UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ____________.
Commission file number: 0-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0484097
------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification 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
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 whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Accelerated Non-accelerated Smaller reporting
filer [ ] filer [ ] filer [ ] company [X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the issuer's common stock, par
value $.001 per share, as of August 29, 2008 was 152,946,843.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of June 30, 2008 (Unaudited)
and December 31, 2007 3
Statements of Operations for the three and six months
ended June 30, 2008 and 2007 (Unaudited) 4
Statements of Cash Flows for the six months ended
June 30, 2008 and 2007(Unaudited) 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17
ITEM 4. Controls and Procedures 17
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
ITEM 6. Exhibits 19
SIGNATURES 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CYTOGENIX, INC.
BALANCE SHEETS
June 30, December 31,
2008 2007
(Unaudited)
ASSETS ------------ ------------
Current Assets:
Cash $ 25,384 $ 162, 042
Inventory 227,481 252,144
Receivables and other current assets 24,968 44,292
------------ ------------
Total Current Assets 277,833 458,478
Property and equipment, net 206,206 237,354
Deposits 6,399 6,399
Long-term investments - restricted -- 53,402
------------ ------------
Total Assets $ 490,438 $ 755,633
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Long-term debt, current portion $ -- $ 27,678
Accounts payable 772,169 388,463
Accrued expenses 1,756,515 1,532,344
------------ ------------
Total Current Liabilities 2,528,684 1,948,485
Long-term debt, less current portion -- 17,336
------------ ------------
Total Liabilities 2,528,684 1,965,821
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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,
152,946,843 and 146,309,719 share issued and outstanding
as of June 30, 2008 and December 31, 2007, respectively 152,947 146,310
Additional paid-in capital 38,162,135 36,999,514
Treasury stock (629,972) (629,972)
Accumulated deficit (39,723,356) (37,726,040)
------------ ------------
Total Stockholders' Deficit (2,038,246) (1,210,188)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 490,438 $ 755,633
============ ============
The accompanying notes are an integral part of these financial statements.
3
CYTOGENIX, INC.
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDING JUNE 30, 2008 AND 2007
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------- ------------- ------------- -------------
(Restated) (Restated)
REVENUES $ 15,188 $ 39,459 $ 28,348 $ 39,459
COSTS OF REVENUES 8,012 12,248 18,366 12,248
------------- ------------- ------------- -------------
GROSS MARGIN 7,176 27,211 9,982 27,211
COSTS AND EXPENSES:
Research and
development 290,506 460,545 537,925 1,326,825
General and
administrative 786,100 552,441 1,340,665 1,251,157
Consulting expense 14,474 20,743 66,483 28,774
Depreciation and
amortization 15,288 16,442 31,148 31,884
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (1,099,192) (1,022,960) (1,966,239) (2,611,429)
OTHER INCOME:
Interest income -- 11,579 517 13,132
Interest expense (14,869) (1,851) (31,594) (3,473)
------------- ------------- ------------- -------------
NET LOSS $ (1,114,061) $ (1,013,232) $ (1,997,316) $ (2,601,770)
============= ============= ============= =============
Net loss per share:
Basic and diluted
net loss per share $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted average shares
outstanding:
Basic and diluted 149,159,551 140,663,961 147,884,162 140,663,961
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
CYTOGENIX, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDING JUNE 30, 2008 AND 2007
(UNAUDITED)
2008 2007
(Restated)
OPERATING ACTIVITIES: ----------- -----------
Net Loss $(1,997,316) $(2,601,770)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 31,148 31,884
Share-based compensation expense 638,472 546,499
Accrued interest income on long-term investment-
restricted -- (3,124)
Changes in assets and liabilities:
Receivables and other current assets 19,324 (54,973)
Inventory 24,663 97,075
Accounts payable 383,706 (44,746)
Accrued expenses 553,957 244,598
----------- -----------
Net cash used in operation activities (346,046) (1,784,557)
----------- -----------
INVESTING ACTIVITIES:
Proceeds from restricted long term
Investment 53,402 --
Purchase of property and equipment -- (33,336)
Payments for deposit on building contract (300,000) (245,589)
----------- -----------
Net cash used in investing activities (246,598) (278,925)
----------- -----------
FINANCING ACTIVITIES:
Payment on notes payable (45,014) (12,283)
Proceeds from notes payable related party 300,000 --
Proceeds from stock subscriptions 201,000 --
----------- -----------
Net cash provided by (used in) financing activities 455,986 (12,283)
----------- -----------
NET CHANGE IN CASH (136,658) (2,075,765)
CASH, beginning of period 162,042 2,854,197
----------- -----------
CASH, end of period $ 25,384 $ 778,432
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,808 $ 1,851
Income taxes paid $ -- $ --
NONCASH TRANSACTIONS:
Note payable converted
to common stock $ 329,786 $ --
The accompanying notes are an integral part of these financial statements.
5
CYTOGENIX, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of CytoGenix, Inc.
("CytoGenix"or the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules of
the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
CytoGenix's latest annual report filed with the SEC on Form 10K. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosure contained in the audited
financial statements for fiscal year ended December 31, 2007, as reported in the
Form 10K/A, have been omitted.
NOTE 2 - RELATED PARTY TRANSACTION
The Company entered into a loan agreement dated January 7, 2008 to borrow money
from KV Mechanical Construction and Restoration Company, Inc. KV Mechanical
Construction and Restoration Company, Inc. is a significant shareholder of the
Company owning approximately 6.1% of the Company's common stock. The principal
amount of the loan is $300,000 with an annual interest rate of 24%. Maturity
date of the note is ten days of closing on the proposed facility or as the
parties agree. Repayment of the loan may be in cash or restricted stock of the
borrower at the average closing price over the past five business days, but no
less than $0.12 per share by mutual consent of both parties. In the event there
is no consent, then payment will be in cash. In June 2008, KV Mechanical
Construction and Restoration Company, Inc. elected to convert its loan of
$300,000 and accrued interest of $29,786 to 2,638,291 shares of the Company's
common stock.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
CytoGenix is obligated, per employment agreements, to deliver cash bonuses after
year end based on the increase in average share price of the Company's common
stock from the last 20 trading days of 2008 compared to the last 20 trading days
of 2007. This bonus is payable when the stock appreciation is at least 15%. The
Company has accrued no bonus amount in the first six months of 2008 based on the
Company's common stock price as of June 30, 2008.
During the first quarter of 2008, the Company initiated negotiations and
tentatively agreed to terms with GE Healthcare Bio-Sciences Corp ("GEHC"), to
amend its original Supply Agreement entered into on March 24, 2006, and first
amended June 11, 2007, for the purchase of customized kits and reagents used in
the manufacture of its proprietary synDNATM products. The terms of the amendment
call for the Company to purchase a minimum of two custom kits at $80,000 each
prior to December 31, 2008; and maintains the Company's obligation to pay
various royalty percentages based on revenue derived from the Company's sale of
synDNA products. The second amendment was executed on April 28, 2008.
6
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.
On June 30, 2008, CytoGenix, Inc. (the "Company"), Lawrence Wunderlich and Frank
Vazquez entered into a Settlement Agreement and Mutual Release (the "Settlement
Agreement") regarding arbitration No. 70 144 08333 06, styled Frank Vazquez and
Lawrence Wunderlich v. CytoGenix, Inc., before the American Arbitration
Association in Houston, Texas, (the "Arbitration"). Pursuant to the Settlement
Agreement, all claims of Messrs. Vazquez and Wunderlich against the Company, and
all claims of the Company against each of Messrs. Vazquez and Wunderlich have
been released, acquitted and forever discharged. The Settlement Agreement
obligates the Company to issue to (i) Mr. Wunderlich warrants to acquire, on or
before June 30, 2011, 1,066,666 shares, 1,066,667 shares and 1,066,667 shares of
the Company's common stock at exercise prices of $0.05, $0.10 and $0.15,
respectively, and (ii) Mr. Vazquez warrants to acquire, on or before June 30,
2011, 666,666 shares, 666,667 shares and 666,667 shares of the Company's common
stock at exercise prices of $0.05, $0.10 and $0.15, respectively. Under the
Settlement Agreement the Company is also obligated to pay $150,000 each to
Messres. Vazquez and Wunderlich in equal monthly installments ($3,125 per month
to each) over a four-year period commencing October 1, 2008.
In a letter from the Department of Labor - Occupational Safety and Health
Administration ("OSHA") dated June 30, 2008 addressed to Lawrence Wunderlich,
Mr. Wunderlich was informed that OSHA approved the Settlement Agreement and was
"closing the investigation of the . . . complaint" previously filed by Mr.
Wunderlich with OSHA under Section 806 of the Corporate and Criminal Fraud
Accountability Act, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1514A.
NOTE 4 - STOCK-BASED COMPENSATION
Employee Stock-Based Compensation
At June 30, 2008, the Company had two stock-based compensation plans, the 2003
stock option plan and the 2005 stock option plan. The Company accounts for these
plans in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment" SFAS
123 (R), which requires companies to recognize the costs of awards of equity
instruments, such as stock options and restricted stock, based on the fair value
of those awards at the date of grant. The Company adopted the SFAS 123 (R)
effective January 1, 2006 using the modified prospective method.
The following compensation expense was recorded for the six months ended June
30, 2008, which includes $118,299 associated with the issuance of 2,000,000
options in the second quarter of 2008 to Directors in exchange for the return of
117,000 shares previously issued to them as Director compensation:
Research and development $ 31,814
General and administrative 345,939
----------
Stock-based compensation $ 388,753
----------
7
We used the Black-Scholes option-pricing model ("Black-Scholes model") to value
our stock options with the following assumptions:
Volatility 116% to 250%
Risk-Fee Interest Rate 1.86% to 4.50%
Dividend Yield 0.00%
Expected Term (years) 10.00
A summary for our stock-based compensation activity for the six months ended
June 30, 2008 is presented below:
Average Aggregated
Average Life Fair
Options Price (1) (years)(2) Value
----------- ----------- ----------- -----------
Outstanding at December 31, 2007 24,286,000 $ 0.48 6.85 $11,059,071
Granted 2,000,000 0.06 10.00 120,000
Exercised -- -- --
Forfeited/expired -- -- --
----------- ----------- ----------- -----------
Outstanding at June 30, 2008 26,286,000 $ 0.43 7.28 $11,179,071
=========== =========== =========== ===========
Exercisable at June 30, 2008 24,019,333 $ 4.4 7.28 $10,567,071
(1) Weighted-average exercise price
(2) Weighted-average contractual life remaining
NOTE 5 -WARRANTS
On June 30, 2008, the Company issued warrants to former employees, as part of
the settlement agreement discussed in Note 3, to purchase 5,200,000 shares of
our common stock with an exercise price equal to $0.05 per share for 1,733,332
of the warrants, $0.10 per share for 1,733,334 of the warrants and $0.15 per
share for the remaining 1,733,334 warrants. These options vested immediately and
have a term of three years. We estimated the fair value of these options using
the Black-Scholes method with assumptions including: (1) term of three years;
(2) a computed volatility rate of 152%; (3) a discount rate of 2.91% and (4)
zero dividends. The fair value of these warrants was estimated to be $196,849
and is included in general and administrative expenses for the six months ended
June 30, 2008.
8
Summary of warrant and option information at June 30, 2008 is as follows:
Weighted
Avg. Outstanding
Exercise Beginning of Forfeitures Outstanding End
Price Period New Grants and Cancellations Exercises of Period
----- ------ ---------- ----------------- --------- ---------
Year ended
December 31, 2007 - - - - -
2008 Activity:
2008 Grants $0.05 1,733,332 - - 1,733,332
2008 Grants $0.10 1,733,334 - - 1,733,334
2008 Grants $0.15 1,733,334 - - 1,733,334
---------------------------------------------------------------------------------------
June 30, 2008 $0.10 - 5,200,000 - - 5,200,000
---------------------------------------------------------------------------------------
NOTE 6 - DEFAULT NOTICE
On March 20, 2008, the Company received notice of termination of its
construction contract with GSL Construction Contractors, Ltd. ("GSL") under the
terms of an earnest money contract it had entered into for the construction of a
new office and lab facility. Accordingly, the Company's earnest money deposits
and change order payments were forfeited. Forfeited deposits and payments
included $901,160 made as of December 31, 2007, as well as an additional payment
of $300,000 made in January 2008. Based on the Company's determination of the
possibility of loss and the subsequent notice of termination, the Company
recorded an impairment loss of $1,201,160 associated with the contract for the
year ended December 31, 2007.
NOTE 7 - COMMON STOCK
In the six months ended June 30, 2008, the Company issued 101,250 shares at a
price of $0.16 per share as part of its November 30, 2007 private placement. In
addition, the Company received $201,000 for 3,297,917 common shares. Also, the
Company issued 249,999 shares with a value of $40,000 for services rendered to
outside consultants (83,333 shares were issued each to TMS Investments, Inc.,
Harris Forbes, Inc., and Chasseur Corporation). Also the Company issued
2,638,291 shares for the conversion of a note payable and accrued interest
totaling $329,786.
On April 14, 2008, the Company issued 750,000 shares of common stock to BioXcel
Corporation in exchange for services valued at $45,000.
9
NOTE 8 - RESTATEMENT
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 SEC
disagreed with this position and requested the Company restate its financial
statements and associated disclosures to include compensation cost assuming the
options were exercisable as they vest. The error resulted in the understatement
of non-cash expenses and a corresponding understatement of net loss of
$2,772,670 in the six months ending June 30, 2007. The restatement impacted
certain line items within cash flow 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 sheet,
statement of operations or the net decrease in cash and cash equivalents
reported in the statements of cash flows for any periods reported prior to March
31, 2007.
The effect of the restatement on specific items in the statement of operations
is as follows:
June 30, 2007
--------------------------------------------
As Previously
Reported Adjustments As Restated
------------ ------------ ------------
COSTS AND EXPENSES:
Research and development $ 2,458,374 $ (1,131,549) $ 1,326,825
General and administrative 2,892,278 (1,641,121) 1,251,157
LOSS FROM OPERATIONS (5,384,099) 2,772,670 (2,611,429)
NET LOSS (5,374,440) 2,772,670 (2,601,770)
10
The effect of the restatement on specific items in the statement of cash flows
is as follows:
June 30, 2007
--------------------------------------------
As Previously
Reported Adjustments As Restated
OPERATING ACTIVITIES: ------------ ------------ ------------
Net Loss $(5,374,440) $ 2,772,670 $(2,601,770)
Adjustments to reconcile net loss to net
cash
Share-based compensation expense 3,319,169 (2,772,670) 546,499
Net cash used in operating activities (1,784,557) -- (1,784,557)
NOTE 9 - SUBSEQUENT EVENTS
On July 3, 2008, the Company issued 3,000,000 warrants to its Vice President -
Legal Counsel that become vested immediately, have an exercise price of $0.06
and expire on July 3, 2018 if not exercised by such date.
On August 9, 2008, the Board of Directors appointed Randy Moseley as a member of
the Board of Directors.
On August 18, 2008, Malcolm Skolnick resigned as President, Chief Executive
Officer and director of the company. Also on this same date Raymond L. Ocampo,
Jr. and Scott Parazynski, MD, resigned as members of the Board of Directors.
On August 18, 2008, Randy Moseley, a member of the Company's Board of Directors,
was elected Interim Chief Executive Officer and Chairman of the Board.
On August 18, 2008, the Company's Board of Directors approved the Company
signing a bridge loan agreement for up to $900,000 with Certain
Lenders("Lenders") upon certain conditions precedent being met by the Company.
On September 2, 2008, the United States Patent and Trademark Office issued the
Company Patent No. US 7,419,964 for the Company's US Patent Application No.
10/313,828. This patent covers the ssDNA ICP4 expression vector acting as the
active ingredient in the Company's topical anti-Herpes preparation.
On September 18, 2008, the Board of Directors appointed Randy Moseley as the
Company's Principal Financial Officer.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
IN ACCORDANCE WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT CERTAIN STATEMENTS IN THIS
FORM 10-Q WHICH ARE FORWARD-LOOKING AND WHICH PROVIDE OTHER THAN HISTORICAL
INFORMATION, INVOLVE RISKS AND UNCERTAINTIES THAT MAY IMPACT THE COMPANY'S
RESULTS OF OPERATIONS. THESE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
STATEMENTS CONCERNING THE COMPANY'S GENERAL BUSINESS STRATEGIES, FINANCING
DECISIONS, AND EXPECTATIONS FOR FUNDING CAPITAL EXPENDITURES AND OPERATIONS IN
THE FUTURE. WHEN USED HEREIN, THE WORDS "BELIEVE," "PLAN," "CONTINUE," "HOPE,"
"ESTIMATE," "PROJECT," "INTEND," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, NO STATEMENTS CONTAINED IN THIS FORM 10-Q SHOULD BE
RELIED UPON AS PREDICTIONS OF FUTURE EVENTS. SUCH STATEMENTS ARE NECESSARILY
DEPENDENT ON ASSUMPTIONS, DATA OR METHODS THAT MAY BE INCORRECT OR IMPRECISE AND
MAY BE INCAPABLE OF BEING REALIZED. THE RISKS AND UNCERTAINTIES INHERENT IN
THESE FORWARD-LOOKING STATEMENTS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPRESSED IN OR IMPLIED BY THESE STATEMENTS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
INFORMATION CONTAINED IN THIS FORM 10-Q IS BELIEVED BY THE COMPANY TO BE
ACCURATE AS OF THE DATE HEREOF. CHANGES MAY OCCUR AFTER THAT DATE, AND THE
COMPANY WILL NOT UPDATE THAT INFORMATION EXCEPT AS REQUIRED BY LAW IN THE NORMAL
COURSE OF ITS PUBLIC DISCLOSURE PRACTICES.
IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THE EXPECTATIONS REFLECTED IN ANY FORWARD-LOOKING STATEMENT HEREIN INCLUDE AMONG
OTHER THINGS: (1) THE ABILITY OF THE COMPANY TO PENETRATE THE MARKET WITH ITS
CURRENT THERAPEUTIC PRODUCTS AGAINST LARGER, WELL-FINANCED COMPETITORS WITHIN
THE MARKETPLACE; (2) THE ABILITY OF THE COMPANY TO GENERATE REVENUES IS
SUBSTANTIALLY DEPENDENT UPON CONTINUED RESEARCH AND DEVELOPMENT FOR, AND FDA
APPROVAL OF, THERAPEUTIC PRODUCTS; (3) THE ABILITY OF THE COMPANY TO ATTRACT AND
RETAIN KEY OFFICERS, KNOWLEDGEABLE SALES AND MARKETING PERSONNEL AND HIGHLY
TRAINED TECHNICAL PERSONNEL; (4) THE ABILITY OF THE COMPANY TO OBTAIN ADDITIONAL
FINANCING FROM PUBLIC AND PRIVATE EQUITY MARKETS TO FUND OPERATIONS AND FUTURE
GROWTH; AND (5) THE ABILITY OF THE COMPANY TO GENERATE REVENUES TO COVER
OPERATING LOSSES AND POSITION THE COMPANY TO ACHIEVE POSITIVE CASH FLOW.
12
Company Overview
CytoGenix has developed down regulation and gene silencing technologies
comprising a set of techniques which can either prevent a gene from expressing
the protein for which it is encoded or interact with the target protein to
change or inhibit its function. These techniques are based on the use of single
stranded DNA (ssDNA) expression vectors for production of specifically designed
strings of single stranded DNA (oligos) inside a cell which can be useful in
triplex, antisense, DNA enzyme and aptameric applications. Triplex applications
are those where a designed sequence of ssDNA binds to a specific location in the
duplex DNA of the genome which can inhibit a promoter or expression of a target
gene and prevent gene expression. In some antisense applications, the expression
vector makes a specific ssDNA sequences that binds to a complementary target
mRNA's and prevents the production of the encoded protein. When this antisense
sequence binds to the targeted mRNA it prevents mRNA from being "read" by a
ribosome. This antisense approach can be modified so that internally produced
ssDNA sequence contains an additional DNA enzyme sequence in the central region
of the ssDNA sequence which can degrade the target mRNA after the sequence binds
to the targeted mRNA and prevents further translation. Aptamers are ssDNA
sequences that directly bind to the target proteins to inhibit their function.
The Company has coordinated and performed experiments utilizing all these
applications. The results appear in scientific publications in peer reviewed
journals as well as in patent applications, some of which have been granted or
allowed.
The Company's early research and development on ssDNA expression vectors was
dependent upon the use of DNA plasmids produced using bacterial fermentation
techniques. The Company looked for alternatives and developed a process for
producing enzymatically biosynthesized DNA (synDNA(TM)) without using bacterial
fermentation. The bacteria-free process for making and purifying therapeutic
quality DNA is proprietary to the Company. The Company believes the combination
of, rapid manufacture, and regulatory advantages associated with endotoxin-free
and bacteria-free production may make our production process more desirable than
that of plasmid DNA. The Company is currently generating minimal revenues from
synDNA(TM) sales.
The Company has used it's enzymatically biosynthesized DNA process to develop
DNA vaccines. Tests comparing the efficacy of various DNA vaccines made with
synDNA(TM) to conventional, bacteria-grown plasmids have demonstrated synDNA(TM)
products are equivalent to or more effective than these conventional plasmids in
some cases. These tests have included targets such as HIV, Hepatitis B virus,
Smallpox, as well as seasonal and avian flu. The Company has entered a
Cooperative Research and Development Agreement with the United States Department
of Agriculture (USDA) to develop a DNA vaccine against Brucellosis and with the
United States Army Medical Research Institute for Infectious Diseases (USAMRIID)
to develop DNA vaccines against ebola and equine encephalitis. The Company is
pursuing cooperative agreements with the federal government especially in the
bio-terror and pandemic threat areas.
The Company is subject to risks common to biopharmaceutical companies, including
risks inherent in its research and development efforts and clinical trials,
reliance on collaborative partners, enforcement of patent and proprietary
rights, the need for future capital, potential competition and uncertainty in
obtaining required regulatory approval. In order for a product to be
commercialized, it will be necessary for the Company and its collaborators to
conduct pre-clinical tests and clinical trials, demonstrate efficacy and safety
of the Company's product candidates, obtain regulatory clearances and enter into
distribution and marketing arrangements either directly or through sublicenses.
From the Company's inception through the date of this document, the major role
of management has been to obtain sufficient funding for required research,
monitoring research progress and to develop and license intellectual property.
13
Results of Operations
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007.
- --------------------------------------------------------------------------------
For the three months ended June 30, 2008, we reported a net loss of
$1,114,061, or less than one cent per share, and revenue of $15,188 as compared
with a net loss of $1,013,232, or less than one cent per share, and revenue of
$39,459 for the three months ended June 30, 2007. Revenue for the three months
ended June 30, 2008 and 2007 resulted from the sale of synDNA.
Research and Development Expenses. Research and development expenses
decreased to $290,506 for the second quarter of 2008 as compared to $460,545
during the same period in 2007 due primarily to a decrease of approximately
$81,000 in payroll related expenses as the result of having fewer employees in
2008, and a decrease of $65,100 in the cost of DNA materials and lab supplies as
the Company's research and development activities declined in 2008 due to the
lack of funds.
General and Administrative Expenses. General and administrative
expenses increased to $786,100 for the second quarter of 2008 compared to
$552,441 for the same period in 2007 primarily due to the increases of
approximately $389,605 in expense recorded for options and warrants issued
during 2008(of which approximately $223,197 related to the settlement with two
former executive officers), $23,800 in accounting related expenses and $20,000
in investor relations expenses and decreases of $136,522 in legal fees,
primarily due to the settling of the Sarbanes-Oxley whistleblower complaint and
an arbitration complaint filed by two former executive officers in 2007, and
$71,200 in payroll and board of directors expenses.
Consulting Expenses. Consulting expenses decreased to $14,474 for the
second quarter of 2008 compared to $20,743 for the same period in 2007. This
decrease was due to a reduction in the costs of financial consultants retained
to advise the Company regarding financing options.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased to $15,288 for the second quarter of 2008 compared to $16,442
for the same period in 2007 due primarily to there being no equipment purchased
during this period and some of the older equipment reaching the fully
depreciated stage.
Interest Expense. Interest expense increased approximately $13,018 to
$14,869 for the second quarter of 2008 compared to $1,851 for the same period in
2007 due to a loan from a related party.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007.
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For the six months ended June 30, 2008, we reported a net loss of
$1,997,316, or less than one cent per share, and revenue of $28,348 as compared
with a net loss of $2,601,770, or less than one cent per share, and revenue of
$39,459 for the six months ended June 30, 2007. Revenue for the six months ended
June 30, 2008 and 2007, respectively resulted from the sale of synDNA.
14
Research and Development Expenses. Research and development expenses
decreased to $537,925 for the six months ended June 30, 2008 as compared to
$1,326,825 during the same period in 2007 due to a decrease of approximately
$355,000 in equity award expenses in 2008. The cost of DNA materials and lab
supplies declined by approximately $105,000 in the six months ended June 30,
2008 from the same period in 2007. The payroll expenses related to R&D declined
by approximately $81,000 in 2008 as the number of employees decreased in 2008.
Additionally, R&D consulting expenses declined by approximately $99,000 in 2008
compared to the same period in 2007. R&D consulting expenses in 2007 were
incurred to with improve the production process for the manufacture of synDNA.
General and Administrative Expenses. General and administrative
expenses increased to $1,340,665 for the six months ended June 30, 2008 compared
to $1,251,157 for the same period in 2007 primarily due to the increase in
auditing and investor relations expenses.
Consulting Expenses. Consulting expenses increased to $66,483 for the
six months ended June 30, 2008 compared to $28,774 for the same period in 2007.
This increase was due to costs of financial consultants retained to advise the
Company regarding financing options.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased to $31,148 for the six months ended June 30, 2008 compared to
$31,884 for the same period in 2007 due primarily to there being no equipment
purchased during this period and some of the older equipment reaching the fully
depreciated stage.
Interest Expense. Interest expense increased approximately $28,121 to
$31,594 for the six months ended June 30, 2008 compared to $3,473 for the same
period in 2007 due to a loan from a related party.
Liquidity and Capital Resources
We had minimal revenues for the three months and six month periods ended June
30, 2008 and 2007.
Our working capital deficit increased by $760,844 to ($2,250,851) at June 30,
2008 compared to ($1,490,007) at December 31, 2007. This deficit is primarily
due to lack of revenues while we are continuing to incur ordinary research and
development and operating expenses.
Our cash flows from operations were negative during the six months ended June
30, 2008 and 2007, respectively, due to our lack of revenues and the
continuation of research and development and operating costs. Our primary
funding sources during the six months ended June 30, 2008 came from $300,000 in
related party loans and $201,000 from stock subscriptions. Also there were
repayments on debt of $45,014. The resulting cash provided by financing
activities was $455,986.
We consumed $346,046 in cash from operating activities for the six months ended
June 30, 2008 compared with $1,784,557 for the six months ended June 30, 2007.
We had a net loss of $1,114,061, $1,013,232, $1,997,316, and $2,601,770 or
$0.01, $0.01, $0.01, and $0.02 per share for the three and six months ended June
30, 2008 and 2007, respectively.
15
Our financial statements are prepared using principles applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. However, we do not have
significant cash or other material liquid assets, nor do we have an established
source of revenue sufficient to cover our operating costs and to allow us to
continue as a going concern. We may, in the future, experience significant
fluctuations in our results of operations. If we are required to obtain
additional debt and equity financing or our illiquidity could suppress the value
and price of our shares if and when trading in those shares develops. However,
our future offerings of securities may not be undertaken, and if undertaken, may
not be successful or the proceeds derived from these offerings may be less than
anticipated and/or may be insufficient to fund operations and meet the needs of
our business plan. Our current working capital is not sufficient to cover
expected cash requirements for 2008 or to bring us to a positive cash flow
position. If we do not raise sufficient capital to execute our business plan, it
is possible that we will not be able to continue as a going concern.
The Company is currently operating at a loss and will continue to require equity
financing until it develops revenue from payments earned under future product
development joint ventures, licensing agreements, and royalties. The process of
developing the Company's future products will require hiring of additional
personnel, significant expenses associated with additional research and
development, preclinical testing and clinical trials, as well as processes
directly related to attaining regulatory approvals. These activities, together
with the Company's general and administrative expenses, are expected to result
in operating losses for at least two more years. The Company will not receive
product revenue from therapeutic and vaccine products unless it completes
clinical trials and successfully commercializes or arranges for the
commercialization of one or more products, the accomplishment of which no
assurance can be given.
We are attempting to raise additional capital through bridge loans and sales of
common stock either through private placements or public offerings, as well as
seeking other sources of funding. There are no assurances that the Company will
be able to achieve a level of revenues adequate to generate sufficient cash flow
from operations or obtain the additional financing through private placements or
public offerings to support the investment in the Company's technologies. It is
possible that additional equity financing will be highly dilutive to existing
shareholders. If these funds are not available the Company may not continue its
operations or execute its business plan.
Intellectual Property Matters:
In the quarter ended March 31, 2008, CytoGenix expanded its enforceable patent
rights in the foreign markets with grant of a patent on the original ssDNA
expression technology in Australia. The Company also filed an International
(PCT) patent application on its avian flu synDNASM vaccine, providing the basis
for individual patent applications in selected foreign countries. The Company
has also received an official US patent allowance on its anti-herpes therapeutic
(SimplivirTM) which is expected to issue in the second quarter of 2008, and has
filed a US divisional patent application on some of this technology in an
attempt to extend the term of protection on some of this allowed technology. The
Company's patent holdings currently comprise a total of 69 patents or patent
applications. We currently have 14 granted patents (US and foreign) pertaining
to our synDNA(TM) in vivo expression technology and 55 additional (US and
foreign) pending patent applications which cover various aspects of our single
stranded DNA expression vectors, including therapeutics for herpes infections
and anti-bacterials, as well as our synDNA(SM) technology platform including
various applications of synDNA(SM) - based vaccines.
16
On September 2, 2008, the United States Patent and Trademark Office issued the
Company US Patent 7,419,964 for the Company's US Patent Application No.
10/313,828. This patent covers the ssDNA ICP4 expression vector acting as the
active ingredient in the Company's topical anti-Herpes preparation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NONE.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, as of June 30, 2008. The Company concluded that
material weaknesses over internal control of financial reporting, as previously
disclosed, are still in existence. Based on this evaluation our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures as of June 30, 2008 are not effective to ensure that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported accurately and
within the time periods specified in Securities and Exchange Commission rules
and forms.
Changes in Internal Controls
The Company is attempting to remediate its control deficiencies. Remediation of
the identified material weakness in internal controls over financial reporting
will be addressed and modified as needed until all necessary internal controls
are implemented and operate for a period of time, are tested, and the Company
and its auditors are 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 controls over financial reporting
in the future.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BREACH OF CONTRACT ACTION
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 pursued arbitration
to resolve claims by Messrs Vazquez and Wunderlich and counterclaims by the
Company.
On June 30, 2008, CytoGenix, Inc. (the "Company"), Lawrence Wunderlich and Frank
Vazquez entered into a Settlement Agreement and Mutual Release (the "Settlement
Agreement") regarding arbitration No. 70 144 08333 06, styled Frank Vazquez and
Lawrence Wunderlich v. CytoGenix, Inc., before the American Arbitration
Association in Houston, Texas, (the "Arbitration"). Pursuant to the Settlement
Agreement, all claims of Messrs. Vazquez and Wunderlich against the Company, and
all claims of the Company against each of Messrs. Vazquez and Wunderlich have
been released, acquitted and forever discharged. The Settlement Agreement
obligates the Company it issue to (i) Mr. Wunderlich warrants to acquire, on or
before June 30, 2011, 1,066,666 shares, 1,066,667 shares and 1,066,667 shares of
the Company's common stock at exercise prices of $0.05, $0.10 and $0.15,
respectively, and (ii) Mr. Vazquez warrants to acquire, on or before June 30,
2011, 666,666 shares, 666,667 shares and 666,667 shares of the Company's common
stock at exercise prices of $0.05, $0.10 and $0.15, respectively. Under the
Settlement Agreement the Company is also obligated to pay $150,000 each to
Messres. Vazquez and Wunderlich in equal monthly installments ($3,125 per month
to each) over a four-year period commencing October 1, 2008. Copies of the
Settlement Agreement and a form of warrant were attached to a Form 8-K filing on
July 7, 2008 and are incorporated herein by reference. The foregoing description
of the terms and provisions thereof is a summary only, and is qualified in its
entirety by reference to the Settlement Agreement.
In a letter from the Department of Labor - Occupational Safety and Health
Administration ("OSHA") dated June 30, 2008 addressed to Lawrence Wunderlich,
Mr. Wunderlich was informed that OSHA approved the Settlement Agreement and was
"closing the investigation of the . . . complaint" previously filed by Mr.
Wunderlich with OSHA under Section 806 of the Corporate and Criminal Fraud
Accountability Act, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1514A. OSHA provided the Company a copy of this letter and it was filed
as an exhibit to the Form 8-K filed on July 7, 2008 and is incorporated herein
by reference.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April 2008, the Company issued 833,333 shares of common stock, par value
$0.001 per shares at a price of $0.06 per shares, for gross proceeds of $50,000,
in conjunction with its private placement.
In April 2008, the Company issued 750,000 shares of common stock, par value
$0.001 per shares for consulting services valued at $45,000.
In June 2008, the Company issued 2,638,291 shares of common stock, par value
$0.001 per shares for the conversion of a note payable and accrued interest
totaling $329,786.
The issuance of these shares was exempt from the registration requirements of
the Securities Act of 1933 under Section 4(2) thereof.
ITEM 6. EXHIBITS.
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Exhibit Number Description
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3.1* Articles of Incorporation of Cryogenic Solutions, Inc.
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3.2* Certificate of Amendment dated November 1, 1995 of Articles
of Incorporation of Cryogenic Solutions, Inc.
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3.3* Certificate of Amendment dated January 13, 2000 of Articles
of Incorporation of CytoGenix, Inc.
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3.4** Certificate of Amendment dated April 6, 2004 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference
to Exhibit 3.5 to the Company's annual report of Form 10-KSB
for the year ended December 31, 2004)
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3.5** 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 Securities and Exchange Commission on
December 23, 2003)
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3.6* Bylaws of Cryogenic Solutions, Inc.
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3.7** Amendment to Bylaws of CytoGenix, Inc. (incorporated by
reference to Annex I of the definitive proxy statement on
Schedule 14A filed with the Securities and Exchange
Commission on December 23, 2003)
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19
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10.1** Loan Agreement dated January 7, 2008 between CytoGenix, Inc.
and KV Mechanical Construction and Restoration Co., Inc.
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10.2** Supply Agreement Amendment No. 2 dated April 28, 2008
between CytoGenix, Inc. and GE Healthcare Bio-Sciences Corp.
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31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
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31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
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* Incorporated by reference to the corresponding Exhibit in the Form 10-SB of
the Company filed on January 31, 2001. ** Previously filed.
(b) 8k Filings
On April 17, 2008, the Company filed a Form 8K, Item 5.02, to announce the
entering into an employment agreement with its Chief Financial Officer.
On June 30, 2008, the Company filed a Form 8K, Items 1.01, 2.03 and 3.02, to
announce that the Company had entered into a settlement agreement with former
employees of the Company.
On August 7, 2008, the Company filed a Form 8K, Item 5.02, to announce the
resignation of two of the Company's Scientists.
On August 21, 2008, the Company filed a Form 8K, Items 5.02, 5.05 and 8.01, to
announce (i) the resignation of the Company's Chief Executive Officer and
Chairman of the Board, and two of the Company's outside directors; (ii) the
appointment of Randy Moseley, a member of the Company's board of directors, to
the position of Interim Chief Executive Officer and Chairman of the Board; (iii)
the amendment of the Company's Code of Ethics so that the duties of the
Corporate Committee are now assigned to the entire Board of Directors, until the
board grows to include a minimum of five members; and (iv) the approval of a
bridge loan that will become effective upon certain conditions precedent being
met by the Company.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYTOGENIX, INC.
Date: September 19, 2008 By: /s/ Randy Moseley
------------------
Randy Moseley
Interim Chief Executive Officer
20