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 September 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 November 10, 2008 was 152,907,843.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 2008 (Unaudited)
and December 31, 2007 3
Statements of Operations for the three and nine months
ended September 30, 2008 and 2007 (Unaudited) 4
Statements of Cash Flows for the nine months ended
September 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 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 13
ITEM 4. Controls and Procedures 14
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
ITEM 6. Exhibits 15
SIGNATURES 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CYTOGENIX, INC.
BALANCE SHEETS
September 30, December 31,
2008 2007
(Unaudited)
ASSETS ------------ ------------
Current Assets:
Cash $ 1,291 $ 162, 042
Inventory 227,481 252,144
Receivables and other current assets 8,738 44,292
------------ ------------
Total Current Assets 237,510 458,478
Property and equipment, net 191,007 237,354
Deposits 6,399 6,399
Long-term investments - restricted -- 53,402
------------ ------------
Total Assets $ 434,916 $ 755,633
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Long-term debt, current portion $ -- $ 27,678
Accounts payable 802,557 388,463
Accrued expenses 2,033,514 1,532,344
Advances from shareholders 24,554 --
------------ ------------
Total Current Liabilities 2,860,625 1,948,485
Long-term debt, less current portion -- 17,336
------------ ------------
Total Liabilities 2,860,625 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, 152,907,843 and
146,309,719 share issued and outstanding
as of September 30, 2008 and December 31, 2007, respectively 152,908 146,310
Additional paid-in capital 38,414,846 36,999,514
Treasury stock (629,972) (629,972)
Accumulated deficit (40,363,491) (37,726,040)
------------ ------------
Total Stockholders' Deficit (2,425,709) (1,210,188)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 434,916 $ 755,633
============ ============
The accompanying notes are an integral part of these financial statements.
3
CYTOGENIX, INC.
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDING SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
------------- ------------- ------------- -------------
(Restated) (Restated)
REVENUES $ -- $ 2,555 $ 28,348 $ 42,014
COSTS OF REVENUES -- 754 18,366 13,002
------------- ------------- ------------- -------------
GROSS MARGIN -- 1,801 9,982 29,012
COSTS AND EXPENSES:
Research and
development 157,400 372,886 695,325 1,699,711
General and
administrative 453,378 911,747 1,794,043 2,162,904
Consulting expense 13,780 126,029 80,263 154,803
Depreciation and
amortization 15,200 16,730 46,348 48,614
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (639,758) (1,425,591) (2,605,997) (4,037,020)
OTHER INCOME:
Interest income -- 2,831 517 15,963
Interest expense (377) (1,810) (31,971) (5,283)
Gain on disposal of
property and equipment -- 1,150 -- 1,150
------------- ------------- ------------ -------------
NET LOSS $ (640,135) $ (1,423,420) $ (2,637,451) $ (4,025,190)
============= ============= ============= =============
Net loss per share:
Basic and diluted
net loss per share $ (0.00) $ (0.01) $ (0.02) $ (0.03)
============= ============= ============= =============
Weighted average shares
outstanding:
Basic and diluted 152,908,266 140,735,630 149,591,806 140,687,851
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
CYTOGENIX, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDING SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
(Restated)
OPERATING ACTIVITIES: ---------- -----------
Net Loss $(2,637,451) $(4,025,190)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 46,348 48,614
Share-based compensation expense 891,143 1,016,044
Gain on disposal of property & equipment -- (1,150)
Accrued interest income on long-term investment-
restricted -- 4,565
Changes in operating assets and liabilities:
Receivables and other current assets 35,554 (18,697)
Inventory 24,663 105,025
Accounts payable 414,094 6,764
Accrued expenses 830,956 426,671
----------- -----------
Net cash used in operation activities (394,693) (2,437,354)
----------- -----------
INVESTING ACTIVITIES:
Proceeds from restricted long-term
investment 53,402 115,500
Purchase of property and equipment -- (39,290)
Payments for deposit on building contract (300,000) (245,589)
----------- -----------
Net cash used in investing activities (246,598) (169,379)
----------- -----------
FINANCING ACTIVITIES:
Payment on notes payable (45,014) (18,634)
Proceeds from notes payable related party 300,000 --
Proceeds from shareholder advances 24,554
Proceeds from stock subscriptions 201,000 --
----------- -----------
Net cash provided by (used in) financing activities 480,540 (18,634)
----------- -----------
NET CHANGE IN CASH (160,751) (2,625,367)
CASH, beginning of period 162,042 2,854,197
----------- -----------
CASH, end of period $ 1,291 $ 228,830
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,808 $ 5,283
Income taxes paid $ -- $ --
NONCASH TRANSACTIONS:
Note payable and accrued interest 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 was $300,000 with an annual interest rate of 24%. 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 nine months of 2008 based on
the Company's common stock price as of September 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.
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
6
to each) over a four-year period commencing October 1, 2008. The Company has
negotiated with Messres. Vazquez and Wunderlich to defer the commencement of the
monthly payments set forth in the settlement agreement from October 1, 2008 to
January 1, 2009.
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 September 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 nine months ended
September 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 156,000 shares previously issued to them as Director compensation:
Research and development $ 31,814
General and administrative 442,421
----------
Stock-based compensation $ 474,235
----------
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 nine months ended
September 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 9.75 120,000
Exercised -- -- --
Forfeited/expired (15,195,000) 0.47 -- (7,101,513)
----------- ----------- ----------- -----------
Outstanding at September 30, 2008 11,091,000 $ 0.45 7.60 $ 4,077,558
=========== =========== =========== ===========
Exercisable at September 30, 2008 9,957,667 $ 0.38 7.45 $ 3,771,559
(1) Weighted-average exercise price (2) Weighted-average contractual life
remaining
NOTE 5 -WARRANTS
On July 3, 2008, the Company issued warrants to its Vice President-Legal Counsel
to purchase 3,000,000 shares our its common stock with an exercise price equal
to $0.06 per share. These warrants become vested immediately and expire on July
3, 2018 if not exercised by such date. We estimated the fair value of these
options using the Black-Scholes method with assumptions including: (1) term of
ten years; (2) a computed volatility rate of 155%; (3) a discount rate of 3.99%
and (4) zero dividends. The fair value of these warrants was estimated to be
$177,899 and is included in general and administrative expenses for the nine
months ended September 30, 2008.
7
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 was included in general and administrative expenses for the nine months
ended September 30, 2008.
Summary of warrant and option information at September 30, 2008 is as follows:
Weighted
Avg. Outstanding Forfeitures Outstanding Exercise
Beginning of and End
Price Period New Grants 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
2008 Grants $0.06 - 3,000,000 - - 3,000,000
- -------------------------------------------------------------------------------------------------
September 30, 2008 $0.09 - 8,200,000 - - 8,200,000
- -------------------------------------------------------------------------------------------------
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 nine months ended September 30, 2008, the Company issued 6,754,124
restricted shares of its common stock for cash, services rendered and conversion
of notes Payable as follows;
o 101,250 shares at a price of $0.16 per share as part of its November
30, 2007 private placement.
o 3,014,584 shares for $201,000 cash.
o 249,999 shares with a value of $40,000 for services rendered to outside
to outside consultants (83,333 shares were issued each to TMS
Investments, Inc., Harris Forbes, Inc., and Chasseur Corporation).
o 750,000 shares to BioXcel Corporation with a value of $45,000 for
Services rendered.
o 2,638,291 shares for the conversion of a note payable and accrued
Interest totaling $329,786.
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
8
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:
Nine months ended September 30, 2007
--------------------------------------------
As Previously
Reported Adjustments As Restated
------------ ------------ ------------
COSTS AND EXPENSES:
Research and development $ 2,798,032 $ (1,098,321) $ 1,699,711
General and administrative 3,785,198 (1,622,294) 2,162,904
LOSS FROM OPERATIONS (6,757,635) 2,720,615 (4,037,020)
NET LOSS (6,745,805) 2,720,615 (4,025,190)
The effect of the restatement on specific items in the statement of cash flows
is as follows:
Nine months ended September 30, 2007
--------------------------------------------
As Previously
Reported Adjustments As Restated
OPERATING ACTIVITIES: ------------ ----------- -----------
Net Loss $(6,745,805) $ 2,720,615 $(4,025,190)
Adjustments to reconcile net loss
to net cash
Share-based compensation expense 3,636,655 (2,720,615) 916,040
Net cash used in operating activities (2,437,354) -- (2,437,354)
NOTE 9 - SUBSEQUENT EVENTS
On November 14, 2008, the Company's Board of Directors elected Lex M. Cowsert,
Ph.D. as a member of the Company's Board of Directors and to the positions of
President and Chief Executive Officer, effective immediately. Dr. Cowsert,
replaces Randy Moseley, who had served as Interim Chief Executive Officer since
August 18, 2008 while the Company searched for a permanent Chief Executive
Officer. Mr. Moseley will continue to serve as Chairman of the Board of
Directors and Principal Financial Officer.
The Company and Dr. Cowsert entered into a Terms Agreement specifying: a base
salary of $10,000/month for six months, subject to adjustments with an option to
convert deferred salary to common stock based on a 30 day moving average should
the Company not have the funds to pay his salary; a hiring bonus of 500,000
shares of the Company's common stock at a purchase price of $0.001/share;
benefits as provided to other officers and directors of the Company; and a
housing allowance of $1,600/month for six months. The Company intends to enter
into an employment agreement with Dr. Cowsert to memorialize the terms of his
employment, which will include the terms of the initial six month term and will
provide for an extension for continued employment.
The Company received approximately $25,000 in shareholder advances subsequent to
September 30, 2008.
9
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.
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.
10
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.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September
30, 2007.
- --------------------------------------------------------------------------------
For the three months ended September 30, 2008, we reported a net loss
of $640,135 and revenue of $-0- as compared with a net loss of $1,423,420 and
revenue of $2,555 for the three months ended September 30, 2007. Revenue for the
three months ended September 30, 2007 resulted from the sale of synDNA.
Research and Development Expenses. Research and development expenses
decreased to $157,400 for the third quarter of 2008 as compared to $372,886
during the same period in 2007 due primarily to a decrease of $69,316 in payroll
related expenses as the result of having fewer employees in 2008, a decrease of
$84,166 in the cost of sponsored research and lab supplies, and a decrease of
$53,431 in consulting expenses as the Company's research and development
activities declined in 2008 due to the lack of operating funds.
General and Administrative Expenses. General and administrative
expenses decreased to $453,378 for the third quarter of 2008 compared to
$911,747 for the same period in 2007 primarily due to a decreases of $72,932 in
expenses recorded for options and warrants issued and vested during 2008, a
decrease of $156,723 in officers and employee salary expenses due the
resignation of officers and reduction in employees, a decrease of $188,630 in
legal fees, primarily due to the settling in the first half of 2008 of the
Sarbanes-Oxley whistleblower complaint and an arbitration complaint filed by two
former executive officers in 2007.
Consulting Expenses. Consulting expenses decreased to $13,780 for the
third quarter of 2008 compared to $126,029 for the same period in 2007. This
decrease was due to a decrease of $75,004 in the costs of financial consultants
retained to advise the Company regarding financing options and a decrease of
$35,625 in construction manager fees as the construction of a company facility
was terminated in the first quarter of 2008.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased to $15,200 for the third quarter of 2008 compared to $16,730
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 decreased approximately $1,433 to
$377 for the third quarter of 2008 compared to $1,810 for the same period in
2007.
11
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007.
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For the nine months ended September 30, 2008, we reported a net loss of
$2,637,451 and revenue of $28,348 as compared with a net loss of $4,025,190, and
revenues of $42,014 for the nine months ended September 30, 2007. Revenues for
the nine months ended September 30, 2008 and 2007, respectively resulted from
the sale of synDNA.
Research and Development Expenses. Research and development expenses
decreased to $695,325 for the nine months ended September 30, 2008 as compared
to $1,699,711 during the same period in 2007 due to a decrease of $395,099 in
equity award expenses, a decrease of $292,511 in the cost of sponsored research
and the cost of DNA materials and lab supplies, a decrease of $158,773 in
payroll related expenses as the number of R&D employees has decreased in 2008
and a decrease of $151,602 in R&D consulting expenses that had previously been
incurred to improve the production process for the manufacture of synDNA.
General and Administrative Expenses. General and administrative
expenses decreased to $1,794,043 for the nine months ended September 30, 2008
compared to $2,162,904 for the same period in 2007 primarily due to the decrease
of $134,764 in officer salaries, a decrease of $483,472 in legal fees (of which
$304,025 related to former employees arbitration actions settled in the first
half of 2008) partially offset by an increase of $50,000 in investor relations
expenses.
Consulting Expenses. Consulting expenses decreased to $80,263 for the
nine months ended September 30, 2008 compared to $154,803 for the same period in
2007. This decrease was due to costs of a reduction of expenses related to
financial consultants retained to advise the Company regarding financing
options.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased to $46,348 for the nine months ended September 30, 2008
compared to $48,614 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 $26,688 to
$31,971 for the nine months ended September 30, 2008 compared to $5,283 for the
Same period in 2007 due interest expense incurred on a loan from a related
party.
Liquidity and Capital Resources
We had no or minimal revenues for the three months and nine month periods ended
September 30, 2008 and 2007.
Our working capital deficit increased by $1,133,108 to ($2,623,115) at September
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 nine months ended
September 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 nine months ended September 30, 2008 came from
$300,000 in related party loans, $24,554 from shareholder advances and $201,000
from stock subscriptions. Also there were repayments on debt of $45,014. The
resulting cash provided by financing activities was $480,540.
We consumed $394,693 in cash from operating activities for the nine months ended
September 30, 2008 compared with $2,437,354 for the nine months ended September
30, 2007.
We had a net loss of $640,135, $1,423,420, $2,637,451, and $4,025,190 or $0.00,
$0.01, $0.02, and $0.03 per share for the three and nine months ended September
30, 2008 and 2007, respectively.
12
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
and/or debt 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.
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.
As of September 30, 2008, CytoGenix holds 15 granted patents (2 US; 13 foreign)
covering our original ssDNA expression vector and anti-herpes platforms, with 27
additional pending patent applications covering these as well as our synDNA and
avian flu vaccine platforms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NONE.
13
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 September 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 September 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.
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.
14
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 6. EXHIBITS.
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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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
- --------------------------------------------------------------------------------
32.1 Certification by Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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32.2 Certification by Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
* 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 November 18, 2008, the Company filed a Form 8K to report the appointment of
Lex M. CowsertII, Ph.D. as a member of the Company's Board of Directors and to
the positions of President and Chief Executive Officer. Dr. Cowsert, replaces
Randy Moseley, who had served as Interim Chief Executive Officer since August
18, 2008 while the Company searched for a permanent Chief Executive Officer. Mr.
Moseley will continue to serve as Chairman of the Board of Directors and
Principal Financial Officer.
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.
Dated: November 19, 2008
By: /s/ Lex M. Cowsert, Ph.D. By: /s/ Randy Moseley
------------------------ -----------------
Lex M. Cowsert, Ph.D. Randy Moseley
Chief Executive Officer Principal Financial Officer
(Appointed November 14, 2008)
15