein by reference to the Company’s Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K is incorporated herein by reference to the Company’s Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference to the Company’s Proxy Statement.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(A)
(1) AND (2) Financial Statements and Financial Statement Schedules See “Index to Consolidated Financial Statements” on page F-1
(A)
(3) EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION
3.1
--Articles of Incorporation of Cryogenic Solutions, Inc.
(incorporated by reference to exhibit 3.1 to the registrant’s
registration statement on Form 10-SB, as amended
(File No. 000-26807), filed with the Securities & Exchange
Commission (“SEC”) initially on July 23, 1999 the (“Form 10-SB”)).
3.2
--Certificate of Amendment dated November 1, 1995 of Articles of
Incorporation of Cryogenic Solutions, Inc. (incorporated by re-
ference to exhibit 3.2 of the Form 10-SB).
3.3
--Certificate of Amendment dated January 13, 2000 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
exhibit 3.3 of the Form 10-SB).
3.4
--Certificate of Amendment dated March 7, 2001 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
Annex II of the definitive proxy statement on Schedule 14A filed
with the SEC on December 23, 2003).
3.5
--Certificate of Amendment dated April 6, 2004 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
Exhibit 3.5 to the registrant’s Form 10-KSB for the year ended
December 31, 2003 filed with the SEC on April 14, 2004).
64
3.6
--Bylaws of Cryogenic Solutions, Inc (incorporated by reference to
exhibit 3.4 of the Form 10-SB).
3.7
--Amendments to Bylaws of CytoGenix, Inc. (incorporated by
reference to Annex I of the definitive proxy statement on
Schedule 14A filed with the SEC on December 23, 2003).
10.1+
--Employment Agreement dated January 1, 2005 between
CytoGenix, Inc. and Malcolm H. Skolnick (incorporated
by reference to exhibit 10.1 of the Form 10-K/A for
Year ended December 31, 2005 filed with the SEC Inc. on
April 21, 2006).
10.2
--License Agreement dated February 3, 2000, between CytoGenix,
Inc. and PharmaGenix, LLC. (incorporated by reference to
exhibit 10.3 of the Form 10-SB).
10.3
--Technology Transfer Agreement dated June 26, 1998 between
Cryogenic Solutions, Inc. and InGene, Inc. (incorporated by
reference to exhibit 10.4 of the Form 10-SB)
10.4
--Sponsored Research Agreement between CytoGenix, Inc. and
Baylor College of Medicine as of March 1, 2000 (incorporated
by reference to exhibit 10.7 of the Form 10-SB).
10.5+
--Stock Option Plan (incorporated by reference to Annex III of
the definitive proxy statement on schedule 14A filed with the
SEC on December 23, 2003).
10.6+
--Stock Option Plan (incorporated by reference to Annex I of the
definitive proxy statement on schedule 14A filed with the
SEC on June 17, 2005).
10.7
--Supply Agreement dated March 22, 2006, between CytoGenix,
Inc. and GE Healthcare Bio-Science Corporation (incorporated
by reference to Exhibit 10 to the registrant’s current report on
Form 8-K filed with the SEC on March 28, 2006).
31.1
--Certifications of Principal Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, the “Act”.
31.2
--Certifications of Principal Financial Officer pursuant to Rule
13a-14(a) of the Act”.
32.1
--Certifications of Principal Executive Officer pursuant to 18
U.S.C. Section 1350.
32.2
--Certifications of Principal Financial Officer pursuant to 18
U.S.C. Section 1350.
-------------------------------------
+ Management contract or compensatory plan or arrangement.
65
SIGNATURES
In accordance with Section 13 or 15(d) Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYTOGENIX, INC.
By: /s/ Malcolm Skolnick
-------------------------------------------------------
MALCOLM SKOLNICK, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: April 14, 2008
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.
Date: April 14, 2008
By:
/s/ Malcolm Skolnick
-------------------------------------------------------
MALCOLM SKOLNICK, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR)
Date: April 14, 2008
By:
/s/ Raymond L Ocampo, Jr.
-------------------------------------------------------
RAYMOND L. OCAMPO, JR.
DIRECTOR
Date: April 14, 2008
By:
/s/ Scott E. Parazynski
-------------------------------------------------------
SCOTT E. PARAZYNSKI
DIRECTOR
Date: April 14, 2008
By:
/s/ Cy A. Stein
-------------------------------------------------------
CY A. STEIN
DIRECTOR
Date: April 14, 2008
By:
/s/ John J. Rossi
-------------------------------------------------------
JOHN J. ROSSI
DIRECTOR
Date: April 14, 2008
By:
/s/ Greg S. Taylor
-------------------------------------------------------
GREG S. TAYLOR
CHIEF FINANCIAL OFFICER
66
