UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
Nevada 76-048409
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) or organization No.)
3100 WILCREST, SUITE 140, HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 713-789-0070
Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK WITH $.001 PAR VALUE
(Title of Class)
Indicate by check mark if the Registrant is a well known seasoned issuer as
defined in Rule 405 of the securities Act. Yes |_| No |X| Indicate by check mark
if Registrant is not required to file reports pursuant to Section 13 or Section
15 (d) of the Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Non-accelerated filer | |
Accelerated Filer |_ | Smaller reporting 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 aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2008 (the last business day of the Registrant's most
recently completed second fiscal quarter) was approximately $6,694,000. The
number of outstanding shares of the Registrant's Common Stock as of the close of
business on May 14, 2009 was 169,404,590.
DOCUMENTS INCORPORATED BY REFERENCE
None
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CYTOGENIX, INC.
FORM 10-K INDEX
PART I
Page
Item 1. Description of Business........................................ 4
Item 1A. Risk Factors .................................................. 13
Item 1B. Unresolved Staff Comments .................................... 13
Item 2. Description of Property ....................................... 14
Item 3. Legal Proceedings ............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders ........... 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ...... 15
Item 6. Selected Financial Data ...................................... 16
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations .......................... 16
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk ................................................... 21
Item 8. Financial Statements .......................................... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................... 36
Item 9A. Controls and Procedures ...................................... 37
Item 9B. Other Information ............................................. 38
PART III
Item 10. Directors and Executive Officers of the Registrant ............ 38
Item 11. Executive Compensation ........................................ 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ................ 43
Item 13. Certain Relationships and Related Transactions ................ 44
Item 14. Principal Accountant Fees and Services ........................ 44
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 45
Signatures..................................................... 46
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
CytoGenix, Inc. ("CytoGenix" or "the Company") is a biopharmaceutical company
whose primary focus is the development and commercialization of its proprietary
technologies for identifying and silencing disease causing genes, expressing
proteins for applications such as vaccines and isolating novel nucleic
acid-based anti-microbial compounds. The Company's three technologies include:
i) gene silencing techniques (ssDNA) applicable to genes from pathogenic
organisms or selected genes from a patient to prevent the expression of harmful
proteins, thereby preventing or ameliorating disease; ii) a novel, cell free
process to produce large quantities of DNA (synDNA(TM)) for use in its own
products and for sale to other biopharmaceutical or life science companies; and
iii) a methodology to isolate and characterize novel DNA-based drugs
(Oligogenix(TM)) to which harmful bacteria have not developed resistance. The
Company seeks to generate revenues and improve the health and well-being of
humans, animals and plants by utilizing its technology to produce molecular
therapies. In addition to development and commercialization of therapeutic
compounds, the Company seeks to provide the service of custom DNA manufacturing
as well as to sell and/or license its technology to other research facilities
and companies seeking to research or regulate a specific gene function and to
consumers of plasmid DNA.
The Company was formed in 1995 as a biomedical research and development company.
The original name of the Company was Cryogenic Solutions, Inc., until the
Company changed its name to CytoGenix, Inc. in January 2000. Equity funding has
been the primary source of operational, research and commercialization working
capital since the Company's inception. The Company made a transition to research
and development of its present technologies in 1998. Since then, the Company has
dedicated itself to engineering DNA-based molecules for therapeutic and drug
target identification purposes. The Company's expertise in nucleic acid
technology enables it to focus on the development of new types of nucleic
acid-based therapeutics.
GENE EXPRESSION AND HUMAN DISEASE
Widely published scientific studies conducted over the last 20 years by leading
universities, government research laboratories such as the National Institutes
of Health and the National Cancer Institute, and private research laboratories,
have established that most diseases are the result of malfunctioning genes in an
organism's genome, or the activities of genes expressed by pathogens such as
viruses, bacteria or fungi. This genetic activity causes the production of
harmful proteins that lead to the symptoms and destructive results of diseases.
Examples of diseases caused by the production of such harmful proteins include
cancer, herpes, sepsis (blood poisoning) and a host of others. To produce a
protein, a cell first makes a positive copy (messenger RNA) of the DNA code
containing the information necessary to produce the protein. This messenger RNA
(mRNA) is called the "sense" molecule. This message-carrying molecule then moves
to another part of the cell where it participates in the assembly of the
biochemical components to produce proteins.
In many instances it is possible to inhibit the production of these harmful
proteins by introducing or producing small molecules of specific genetic
material into the cells themselves. This genetic activity can be interrupted and
controlled at three levels with the introduction of multiple copies of a
specific sequence of single stranded DNA ("ssDNA") into the cells at the level
of the genomic DNA itself, interfering with the transcription of the messenger
RNA ("mRNA") or by directly binding to a protein to disable it.
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CYTOGENIX GENE SILENCING TECHNOLOGY
CytoGenix owns patented intracellular expression system technology to produce
desired sequence-specific, ssDNA molecules in individual cells for the purpose
of triplex, antisense, catalytic DNA, and aptamer applications.
1. Triplex: As mRNA is transcribed and the DNA strands are still
separated, a single strand of complementary DNA is inserted into the
gap forming a triple helix (triplex) structure, thus preventing the
future production of mRNA from that segment.
2. Antisense: Messenger RNA is intercepted en route by a complementary
ssDNA sequence that it binds to and results in the destruction of the
mRNA by enzymes within the cell, thus preventing the mRNA from
producing the undesired protein.
3. Catalytic DNA: Similar to antisense, an ssDNA sequence containing
sequence regions binds to the mRNA, but also contains a unique
sequence region that acts to cut and destroy the mRNA, thus preventing
it from producing the undesired protein.
4. Aptamer: The ssDNA binds to the protein itself in the cell and causes
the undesired protein to become inactivated or dysfunctional.
The key to success with these genetic interventions is to insure that sufficient
quantities of the ssDNA molecules ultimately are produced in targeted cells or
induced from external sources. CytoGenix has invented a compound that functions
as a tiny biological "factory" and after its introduction into the cell,
actually produces many copies of specific ssDNA molecules in the cell. A major
element of CytoGenix's business is to refine this technology and apply it to the
delivery of various patented DNA molecules for the development of effective
therapeutic drugs.
DEVELOPMENTS TO DATE (RESEARCH AND DEVELOPMENT)
The ssDNA expression vector technology originated with the work of Dr. Charles
Conrad, which he developed while at InGene, Inc. The original expression
cassette technology is protected by issued United States Patent No. 6,054,299
entitled, "Methods and Compositions for Producing Single-stranded cloned DNA in
eukaryotic cells." In 1999, CytoGenix purchased the rights to Dr. Conrad's
patent as well as other proprietary information from InGene, and has since
instituted a broad research and development program to advance single stranded
DNA expression technology. Applications to protect subsequent improvements and
therapeutic applications of this technology have since been filed to expand the
protection of this technology in both the US and foreign markets. As of December
31, 2008 CytoGenix holds a patent portfolio of approximately 13 granted and 2
allowances with approximately 55 additional foreign or US pending patent
applications claiming methods and materials in connection with our platform
technologies. This assertive approach for protection of the Company's technology
has enabled CytoGenix to expand and refine the development of therapeutics for
human, animal and agricultural use. The Company currently holds thirteen granted
patents covering the early ssDNA expression technology in US and foreign
markets, and one US and one foreign allowance for our Herpes therapeutic.
These patents are important to the Company because they help form the basis of
the technology needed for the production of the Company's complementary
technology and other products. The technology has been proven in numerous
laboratory and animal experiments and has been widely published as set forth
below. It has been reported in scientific literature, such as in Reuters
Business Insight 2000 publication, Antisense Therapy: Technical Aspects and
Commercial Opportunities by Prof. Dr. K.K. Jain, M.D. that other molecule
delivery methods have failed to provide sufficient quantities to be
therapeutically effective except in limited applications.
Laboratory cell culture studies have demonstrated that the Company's ssDNA
expression vector can adequately deliver sequence specific DNA molecules in
sufficient quantities in virtually all cell types, thereby overcoming many of
the challenges previously experienced.
As described under "CytoGenix Gene Silencing Technology" above, the Company's
technology is not limited to only antisense applications, but can target and
enzymatically cleave target mRNA using DNA enzyme formulations. As described
above, the technology can also be used to (i) generate triplex forming
oligonucleotides that bind to specific sites in the genome itself to inhibit
expression by the gene at that site, (ii) generate ssDNA that bind to specific,
targeted proteins to neutralize them and (iii) competitively inhibit genetic
expression/transcription of targeted genes. The Company has successfully
extended the results achieved in cell cultures to cells in live animals.
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The genomics field has vastly expanded the number of potential drug targets. The
Company has utilized its ssDNA expression technology to develop a library
screening technique for gene target identification and validation. The CytoGenix
proprietary gene neutralization system is a powerful tool in confirming gene
target function. The screening library technique enables efficient testing of
multiple oligonucleotide sequences. When a sequence silences a targeted gene,
the construct for introducing the identified sequence in cellular and animal
experiments is readily produced. Use of the screening library has led to the
discovery of sequences that have been useful in several of the Company's
products under development.
The Company has developed a novel screening library technique to identify
oligonucleotides with specific activity against bacteria in a given culture.
This technology platform is called Oligogenix(TM) and has been used to produce
compounds with activity against bacteria using mimetic oligonucleotides as
sequences to silence targeted bacterial genes. Targeted genes include those
necessary for the bacteria's survival, reproduction and/or for the expression of
various toxins. Animal studies using these compounds have demonstrated cytotoxic
activity against bacterial species including Escherichia coli, methicillin
resistant and vancomycin resistant Staphylococcus aureus.
The Company has also developed a novel cell-free large scale DNA synthesis
technique (synDNA(TM)) for producing therapeutic DNA which bypasses the
bacteria-based fermentation process. The cell-free synthesis of DNA has various
advantages: CytoGenix's DNA is virtually free of bacterial endotoxins, as well
as bacterial DNA, RNA and proteins which must be removed from DNA manufactured
using traditional fermentation process using live bacteria. CytoGenix's process
does not require the use of antibiotic markers and does not require genetic
sequences comprising the usual backbone of plasmid DNA. Elimination of the
plasmid backbone enables production of DNA constructs that are approximately 3
kilobase pairs smaller than the equivalent plasmid DNA. More importantly, the
synDNA(TM) technology can produce therapeutic DNA's more rapidly and with fewer
complications than in the traditional fermentation methods.
Using its expanding technological base, the Company is seeking to develop drugs
and vaccines that address significant and unmet medical needs. The Company has
conducted research and/or preclinical development with product candidates in the
following areas: infectious disease (anti-virals and anti-bacterials),
inflammation, cancer and vaccines.
PRODUCTS UNDER DEVELOPMENT:
INFECTIOUS DISEASE PROGRAM
ANTI-VIRAL: Our herpes therapeutic, SIMPLIVIR(TM), is an anti-herpes topical
compound which will potentially address the needs of 70 million infected
Americans. Today's marginally effective products have revenues in excess of $1
billion. The most likely methods of use include prophylactic and neonatal
applications. The Company's proprietary plasmid DNA sequences are believed to
turn-off the expression of the HSV ICP4 and ICP47 genes. Found in HSV-1, -2,
Herpes Zoster, and other viruses in that family, the ICP4 gene is critical for
the replication of the virus in the host cell. The ICP47 gene produces a protein
that assists the virus in interfering with a host's immune system in recognizing
the virus and eliminating it. Pre-clinical, in vitro studies have shown a
100-fold reduction in HSV viral load in test cells containing the Company's
proprietary plasmid DNA coded with an ICP4 knockdown sequence.
Mouse trials have been conducted and additional studies with cotton rats are
planned. Pre-clinical toxicology, absorption, distribution, metabolism and
excretion (ADME) studies are being designed and the Company plans to file an
Investigational New Drug (IND) application with the Food & Drug Administration
(FDA) at such time as it has the funds to do so.
ANTI-MICROBIALS: Using its proprietary technique (Oligogenix(TM)), the Company
has developed and tested compounds against methicillin and vancomycin resistant
Staphylococcus aureus (MRSA and VRSA). Additional studies to determine dosages
and minimum inhibitory concentrations are planned. These anti-bacterial
compounds also require ADME studies.
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DNA VACCINES: Using the synDNA(TM) process, the Company is developing DNA
vaccines for use in humans and animals.
HUMAN VACCINES:
DNA vaccines against both seasonal influenza as well as the highly
pathogenic and potentially pandemic humanized avian influenza virus (H5N1)
are being developed and tested in animal models (mice and ferrets).
Together with ADME and toxicology studies, additional pre-clinical studies
have been planned in order to analyze the immune response triggered as well
as optimize the immunization regimen.
ANIMAL VACCINES:
Poultry: Utilizing the knowledge and experience gathered from the
development of DNA vaccines against human influenza, studies on developing
vaccines for use in poultry against avian flu are under development.
Potential collaborators in both academic and industry settings are being
approached.
Aquaculture: In other extramural collaborations, the Company is developing
DNA vaccines for use in fish. Focus has been given to fish species of high
economic impact such grouper, salmon and Cobia. The Company has identified
target viral diseases and it is determining the optimal course of action to
generate and test various DNA constructs.
Cattle: Finally, in collaboration with the United States Department of
Agriculture, the Company is engaged in a project to develop a synDNA(TM)
based vaccine against brucellosis, a zoonotic disease which is easily
transmitted from animals to humans and is consequently of global
importance. Tests using various DNA vaccines developed by the Company as
well as various combinatory formulas have been completed in a laboratory
animal model. Ongoing analysis of the data gathered should provide
information as to the next course of action to be taken.
synDNA(TM) PROCESS
As briefly noted above, the Company has developed a novel method for producing
large amounts of high quality therapeutic DNA (synDNA(TM)) with reductions in
residual contaminants compared to traditional fermentation methods.
Specifically, the Company has identified and developed a method for in vitro DNA
synthesis and amplification for the production of good manufacturing
practice-grade (GMP) drug substances.
Cell-free amplification of DNA sequences has many important benefits beginning
with the size and composition of the therapeutic compound. Under this system,
there is no need for bacterial replication genes or selection markers such as
antibiotic resistant genes found on most bacterial plasmid vectors. In most
cases, this will reduce the size and weight of the therapeutic DNA by at least
3,000 base pairs or a molecular weight of approximately 2,000 kilo Daltons
(kDa). The Dalton is a measure of molecular weight or mass. Molecular weight has
long been recognized as a significant factor in the uptake of DNA by cells with
smaller being more preferred. The total absence of bacteria and growth media
assures that there is no need to employ mechanical or chemical purification
methods to extract cell or animal proteins, RNA, genomic DNA and backbone
molecules. This feature allows the designer more control of coding for
non-specific and specific immune responses.
Robust biological activity.
The Company's experiments have shown that the biological response to this
material (devoid of vector backbone) is similar to traditional plasmids.
Experiments conducted in several animal models have shown that linear DNA
prepared with the CytoGenix synDNA(TM) process triggers a robust biological
response (immune or physiological, depending on the application) in treated
groups similar to plasmid DNA -treated animals.
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Low risk, competitive cost, universal accessibility and fast cycle time.
The entire process is bench-scale and requires little equipment, space or human
intervention in comparison to bacterial fermentation manufacturing facilities.
This process easily lends itself to liquid-handling automation, and a skilled
technician can synthesize multi-gram quantities of this material within a few
weeks, while working in a compact room-size facility. Unlike PCR, this process
requires only basic laboratory equipment and is therefore accessible to many
facilities around the world, especially field facilities in rural settings where
access to specialized equipment is limited and often prohibitive.
Improved regulatory profile.
The benefits of using this cell-free DNA manufacturing technology are
significant from a regulatory agency review and compliance perspective. Product
cGMP manufacturing procedures detailing methods for cell collection, processing
and cell culture conditions are no longer necessary and therefore reduces the
level of risk, amount of documentation, amount of required space, as well as
QA/QC and compliance costs.
CytoGenix is carrying out a multi-pronged strategy to continue commercializing
this technology. The following summarizes the Company's activities and plans:
o PROCESS OPTIMIZATION AND SCALE-UP: The Company has conducted
experimentation to achieve yield optimization, efficiency and reduced
costs. The process has progressed from manufacture of milligram
quantities to producing gram quantities consistently. The Company has
conducted animal studies comparing synDNA(TM) compounds with various
plasmids to verify that the synDNA(TM) based compounds exert
bioactivity equal to or greater than plasmids produced via traditional
methods. These studies have analyzed various Company produced DNA
vaccines and compounds for expressing specific proteins.
o DEVELOP REAGENT SUPPLIERS AND SOURCING: The Company entered into an
Agreement with General Electric Healthcare Bio-Science Corporation
("GEHBC") to provide necessary enzymes and reagents for large-scale
production of DNA using the synDNA(TM) process for therapeutic
applications. GEHBC is the Company's largest supplier of enzymes and
reagents, however other sources are available for the Company's
research purposes.
o BUSINESS DEVELOPMENT, the Company is currently evaluating options for
industry partnership for continued development of the process
including contract manufacturing.
The Company is currently supporting a Sponsored Research Agreements (SRA):
Dr. Slobodan Paessler at the University of Texas Medical Branch at
Galveston has conducted animal trials to test CytoGenix's synDNA(TM) vaccine
against avian flu (H5N1). Several challenge rounds have been conducted exposing
vaccinated mice to lethal doses of the Vietnam strain of avian flu. A
significant majority of vaccinated mice survived the exposure. All animals in
the control groups died. These experiments were continued with the use of
ferrets as a second animal model. The collaboration with Dr. Paessler will
extended to the development of DNA vaccines with veterinary applications, at
such time as the Company has the funds to do so.
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PUBLICATIONS
The Company and its cooperating university scientists have published a number of
scientific papers and presented at scientific meetings. These publications
include:
1. Kendirgi, F., Nadezda E. Yun, N.E, Linde, N.S., Zacks, M.A, Smith,
J.N., Smith, J.K., McMicken, H., Chen, Y.*, & Paessler, S. Novel
linear DNA vaccines induce protective immune responses against lethal
infection with influenza virus type A/H5N1 (under review).
2. Benimetskaya, L., Ayyanar, K. Kornblum, N., Castanotto, D., Rossi, J.,
Wu, S., Lai, J., Brown, B., Popova, N., Miller, P., McMicken, H.,
Chen, Y. & Stein, C. Bcl-2 protein in 518A2 melanoma cells in vivo and
in vitro. Clinical Cancer Research, 12:4940-4948, 2006.
3. Xing-Xin Tan & Yin Chen, Discovery of Novel Antibiotics By screening
of an Oligodeoxynucleotide Expression Library, (invited review
article, submitted) "New Research on Antisense Elements (Genetics)."
Frank Columbus, Editor-in-Chief, Nova Science Publishers, Inc.
4. Tan, X. & Chen, Y., A novel genomic approach identifies bacterial
DNA-dependent RNA polymerase as the target of an antibacterial
oligodeoxynucleotide, RBL-1 Biochemistry, 44:6708-6714, 2005.
5. Tan, X., Actor, J.K., & Chen, Y., PNA antisense oligomer as a
therapeutic strategy against bacterial infection: proof of principle
using mouse peritonitis model, Antimicrobial Agent and Chemotherapy,
49: 3203-3207, 2005.
6. Tan, X., & Chen, Y., Discovery of novel antibiotics using cell-based
screening (Review), Current Drug Discovery, pp. 21-23, April, 2004.
7. Tan, X., Knesha, R., Margolin, W. and Chen, Y., DNA enzyme generated
by a novel single-stranded DNA expression vector inhibits expression
of the essential bacterial cell division gene ftsZ, Biochemistry,
43:1111-1117, 2004.
8. McMicken, H., Bates, P. and Chen, Y., Antiproliferative activity of
G-quartet-containing oligonucleotides generated by a novel
single-stranded DNA expression system, Cancer Gene Therapy,
10(12):867-869, 2003.
9. Chen, Y. and McMicken, H., Intracellular production of DNA enzyme by a
novel single-stranded DNA expression vector, Gene Therapy,
10:1776-1780, 2003.
10. Chen, Y., Ji, Y. and Conrad, C., Expression of single-stranded DNA in
mammalian cells, Biotechniques, 34:167-171, 2003.
11. Chen, Y., Novel Technologies for target validation, Genetic
Engineering News, 23(11):7-9, 2003.
12. Chen, Y., A novel single-stranded DNA (ssDNA) expression vector
(Review), Expert Opinion on Biological Therapy, 2:735-740, 2002.
13. Chen, Y., Meeting highlights, 10th International conference on gene
therapy of cancer, Expert Opinion on Biological Therapy, 2:443-445,
2002.
14. Chen, Y., Growth of oligo-based drugs, Genomics & Proteomics, October,
2002.
15. Datta, H. and Glazer, P., Intracellular generation of single-stranded
DNA for chromosomal triplex formation and induced recombination,
Nucleic Acid Research, 29:5140-5147, 2001. A marvel of biochemical
engineering means cells can produce DNA enzyme to attach cancer, New
Scientist, January, 2001.
16. Chen, Y., Ji, Y., Roxby, R. and Conrad, C., In vivo expression of
single-stranded DNA in mammalian cells with DNA enzyme sequences
targeted to c-raf, Antisense & Nucleic Acid Drug Development,
10:415-422, 2000.
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BUSINESS STRATEGY
The goal and the focus of the Company are to leverage its proprietary technology
to maximize shareholder value. The Company is developing anti-viral and
anti-bacterial products based on its proprietary technologies including: topical
compounds for herpes infections, DNA vaccines, and compounds against methicillin
and vancomycin resistant bacteria. Upon initiation of clinical trials, the
Company intends to seek license and distribution agreements with domestic and
foreign pharmaceutical companies. To this end:
o The Company will pursue partnerships with pharmaceutical or
biotechnology companies to develop DNA expression-based therapeutics.
o The Company will seek to maintain and expand its patent portfolio and
proprietary technology. The Company aggressively pursues patent
protection to maintain worldwide rights relating to the development,
manufacture and sale of oligodeoxynucleotide mediated therapeutics and
services and products related to the manufacture of synDNA(TM) and
ssDNA.
o The Company intends to leverage its oligonucleotide expertise through
licensing, process development and pilot manufacturing. The Company
believes that it has established one of the leading nucleic acid
chemistry groups that can provide medicinal chemistry, process
development and manufacturing to others in need of this expertise. The
Company believes that it will be able to capitalize on its continuing
investment in oligonucleotide and nucleic acid technology by entering
into licensing, process development and pilot manufacturing
arrangements with collaborators to generate revenues, while retaining
this capability for its own drug development.
o The Company plans to expand its customer base of non-competitors o for
uses of synDNA(TM) as it advances the ability to amplify and purify
diverse sequences. The sales will come from excess capacity above the
material the Company needs for its own product development. The
Company will seek strategic partners to expand the production and
distribution of synDNA(TM) based products.
MARKETING STRATEGY
The Company plans to market initial products, when developed, and for which it
will obtain regulatory approval, through marketing arrangements or other
licensing arrangements with pharmaceutical companies. Implementation of this
strategy will depend on many factors, including the market potential of any
products the Company develops, and its financial resources. To market products
that will serve a large, geographically diverse patient population, we expect to
enter into licensing, distribution, or partnering agreements with pharmaceutical
companies that have large, established sales organizations. The timing of the
Company's entry into marketing arrangements or other licensing arrangements with
large pharmaceutical companies will depend on successful product development and
regulatory approval within the regulatory framework established by the Federal
Food, Drug and Cosmetics Act, as amended, and regulations promulgated there
under. Although the implementation of initial aspects of the Company's marketing
strategy may be undertaken before this process is completed, the development and
approval process typically is not completed in less than three to five years
after the filing of an Investigational New Drug ("IND") application and its
marketing strategy therefore may not be implemented for several years. See "Drug
Approval Process and Other Governmental Regulation" below.
INTELLECTUAL PROPERTY RIGHTS
The Company has developed or acquired a comprehensive body of intellectual
rights. The proprietary nature of, and protection for, the Company's technology,
processes and know-how are important to its business. The Company plans to
prosecute and aggressively defend its patents and proprietary technology. Our
policy is to seek patent protection for technologies, inventions, and
improvements that are considered important to the development of our business.
The Company also depends upon trade secrets, know-how, and continuing
technological innovation to develop and maintain its competitive position.
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CytoGenix currently holds 13 granted and 2 allowances with approximately 55
additional foreign or US pending patent applications claiming methods and
materials in connection with these platform technologies. The Company intends to
protect its proprietary technology with additional filings as appropriate.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The system of reviewing and approving drugs in the United States is considered
the most rigorous in the world. Estimates of the upper range of costs to bring a
single product from research through market approval and launch into commerce
range from $800 million (Pharmaceutical Research and Manufacturers Association)
to $1.7 billion in 2000 through 2002 (FDA), with the timing to do so typically
ranging between 10 and 15 years. The Pharmaceutical Research and Manufacturers
Association estimates that of every 5,000 medicines tested, on average, only
five are tested in clinical trials, and only one of those is approved for human
use. These estimates may vary depending on the nature of the drug and the
mechanism by which it works.
DRUG DISCOVERY
The drug discovery process can take several years. Once a company locates a
screening lead, or starting point for drug development, isolation and structural
determination may begin. The development process results in numerous chemical
modifications to the screening lead in an attempt to improve its drug
properties. After a compound emerges from the above process, the next steps are
to conduct further preliminary studies on the mechanism of action, further in
vitro (test tube) screening against particular disease targets and, finally,
some in vivo (animal) screening. If the compound passes these hurdles, the toxic
effects of the compound, if any, are analyzed by performing preliminary
exploratory animal toxicology. If the results are positive, the compound emerges
from the basic research mode and moves into the pre-clinical phase.
Preclinical Testing
During the pre-clinical testing stage, laboratory and animal studies are
conducted to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety, stability, biodistribution
(where the drug goes in the body) and genomic integration (where the DNA is
incorporated in any of the body's cell's genome).
Investigational New Drug Application
During the pre-clinical testing, an Investigational New Drug Application ("IND")
is filed with the FDA to seek permission to begin human testing of the drug. The
IND becomes active if not rejected by the FDA within 30 days. The IND must
indicate the results of previous experiments, how, where and by whom the studies
were conducted, the chemical structure of the compound, the method by which it
is believed to work in the human body, any toxic effects of the compound found
in the animal studies and how the compound is manufactured. Progress reports
detailing the results of the clinical trials must be submitted at least annually
to the FDA.
Phase I Clinical Trials
After an IND becomes active, Phase I human clinical trials may begin. These
tests, involving usually between 20 and 80 patients or healthy volunteers,
typically take approximately one year to complete and cost between $300,000 and
$500,000 per trial. The primary goal of Phase I clinical studies are focused on
safety. The Phase I clinical studies also determine how a drug is absorbed,
distributed, metabolized and excreted by the body, and the duration of its
action. Phase I trials are not normally conducted for anticancer product
candidates. A Phase Ib study involves patients with the targeted disease cancer
and is focused on safety.
11
Phase II Clinical Trials
In Phase II Clinical trials, controlled studies are conducted on approximately
100 to 300 volunteer patients with the targeted disease. The preliminary purpose
of these tests is to evaluate the effectiveness of the drug on the volunteer
patients as well as to determine if there are any side effects. These studies
generally take approximately two years and cost between $500,000 and $4 million
per trial. In addition, Phase I/ II clinical trials may be conducted to evaluate
not only the efficacy of the drug on the patient population, but also its
safety.
Phase III Clinical Trials
This phase typically lasts about three years, usually involves 1,000 to 3,000
patients and costs between $5 million and $50 million per trial. During the
Phase III clinical trials, physicians monitor the patients to determine efficacy
and to observe and report any reactions that may result from long-term use of
the drug.
New Drug Application
After the completion of the requisite three phases of clinical trials, if the
data indicate that the drug has an acceptable benefit to risk assessment and it
is found to be safe and effective, a New Drug Application ("NDA") is filed with
the FDA. The requirements for submitting an NDA are defined by the FDA. These
applications are comprehensive, including all information obtained throughout
all clinical trials as well as all data pertaining to the manufacturing and
testing of the product. In general, these filings can far exceed 100,000 pages.
With the implementation of the Prescription Drug Users Fee Act (PDUFA), review
fees are provided at the time of NDA filing. In 2007, each NDA with clinical
data must be accompanied by an $896,200 review fee. If the NDA is assessed as
unacceptable in the initial 30 day review, it is returned to the submitter, with
50% of the fee. The historical average review time for a New Molecular Entity
(NME) has remained constant at approximately 16 months, however, a new NME can
be approved in as little as six months.
Marketing Approval
If the FDA approves the NDA, the drug becomes available for physicians to
prescribe. Periodic reports must be submitted to the FDA, including descriptions
of any adverse reactions reported. The FDA may request additional studies (Phase
IV) to evaluate long-term effects.
Phase IV Clinical Trials and Post Marketing Studies
In addition to studies requested by the FDA after approval, these trials and
studies are conducted to explore new indications. The purpose of these trials
and studies and related publications is to broaden the application and use of
the drug and its acceptance in the medical community.
COMPETITION
The pharmaceutical and biotechnology industries are highly competitive. The
Company faces competition from biotechnology and pharmaceutical companies using
more traditional approaches to treating human diseases. The Company's
competitors may develop safer, more effective or less costly gene-based
therapeutics. In addition, the Company faces and will continue to face
competition from other companies for corporate collaborations with
pharmaceutical and biotechnology companies, for establishing relationships with
academic and research institutions and for licenses to proprietary technology,
including intellectual property.
12
Many of the Company's competitors and potential competitors have substantially
greater product development capabilities and financial, scientific,
manufacturing, managerial and human resources than the Company. There can be no
assurance that research and development by others will not render the Company's
products, or the products developed by corporate partners using its licensed
technologies obsolete, or non-competitive, or that any product the Company or
its corporate partners develop will be preferred to any existing or newly
developed technologies. In addition, there can be no assurance that the
Company's competitors will not develop safer, more effective or less costly gene
delivery systems, gene therapeutics, non-gene therapies, or other therapies,
achieve superior patent protection or obtain regulatory approval of product
commercialization earlier than the Company, any of which could have a material
adverse effect on its business, financial condition or results of operations.
RESEARCH AND DEVELOPMENT
The Company expensed $770,143 and $2,106,746 on research and development
activities during the years ended December 31, 2008 and 2007, respectively.
Research and development (R&D) expenses include related salaries and other share
based compensation, contractor fees, materials, and utilities.
R&D expenses also consist of independent R&D costs and costs associated with
collaborative development arrangements with other companies and research
institutions. Research and development costs are expensed as incurred.
EMPLOYEES
As of December 31, 2008, the Company has 3 employees, 2 of whom hold advanced
degrees. The Vice President -Legal Affairs, who holds an advanced degree,
resigned in March 2009. None of the Company's employees are covered by
collective bargaining agreements, and the Company considers relations with its
employees to be good.
HOW YOU CAN FIND ADDITIONAL INFORMATION
The Company is a reporting company and files annual, quarterly and current
reports, proxy statements and other information with the SEC. For further
information with respect to the Company, you may read and copy its reports,
proxy statements and other information, at the SEC public reference rooms at 100
F. Street, N.E., Washington, D.C. 20549, as well as at the SEC's regional
offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661 and at 233
Broadway, New York, NY 10279. You can request copies of these documents by
writing to the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference
rooms. The Company's SEC filings are also available at the SEC's web site at
http://www.sec.gov. In addition, you can read and copy the Company's SEC filings
at the office of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 2006.
Copies of CytoGenix's Annual Reports on Form 10K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are all available on its website (www.cytogenix.com) or by sending a
request for a paper copy to: CytoGenix, Inc. 3100 Wilcrest, Suite 140, Houston,
TX
77042, attn. Investor Relations.
ITEM 1A. RISK FACTORS
Item 1A is not required for a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
13
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate executive offices are located at 3100 Wilcrest, Suite
140, Houston, Texas 77042. The Company has occupied approximately 6000 square
feet of executive office and laboratory space since December 2003. The facility
is in reasonable condition and is adequate for the Company's current operations.
Rent on the facility averages to be $5,622 per month with a lease term ending
December 2009. The Company believes it's current and contracted for facilities
are suitable and adequate for its present and immediately foreseeable future
operational requirements.
ITEM 3. LEGAL PROCEEDINGS
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
Messrs. 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.
Four former employees have filed complaints with the Texas Workforce Commission
for unpaid wages totaling approximately $175,147, which the Company has included
as part of its accrued compensation liability on the December 31, 2008 balance
sheet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securities holders during the
fourth quarter of our fiscal year ended December 31, 2008.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Authorized capital stock consists of 300,000,000 shares of common stock, par
value $0.001 per share, and 50,000,000 shares of preferred stock, par value
$0.001 per share. There were 156,071,257 shares of common stock and no shares of
preferred stock outstanding as of March 31, 2009. The Company's common stock is
traded on the NASDAQ, OTC Bulletin Board under the ticker symbol CYGX.OB.
The high and low bid prices for the Company's common stock for each quarter
within the last two fiscal years, as quoted by the OTC Bulletin Board, were as
follows. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
High Low
---- ---
Fiscal Year Ending December 31, 2007
Quarter 1 $0.66 $0.37
Quarter 2 $0.56 $0.30
Quarter 3 $0.40 $0.23
Quarter 4 $0.35 $0.11
Fiscal Year Ending December 31, 2008
Quarter 1 $0.07 $0.06
Quarter 2 $0.05 $0.05
Quarter 3 $0.07 $0.06
Quarter 4 $0.02 $0.02
STOCKHOLDERS
As of March 31, 2009 there were approximately 644 shareholders of record of
Common Stock, one of which is Cede & Co., a nominee for Depository Trust Company
(or DTC). All of the shares of Common Stock held by brokerage firms, banks, and
other financial institutions as nominees for beneficial owners are deposited
into participant accounts at DTC, and are considered to be held of record by
Cede & Co. as one shareholder. The Company has not paid any dividends on its
Common Stock and the Board does not intend to declare any dividends in the
foreseeable future.
CHANGES IN SECURITIES
All of the Company's securities sold during 2008 have been reported in this 10-K
or previously reported on its Form 10-Qs and Form 8-Ks filed with the Securities
and Exchange Commission.
During the year ended December 31, 2008, the Company issued 9,761,538 restricted
shares of its common stock for cash, services rendered and conversion of notes
Payable as follows;
o 156,000 shares previously issued for services were surrendered.
o 3,115,834 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 5,801.705 shares for the conversion of a note payable and accrued
interest totaling $348,102.
15
ITEM 6. SELECTED FINANCIAL DATA
Item 6 is not required for a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements regarding the Company's plans,
expectations, estimates and beliefs. Actual results could differ materially from
those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. The Company has based these forward-looking statements largely on
its expectations. Forward-looking statements in this report include, but are not
necessarily limited to, those relating to the Company's:
o intention to introduce new products,
o receipt of any required FDA or other regulatory approval for its
products,
o expectations about the markets for its products,
o acceptance of its products, when introduced, in the marketplace,
o future capital needs, and
o success of its patent applications.
Forward-looking statements are subject to risks and uncertainties, certain of
which are beyond the Company's control. Actual results could differ materially
from those anticipated as a result of the factors described in the "Risk
Factors" and detailed in the Company's other Securities and Exchange Commission
filings, including among others:
o the effect of regulation by the FDA and other governmental agencies,
o delays in obtaining, or its inability to obtain, approval by the FDA
or other regulatory authorities for its products,
o research and development efforts, including delays in developing, or
the failure to develop, its products,
o the development of competing or more effective products by other
parties,
o the results of pre-clinical and clinical testing,
o uncertainty of market of acceptance of its products,
o problems that it may face in manufacturing, marketing, and
distributing its products,
o inability to raise additional capital when needed,
o delays in the issuance of, or the failure to obtain, patents for
certain of its products and technologies, and
o problems with important suppliers and business partners.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report or incorporated by reference might not
transpire. Factors that cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this report.
OVERVIEW
From its inception in 1995, the Company has devoted its resources primarily to
fund its research and development efforts. The Company has been unprofitable
since inception and, other than limited interest and grant revenue, has had
minimal revenues from the sale of products and other sources. The Company
expects to continue to incur losses for the foreseeable future as it continues
to expand its research and development efforts and enter additional
collaborative efforts. As of December 31, 2008, the Company's accumulated
deficit was $41,114,663.
16
RESULTS OF OPERATIONS
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
For the year ended December 31, 2008, the Company reported a net loss of
$3,388,623, or $0.02 per share, and $52,348 of revenue as compared with a net
loss of $6,266,075, or $0.04 per share, and $66,043 of revenue for the twelve
months ended December 31, 2007.
Research and Development Expenses. Research and development expenses decreased
to $770,143 for the twelve months ended December 31, 2008 compared to $2,106,746
for the same period in 2007 primarily due to a decline of approximately $428,327
in compensation in the research and development department for non-cash stock
option compensation expense, a $311,941 decrease in payroll for research
employees as the number of these employees decreased in 2008 and a $197,532
decrease in research and development consulting fees related to developing new
clients and construction of the abandoned new building.
General and Administrative Expenses. General and administrative expenses
decreased to $2,400,741 for the twelve months ended December 31, 2008 compared
to $2,531,807 for the same period in 2007. This decline was due primarily to the
following: (1) an increase in personnel costs by approximately $156,745; (2)
decrease of $401,489 in legal fees primarily due to the settlement in 2008 of
the Company's ongoing arbitration with two of its former executive officers.
Consulting Expenses. Consulting expenses decreased to $96,398 for the twelve
months ended December 31, 2008 compared to $415,258 for the same period in 2007.
Approximately $83,125 of this increase is attributed to the services of a
construction management firm to oversee and manage the Company's abandoned
construction project and $246,753 in financial consulting fees.
Depreciation and Amortization Expense. Depreciation and amortization expenses
decreased to $61,548 for the twelve months ended December 31, 2008 compared to
$64,879 for the same period in 2007 primarily due to no new equipment purchases
in 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through equity
sales totaling approximately $18,201,000, and from grants and contract research
funding of $200,000 from various sources. The Company expects to continue to
incur losses as it expands its research and development activities and related
regulatory work and increases its collaborative efforts. For 2009, the Company
expects that its needs for operations, including its collaborative efforts to be
approximately $2 to $3 million. The increase compared to 2008 expenditures is
expected to result from additional production staff and expansion of preclinical
product development efforts. However, if the total funds needed in 2009 are not
available, the Company could reduce its expenditures because the vast majority
of its costs are variable. Those estimated expenditures include amounts
necessary to fulfill its obligations under various collaborative, research and
licensing agreements during 2009.
Because of the cost (up to $1.7 billion) and timeframe (up to 15 years)
traditionally associated with developing a potential drug or pharmaceutical
product to FDA approval for human sales is received, the Company's business
strategy is to develop its products to initial Phase I or II clinical trials and
look for third parties to fund completion of development of the product and
market the product through strategic partnerships, license agreements or other
relationships. The Company also looks for collaborative and other efforts
utilizing its technology to increase shareholder value. The Company currently
uses this strategy to limit the potential cost the Company would incur in
developing a product. The Company's expected costs under our various contracts
and for various drug development products can be estimated for the next year or
two, but not much beyond that due to the uncertainty of clinical trial and
research results. Because of the various factors noted above and the expectation
that, until the Company establishes revenue sources, the Company will license
to, or jointly develop its prospective products with, strategic partners, the
Company reviews, at least annually, each research program and clinical trial,
based on results and progress during the prior year and estimates its needs for
that program or trial for the coming year, making adjustments based on the
progress of the program during the year. The Company does not set long-term
development budgets or development schedules for bringing its products to market
or track its research costs on a product basis.
17
Cash and cash equivalents were $5,475 at December 31, 2008, compared with
$162,042 at December 31, 2007. The decrease of $156,567 was due to the cost of
operations for the year exceeding the sources of funds. See "Results of
Operations" above.
To fund operations in 2009 and beyond the Company will need to raise additional
capital. The Company will continue to look for opportunities to finance its
ongoing activities and operations through accessing corporate partners or the
equity markets, as the Company currently has no credit facility, nor does the
Company currently intend to seek one.
CONTRACTUAL PAYMENT OBLIGATIONS -- Not Applicable
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, Including an amendment of
SFAS No. 115 ("SFAS 159"). SFAS 159 permits companies to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The adoption of SFAS 159 did not have a material impact on
the Company's consolidated financial statements.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements ("SFAS 157"). In February 2008, the FASB issued Staff Position No.
157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delayed the
effective date of SFAS 157 for certain nonfinancial assets and liabilities,
including fair value measurements under SFAS No. 141, Business Combinations
("SFAS 141") and SFAS 142, to fiscal years beginning after November 15, 2008.
Therefore, the Company has adopted the provisions of SFAS 157 with respect to
its financial assets and liabilities only. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
Fair value is defined under SFAS 157 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation
techniques used to measure fair value under SFAS 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on the following three levels of inputs,
of which the first two are considered observable and the last unobservable, that
may be used to measure fair value:
o Level 1 - Quoted prices in active markets for identical assets or
liabilities.
o Level 2 - Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
o Level 3 - Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
As of December 31, 2008, the Company did not hold any assets or liabilities that
are required to be measured at fair value on a recurring basis, and therefore
the adoption of the respective provisions of SFAS 157 did not have an impact on
the Company's consolidated financial statements. On January 1, 2009, the Company
will implement the previously deferred provisions of SFAS 157 for nonfinancial
assets and liabilities recorded at fair value, as required. Management does not
believe that the remaining provisions will have a material effect on the
Company's consolidated financial statements when they become effective.
18
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles ("SFAS 162"). The statement is intended to improve
financial reporting by identifying a consistent hierarchy for selecting
accounting principles to be used in preparing financial statements that are
prepared in accordance with generally accepted accounting principles. Unlike
Statement on Auditing Standards ("SAS") No. 69, The Meaning of Present Fairly in
Conformity With GAAP, SFAS 162 is directed to the entity rather than the
auditor. The statement was effective November 15, 2008, after approval by the
SEC which occurred in September 2008. The application of this statement did not
have a material impact on the Company's consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of
the Useful Life of Intangible Assets ("FSP 142-3"). FSP 142-3 requires companies
estimating the useful life of a recognized intangible asset to consider their
historical experience in renewing or extending similar arrangements or, in the
absence of historical experience, to consider assumptions that market
participants would use about renewal or extension as adjusted for SFAS 142's
entity-specific factors. FSP 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Adoption of this statement
is not expected to have a material impact on the Company's consolidated
financial statements when it becomes effective.
In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations
("SFAS 141R"), which is a revision of SFAS 141. SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any no
controlling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The revised statement will require, among other things, that
transaction costs be expensed instead of recognized as purchase price. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after January 1, 2009.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company's financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to
valuation of investments, long-lived assets, and revenue recognition. The
Company bases their estimates on historical experience and on various other
assumptions. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies and the related judgments and estimates affect the
preparation of its financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, temporary cash investments
having original maturity dates of three months or less. For reporting purposes,
such cash equivalents are stated at cost plus accrued interest which
approximates fair value.
Accounts Receivable
The company's accounts receivable primarily consist of trade receivables.
Management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The company includes any accounts
receivable balances that are determined to be uncollectible in its allowance for
doubtful accounts. As of December 31, 2008 and 2007 the allowance for doubtful
accounts is zero.
19
Inventory
Inventory includes raw materials (liquid buffers and enzyme mix) that are used
to produce enzymatically synthesized DNA (synDNA(TM)). Inventory is stated at
the lower of cost or market, cost being determined using the first-in, first out
("FIFO") method. Reserves are established for excess or obsolete inventories.
Inventory is included in the cost of revenue when sold.
Property and Equipment
Property and equipment is recorded at cost and depreciation is computed using
the straight-line method over the useful lives of the assets. Major renewals and
improvements are capitalized; minor replacements, maintenance and repairs are
charged to current operations.
Impairment of Long-lived Assets
CytoGenix performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment of or Disposal of Long-Lived Assets, sets forth guidance as to when
to recognize an impairment of long-lived assets and how to measure such
impairment. The standards require certain assets be reviewed for impairment
whenever events or circumstances indicate the carrying amount may not be
recoverable.
Revenue Recognition
CytoGenix's revenues are primarily derived from selling synDNA(TM). CytoGenix
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collection is
probable.
Research and Development
Research and Development (R&D) expenses include salaries, benefits and other
headcount costs; outside services required to conduct the preclinical
development; contract and other outside service fees; employee stock-based
compensation expense; and facilities and overhead expenses. R&D costs are
expensed as incurred.
Income Taxes
The Company has adopted the provisions of SFAS 109, "Accounting for Income
Taxes," which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Company provides a valuation allowance to reduce deferred tax assets to
their net realizable value.
Income (Loss) Per Common Share
SFAS 128, "Earnings Per Share," requires earnings per share to be computed and
reported as both basic EPS and diluted EPS. Basic EPS is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of common shares and dilutive common stock equivalents (convertible notes
and interest on the notes, stock awards and stock options) outstanding during
the period. Dilutive EPS reflects the potential dilution that could occur if
options to purchase common stock were exercised for shares of common stock.
Basic and diluted EPS are the same as the effect of our potential common stock
equivalents would be anti-dilutive.
20
Stock-Based Compensation
The Company estimates the fair value of stock option awards on the date of grant
utilizing a modified Black-Scholes option pricing model. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
short-term traded options that have no vesting restrictions and are fully
transferable. However, certain assumptions used in the Black-Scholes model, such
as expected term, can be adjusted to incorporate the unique characteristics of
the Company's stock option awards. Option valuation models require the input of
somewhat subjective assumptions including expected stock price volatility and
expected term. The Company believes it is unlikely that materially different
estimates for the assumptions used in estimating the fair value of stock options
granted would be made based on the conditions suggested by actual historical
experience and other data available at the time estimates were made. Restricted
stock awards are valued at the price of our common stock on the date of the
grant.
Off-Balance Sheet Arrangements
The Company currently has no off-balance sheet arrangements, except operating
lease commitments as disclosed in Note 13, Commitments and Contingencies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A is not required for a smaller reporting company.
21
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CytoGenix, Inc.:
We have audited the accompanying balance sheet of CytoGenix, Inc. (the Company)
as of December 31, 2008 and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year ended December 31, 2008. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company as of December 31, 2007, were
audited by other auditors, whose report dated April 4, 2008, expressed an
unqualified opinion on those statements.
Except as discussed in the following paragraph, we conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
We were unable to observe inventory at December 31, 2008. The nature of the
inventory does not permit the application of other auditing procedures. The
value of the inventory as stated in the financial statements December 31, 2008
is $189,999.
We were not engaged to examine management's assertion about the effectiveness of
CytoGenix, Inc.'s internal control over financial reporting as of December 31,
2008 and, accordingly, we do not express on opinion thereon.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to observe inventory, the
financial statements referred to above present fairly, in all material respects,
the financial position of CytoGenix, Inc. as of December 31, 2008 and the
results of its operations and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred substantial losses from
operations of approximately $41,000,000 since its inception, has experienced
negative cash flows from operations since its inception and has a working
capital deficiency of approximately $3,000,000 at December 31, 2008, all of
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/The Hall Group, CPAs
The Hall Group, CPAs
Dallas, Texas
May 4, 2009
22
CYTOGENIX, INC.
Balance Sheets
December 31, 2008 and 2007
ASSETS 2008 2007
------------ ------------
Current Assets: (Restated)
Cash $ 5,475 $ 162,042
Receivables and other current assets 4,103 44,292
Inventory 189,999 252,144
------------ ------------
Total Current Assets 199,577 458,478
Property and equipment, net 175,806 237,354
Deposits 6,399 6,399
Long-term investments - restricted 0 53,402
------------ ------------
Total Assets $ 381,782 $ 755,633
============ ============
LIABILITIES AND STOCKHOLERS' EQUITY (DEFICIT)
Current Liabilities:
Long-term debt, current portion $ 0 $ 27,678
Accounts payable 852,932 388,463
Advances from shareholders 104,813 0
Accrued expenses 2,425,771 1,532,344
------------ ------------
Total Current Liabilities 3,383,516 1,948,485
Long-term debt, less current portion 0 17,336
------------ ------------
Total Liabilities 3,383,516 1,965,821
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 50,000,000 share
authorized,
no shares issued and outstanding 0 0
Common stock, $.001 par value; 300,000,000 share
authorized,
156,071,257 and 146,309,719 share issued
and outstanding as of December 31, 2008
and 2007, respectively 156,071 146,310
Additional paid-in capital 38,586,830 36,999,514
Treasury stock (629,972) (629,972)
Accumulated deficit (41,114,663) (37,726,040)
------------ ------------
Total Stockholders' Equity (Deficit) (3,001,734) (1,210,188)
------------ ------------
Total Liabilities and Stockholders' Equity $ 381,782 $ 755,633
(Deficit) ============ ============
The accompanying notes are an integral part of these financial statements.
22
CYTOGENIX, INC.
Statements of Operations
For the Years Ended December 31, 2008 and 2007
2008 2007
------------- -------------
(Restated)
REVENUES $ 52,348 $ 66,043
COSTS OF REVENUES 62,357 23,539
------------- -------------
GROSS MARGIN (DEFICIT) (10,009) 42,504
COSTS AND EXPENSES:
Research and development 770,143 2,106,746
General and administrative 2,400,741 2,531,807
Consulting expense 96,398 415,258
Depreciation and amortization 61,548 64,879
Impairment Expenses 0 1,201,160
------------- -------------
LOSS FROM OPERATIONS (3,338,839) (6,277,346)
OTHER INCOME (EXPENSE):
Interest income, net 517 18,410
Other (50,301) (7,139)
------------- -------------
NET LOSS $ (3,388,623) $ (6,266,075)
============= =============
Net loss per share:
Basic and diluted net loss per
share $ (0.02) $ (0.04)
============= =============
Weighted average shares outstanding:
Basic and diluted 150,420,815 141,452,405
============= =============
The accompanying notes are an integral part of these financial statements.
24
CYTOGENIX, INC.
Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2008 and 2007
Total
Common Stock Additional Stockholders'
-------------------------- Paid -in Treasury Accumulated Equity
Shares Amounts Capital Stock Deficit (Deficit)
-----------------------------------------------------------------------------------------
Stockholders' Equity, December
31, 2006 (Restated) 140,663,961 $ 140,664 $ 34,851,026 $ (629,972) $(31,459,965) $ 2,901,753
Shares issued for cash, net
fundraising 4,389,750 4,390 714,170 -- -- 718,560
Shares issued for services 1,256,008 1,256 344,087 -- -- 345,343
Stock based compensation -- -- 1,090,231 -- -- 1,090,231
Net loss -- -- -- -- (6,266,075) (6,266,075)
-----------------------------------------------------------------------------------------
Stockholders' Equity (Deficit),
December 31, 2007 (Restated) 146,309,719 $ 146,310 $ 36,999,514 $ (629,972) $(37,726,040) $ (1,210,188)
Shares issued for cash, net
fundraising 3,115,834 3,116 197,884 -- -- 201,000
Shares issued for services 843,999 844 41,316 -- -- 42,160
Stock based compensation -- -- 808,966 -- -- 808,966
Warrants issued for settlement -- -- 196,849 -- -- 196,849
Shares issued for debt
conversion 5,801,705 5,801 342,301 -- -- 348,102
Net loss
-- -- -- -- (3,388,623) (3,388,623)
-----------------------------------------------------------------------------------------
Stockholders' Equity (Deficit),
December 31, 2008 156,071,257 $ 156,071 $ 38,586,830 $ (629,972) $(41,114,663) $ (3,001,734)
=========================================================================================
The accompanying notes are an integral part of these financial statements.
25
CYTOGENIX, INC.
Statements of Cash Flows
For the Years Ended December 31, 2008 and 2007
2008 2007
----------- -----------
(Restated)
OPERATING ACTIVITIES:
Net loss $(3,388,623) $(6,266,075)
Adjustments to reconcile net loss to net
cash
used in operating activities:
Depreciation and amortization 61,548 64,879
Impairment Expenses 0 1,201,160
Stock-based compensation expenses 808,966 1,090,231
(Gain) on disposal of property and
equipment 0 (1,150)
Loss on long-term investments
restricted 0 3,991
Warrants issued for settlement 196,849 0
Stock issued for services 42,160 345,343
Stock issued for interest expense 48,102 0
Changes in assets and liabilities:
Accounts receivable 40,189 (13,423)
Inventory 62,145 169,813
Prepaid expenses 0 (13,994)
Accounts payable 464,469 78,588
Accrued expenses 893,427 304,454
----------- -----------
Net cash (used) in operation activities (770,768) (3,036,183)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment 0 (39,290)
Deposit on building contract 0 (425,588)
Change in long-term investments - 53,402 115,500
restricted
----------- -----------
Net cash provided by (used in) investing 53,402 (349,378)
activities
FINANCING ACTIVITIES:
Proceeds from notes payable 300,000 0
Proceeds from shareholder advances 104,813 0
Payment on notes payable (45,014) (25,154)
Proceeds from sale of common stock 201,000 718,560
----------- -----------
Net cash provided by financing activities 560,799 693,406
----------- -----------
NET CHANGE IN CASH (156,567) (2,692,155)
CASH, beginning of period 162,042 2,854,197
----------- -----------
CASH, end of period $ 5,475 $ 162,042
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,198 $ 5,672
=========== ===========
Income taxes paid $ 0 $ 0
=========== ===========
NONCASH TRANSACTIONS:
Common stock issued for debt $ 300,000 $ 0
=========== ===========
The accompanying notes are an integral part of these financial statements.
26
CYTOGENIX, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of Business
CytoGenix, Inc. ("CytoGenix") was incorporated on February 10, 1995 in Nevada.
CytoGenix is a biotechnology company focusing on controlled cellular processes.
CytoGenix has acquired the rights for application to a specialized expression
vector capable of producing single stranded DNA (ssDNA) in both eukaryotes and
prokaryotes.
Basis of Presentation
These financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States of
America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, temporary cash investments
having original maturity dates of three months or less. For reporting purposes,
such cash equivalents are stated at cost plus accrued interest which
approximates fair value.
Accounts Receivable
The Company's accounts receivable primarily consist of trade receivables.
Management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The company includes any accounts
receivable balances that are determined to be uncollectible in its allowance for
doubtful accounts. As of December 31, 2008 and 2007 the allowance for doubtful
accounts is zero.
Inventory
Inventory includes raw materials (liquid buffers and enzyme mix) that are used
to produce enzymatically synthesized DNA (synDNA(TM)). Inventory is stated at
the lower of cost or market, cost being determined using the first-in, first out
("FIFO") method. Reserves are established for excess or obsolete inventories.
Inventory is included in the cost of revenue when sold.
Inventory detail is as follows:
December 31, 2008 December 31, 2007
----------------- -----------------
Inventory
Raw materials $189,999 $241,790
Finished goods 0 10,354
-------- --------
Total Inventory $ 89 $252,144
======== ========
27
Intellectual Property Rights
The Company has developed or acquired a comprehensive body of intellectual
rights. The proprietary nature of, and protection for, the Company's technology,
processes and know-how are important to its business. The Company plans to
prosecute and aggressively defend its patents and proprietary technology. Our
policy is to seek patent protection for technologies, inventions, and
improvements that are considered important to the development of our business.
The Company also depends upon trade secrets, know-how, and continuing
technological innovation to develop and maintain its competitive position.
CytoGenix currently holds 13 granted and 2 allowances with approximately 55
additional foreign or US pending patent applications claiming methods and
materials in connection with these platform technologies. The Company intends to
protect its proprietary technology with additional filings as appropriate.
The Company has chosen not to apply "fair value" valuation to its intellectual
property assets due to the extreme uncertainty of the future cash flows that can
potentially be derived from them.
Property and Equipment
Property and equipment is recorded at cost and depreciation is computed using
the straight-line method over the useful lives of the assets. Major renewals and
improvements are capitalized; minor replacements, maintenance and repairs are
charged to current operations. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Impairment of Long-lived Assets
CytoGenix performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment of or Disposal of Long-Lived Assets", sets forth guidance as to
when to recognize an impairment of long-lived assets and how to measure such
impairment. The standards require certain assets be reviewed for impairment
whenever events or circumstances indicate the carrying amount may not be
recoverable.
Revenue Recognition
CytoGenix's revenues are primarily derived from selling synDNA(TM). CytoGenix
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collection is
probable.
Research and Development
Research and Development (R&D) expenses include salaries, benefits and other
headcount costs; outside services required to conduct the preclinical
development; contract and other outside service fees; employee stock-based
compensation expense; and facilities and overhead expenses. R&D costs are
expensed as incurred.
Income Taxes
The Company has adopted the provisions of SFAS 109, "Accounting for Income
Taxes", which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Company provides a valuation allowance to reduce deferred tax assets to
their net realizable value.
Income (Loss) Per Common Share
SFAS 128, "Earnings Per Share", requires earnings per share to be computed and
reported as both basic EPS and diluted EPS. Basic EPS is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of common shares and dilutive common stock equivalents (convertible notes
and interest on the notes, stock awards and stock options) outstanding during
the period. Dilutive EPS reflects the potential dilution that could occur if
options to purchase common stock were exercised for shares of common stock.
Basic and diluted EPS are the same as the effect of our potential common stock
equivalents would be anti-dilutive.
28
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised),
"Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach.
Prior to the adoption of SFAS 123(R) we accounted for stock option grant in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and accordingly, recognized compensation expense for stock option grants using
the intrinsic value method.
Under the modified prospective approach, SFAS 123(R) applies to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the first quarter of fiscal 2006 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation cost for
all share-based payments granted subsequent to January 1, 2006 based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). For all quarters after the first quarter of fiscal 2006, compensation
costs recognized will include compensation costs for all share-based payments
granted based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R).
The Company has granted options and warrants to purchase CytoGenix's common
stock. These instruments have been valued using the Black-Sholes model and are
fully detailed in Note 9.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to financial statements
when the fair value of its financial instruments is different from the book
value. When the book value approximates fair value, no additional disclosure is
made.
Segment Reporting
The Company operates in one industry segment -- biotechnology research and
development. The Company operates in one geographic area, being the United
States of America.
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is its Chief Executive Officer. The Company's Chief Executive
Officer reviews financial information presented on a consolidated basis for
purposes of allocating resources and evaluating financial performance. The
Company has one business activity and there are no segment managers who are held
accountable for operations, operating results and plans for products or
components below the consolidated unit level. Accordingly, the Company reports
as a single operating segment.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities, Including an amendment of
SFAS No. 115" ("SFAS 159"). SFAS 159 permits companies to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The adoption of SFAS 159 did not have a material impact on
the Company's consolidated financial statements.
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). In February 2008, the FASB issued Staff Position No.
157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"), which delayed
the effective date of SFAS 157 for certain nonfinancial assets and liabilities,
including fair value measurements under SFAS No. 141, "Business Combinations"
("SFAS 141") and SFAS 142, to fiscal years beginning after November 15, 2008.
Therefore, the Company has adopted the provisions of SFAS 157 with respect to
its financial assets and liabilities only. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
Fair value is defined under SFAS 157 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation
techniques used to measure fair value under SFAS 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on the following three levels of inputs,
of which the first two are considered observable and the last unobservable, that
may be used to measure fair value:
29
o Level 1 - Quoted prices in active markets for identical assets or
liabilities.
o Level 2 - Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
o Level 3 - Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
As of December 31, 2008, the Company did not hold any assets or liabilities that
are required to be measured at fair value on a recurring basis, and therefore
the adoption of the respective provisions of SFAS 157 did not have an impact on
the Company's consolidated financial statements. On January 1, 2009, the Company
will implement the previously deferred provisions of SFAS 157 for nonfinancial
assets and liabilities recorded at fair value, as required. Management does not
believe that the remaining provisions will have a material effect on the
Company's consolidated financial statements when they become effective.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). The statement is intended to improve
financial reporting by identifying a consistent hierarchy for selecting
accounting principles to be used in preparing financial statements that are
prepared in accordance with generally accepted accounting principles. Unlike
Statement on Auditing Standards ("SAS") No. 69, "The Meaning of Present Fairly
in Conformity With GAAP", SFAS 162 is directed to the entity rather than the
auditor. The statement was effective November 15, 2008, after approval by the
SEC which occurred in September 2008. The application of this statement did not
have a material impact on the Company's consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. 142-3, "Determination of
the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 requires
companies estimating the useful life of a recognized intangible asset to
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, to consider
assumptions that market participants would use about renewal or extension as
adjusted for SFAS 142's entity-specific factors. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Adoption of this statement is not expected to have a material impact on the
Company's consolidated financial statements when it becomes effective.
In December 2007, FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which is a revision of SFAS 141. SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree, recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The revised statement will require, among other things,
that transaction costs be expensed instead of recognized as purchase price. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after January 1, 2009.
NOTE 2 - GOING CONCERN
CytoGenix has had negligible revenues since inception and only approximately
$118,000 in the last two years. The Company has incurred losses totaling
$41,114,663 from inception through December 31, 2008. Because of these
conditions, CytoGenix will require additional working capital to develop
business operations. CytoGenix intends to raise additional working capital
either through private placements, public offerings and/ or bank financing.
There are no assurances that CytoGenix will be able to achieve a level of
revenue adequate to generate sufficient cash flow from operations or obtain
additional financing through private placements, public offerings and/ or bank
financing necessary to support CytoGenix's working capital requirements. To the
extent that funds generated from any private placements, public offerings and/
or bank financing are insufficient, CytoGenix will have to raise additional
working capital. No assurance can be given that additional financing will be
available, or if available, will be on terms acceptable to CytoGenix. If
adequate working capital is not available CytoGenix may not increase its
operations.
These conditions raise substantial doubt about CytoGenix's ability to continue
as a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should
CytoGenix be unable to continue as a going concern.
30
NOTE 3 - LONG TERM INVESTMENT - RESTRICTED
The Company established a CD for $50,000 with Frost National bank which matured
on July 18, 2008. This CD earned interest at 4.65% and in 2008 and 2007 interest
earned was $517 and $2,345 respectively. The CD was required by Frost National
Bank to partially secure the equipment loan discussed in Note 7.
The Company had a restricted long-term CD investment of $115,500 in 2007 for the
pending appeal of a case CytoGenix to comply with a court order. This CD earned
interest at a rate of 3.4% annually. This CD was maintained until a mandate was
issued by the 1st Court of Appeals. In 2007 the mandate was issued and the CD
was released to the Company.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property consisted of the following as of December 31:
2008 2007
----------------------
Lab equipment 5-7 years $ 338,295 $ 338,295
Office Furniture & Fixtures 3-7 years 62,592 62,592
Office Equipment 3-7 years 63,034 63,034
Leasehold Improvements Lease Term 16,804 16,804
Less: accumulated depreciation (304,919) (243,371)
--------- ---------
Net book value $ 175,806 $ 237,354
========= =========
Depreciation expense totaled $61,548 and $64,879 for 2008 and 2007,
respectively.
NOTE 5 - DEPOSITS
The Company's deposits at December 31, 2008 and 2007 represent a deposit on the
lab facilities in the amount of $6,399.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist mainly of unpaid salaries and unpaid payroll taxes on
cash compensation and stock based compensation. Total accrued payroll taxes for
previously issued stock compensation as of December 31, 2008 and 2007 was
$207,154. Accrued bonus compensation per employment agreements as of December
31, 2008 and 2007 was $155,446 and $361,946.
NOTE 7 - DEBT
CytoGenix entered into an $80,000, 36 month promissory note with a bank on July
18, 2006 to finance the cost of equipment. The note requires monthly payments of
$2,569 including interest at 9.51%. Interest paid for the year ended December
31, 2008 and 2007 was $2,198 and $5,672 respectively. The principal balance of
$45,014 outstanding at December 31, 2007 was paid during 2008.
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue 300,000,000 shares of common stock at $.001
par value. Each share of common stock has one voting right and the right to
dividends if and when declared by the Board of Dicrectors. The Company had
issued 156,071,257 and 146,309,710 shares outstanding at December 31, 2008 and
2007, respectively.
Preferred Stock
The Company is authorized to issue 50,000,000 shares of preferred stock. The
Company had issued zero shares at December 31, 2008 and 2007.
Treasury Stock
At December 31, 2008 the Company has 547,250 shares of treasury stock valued at
its cost basis of $629,972.
31
During the year ended December 31, 2008, the Company issued 9,761,538 restricted
shares of its common stock for cash, services rendered and conversion of notes
payable as follows;
o 156,000 shares previously issued for services were surrendered.
o 3,115,834 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 5,801,705 shares for the conversion of a note payable and accrued
interest totaling $348,102.
On November 30, 2007, the Company completed a private placement of 4,491,000
shares (4,389,750 shares issued as of December 31, 2007, 101,250 issued
subsequent to December 31, 2007) of restricted common stock at $.16 per share
for gross proceeds of $718,560. The difference between the selling price and the
market value on the date the shares were sold was approximately $.09 per share
($404,190). In 2007 the Company issued 1,256,008 shares with a value of $345,343
for services.
During 2006, the Company issued 15,882,991 shares through private placement with
net proceeds totaling $6,314,566, and issued 320,000 shares valued at $275,200
for services.
During 2005, the company issued 13,928,967 shares through private placement with
net proceeds totaling $3,585,080, and issued 647,701 shares valued at $542,126
in settlement of debt, and 679,963 shares valued at $328,500 for services.
NOTE 9 - STOCK-BASED COMPENSATION
Employee Stock-Based Compensation
At December 31, 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 year ended December 31,
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 $ 24,559
General and administrative 765,258
----------
Stock-based compensation $ 789,817
----------
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
32
A summary for our stock-based compensation activity for the years ended December
31, 2008 and 2007 are 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 (16,973,500) 0.49 -- (8,041,758)
------------ ------------ ------------ ------------
Outstanding at December 31, 2008 9,312,500 $ 0.34 7.56 $ 3,137,313
============ ============ ============ ============
Exercisable at December 31, 2008 8,179,167 $ 0.35 9.82 $ 2,861,313
============ ============ ============ ============
(1) Weighted-average exercise price (2) Weighted-average contractual life
remaining
WARRANTS
On November 12, 2008, the Company issued warrants to its Chief Executive Officer
to purchase 500,000 shares our its common stock with an exercise price equal to
$0.001 per share. These warrants become vested immediately and expire on
November 12, 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 171%; (3) a discount rate
of 3.75% and (4) zero dividends. The fair value of these warrants was estimated
to be $22,500 and is included in general and administrative expenses for the
year ended December 31, 2008.
On July 3, 2008, the Company issued warrants to its Vice President-Legal Counsel
to purchase 3,000,000 shares of 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 year
ended December 31, 2008.
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 year ended
December 31, 2008.
NOTE 10 - 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.
33
NOTE 11 - INCOME TAXES
During the year ended December 31, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), which supplements SFAS No. 109,
"Accounting for Income Taxes", by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
Interpretation requires that the tax effects of a position be recognized only it
if is "more-likely-than-not" to be sustained based solely on its technical
merits as of the reporting date. The more-likely-than-not threshold represents a
positive assertion by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its technical merits, no
benefits of the tax position are to be recognized. Moreover, the
more-likely-than-not threshold must continue to be met in each reporting period
to support continued recognition of a benefit. With the adoption of FIN 48,
companies are required to adjust their financial statements to reflect only
those tax positions that are more-likely-than-not to be sustained. Any necessary
adjustment would be recorded directly to retained earnings and reported as a
change in accounting principle.
The Company's deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax reporting purposes, and
(b) net operating loss carry forwards. For Federal income tax purposes, the
Company uses the cash basis of accounting, whereas the accrual basis is used for
financial reporting purposes. In addition, certain assets are charged to expense
when acquired under Section 179 of the Internal Revenue Code for income tax
purposes.
The Company provided a full valuation allowance on the net deferred tax asset,
consisting primarily of net operating loss carry forwards, because management
has determined that it is more-likely-than-not that the Company will not earn
income sufficient to realize the deferred tax assets during the carry forward
period.
The cumulative tax effect at the expected tax rate of 25% of significant items
comprising the Company's net deferred tax amounts as of December 31, 2008 and
2007 are as follows:
12/31/08 12/31/07
Deferred tax assets attributable to:
Prior years $ 8,501,000 $ 6,775,000
Tax benefit (liability) for current year 1,078,000 1,726,000
----------- -----------
Total Deferred Tax Benefit $ 9,579,000 $ 8,501,000
Valuation Allowance (9,579,000) (8,501,000)
----------- -----------
Net Deferred Tax Benefit $ 0 $ 0
=========== ===========
Components of the current provision (benefit) for taxes on income for the
current year are as follows:
12/31/08 12/31/07
Income tax before extraordinary item:
Tax (benefit) liability on
current year operations $ 1,078,000 $ 1,726,000
Valuation Reserve (1,078,000) (1,726,000)
----------- -----------
Net provision (benefit) $ 0 $ 0
=========== ===========
The realization of deferred tax benefits is contingent upon future earnings and
is fully reserved at December 31, 2008.
34
NOTE 12 - CONCENTRATIONS
The Company had gross sales of $52,348 and $ 66,043 for the years ended 2008 and
2007, respectively. The Company had one customer that represented 100% of the
gross sales for the year ended December 31, 2008 and two customers that
represented 100% of the gross sales for the year ended December 31, 2007. The
Company has one supplier that provides all the materials necessary to generate
the sales for the years ended December 31, 2008 and 2007, respectively. Due to
the nature of the materials, it might be difficult to find a new supplier should
that be necessary.
The Company has cash balances in a single financial institution which, from time
to time, exceed the federally insured limit of $250,000. As of December 31,
2008, the Company's cash balance did not exceed the federally insured limit. No
loss has been incurred related to this concentration of cash.
NOTE 13 - COMMITMENTS AND CONTIGENCIES
Lease
- -----
CytoGenix leases office facilities under an operating lease that expires on
December 31, 2009. Rent expense was $ 84,583 and $76,414 for 2008 and 2007,
respectively. On November 25, 2008, the Company and the landlord executed the
First Amendment to Lease. The Amendment provided for a temporary deferment of
rent and a provision for paying the delinquent rent amount of $28,876 as of the
date of the Amendment. Per the Amendment, annual future minimum rental payments
are $101,618 for year ended December 31, 2009, of which $28,876 was accrued at
December 31, 2008. The lease also provides for operating expenses reimbursements
to the landlord. The Company is required to pay $16,611 in operating expense
escrows during 2009. The actual operating expense will be reconciled and billed
or credited subsequent to the end of the year. At December 31, 2008, accounts
payable includes $37,803 due under the lease.
Rent expense is recognized on a straight line basis over the term of the lease.
The average minimum rental payment over the term of the lease is $5,622 per
month from December 2003 through December 2009. As of December 31, 2008 and 2007
deferred rent was $9,323 and $18,645, respectively and is included in accrued
expenses.
Land & Building
- ---------------
On October 30, 2006, the Company entered into an earnest money contract with GSL
Constructors, Ltd. ("GSL") for a design/build project located in the Westchase
District of Houston for $3,796,577 and paid GSL a deposit of $474,572. On March
20, 2008, the Company received notice of termination of this contract due to an
alleged default by the Company. GSL purports to have terminated the earnest
money contract pursuant to the terms of Section 11 thereof, and pursuant to that
section GSL would be entitled to the deposit and all payments previously made by
the Company as liquidated damages. The Company has paid approximately $1,201,160
under the contract. GSL has not released the Company from any of its obligations
under the contract.
Research
- --------
CytoGenix has entered into Sponsored Research Agreements (SRA) with several
universities. The universities do research for CytoGenix related to CytoGenix's
proprietary technology. As work progresses, the universities invoice CytoGenix
for reimbursement of expenses related to the research. The SRA's have
established budgets. As of December 31, 2008 and 2007, the company had unbilled
amounts under the SRA's totaled approximately $0 and $116,000.
Board of Directors
- ------------------
At December 31, 2008, there were two outside Directors who received
approximately $58,866 and $68,866 in compensation for the year ending December
31, 2008.
Inventory
- ---------
The Company has entered an agreement with GE Healthcare Bio-Sciences Corp.
whereas GEHC will provide the Company with DNA production reagents for use in
the manufacture of vaccines and therapeutic compounds. The Company plans to
begin the process of negotiating with GE for the optional extensions of the
contract for 2008 and beyond. As of the date of this filing no agreement has
been finalized.
35
Litigation
- ----------
Frank Vazquez and Lawrence Wunderlich v. CytoGenix, Inc.
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
Messrs. 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.
Four former employees have filed complaints with the Texas Workforce Commission
for unpaid wages totaling approximately $175,147, which the Company has included
as part of its accrued compensation liability on the December 31, 2008 balance
sheet.
NOTE 14 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2008, Capital Equity Partners, LLC, of which
the Company's Chairman of the Board and Principal Financial Officer is a limited
partner, advanced the Company approximately $105,000 and purchased 283,333
shares of restricted common stock for $17,000. The amounts advanced by Capital
Equity Partners, LLC will be repaid as cash flows allow.
In January 2008, the Company entered into a loan agreement 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%. During 2008,
the $300,000 note plus accrued interest of $48,102 was converted to 5,801,705
shares of the Company's common stock.
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to December 31, 2008, the Company received approximately $200,000 in
proceeds from a private placement offering of 13,333,333 shares of restricted
common stock.
On April 24, 2009, the Company executed a Settlement Agreement, Indemnification
and Mutual Release with Malcolm Skolnick, its former Chairman of the Board,
Chief Executive Officer and President for the sum $10.00 and the agreement to
enter into a consulting agreement with Mr. Skolnick. The Agreement dismisses any
and all actual and potential claims that have been raised or which could be
raised at the time of the execution of the Agreement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Effective March 2, 2009, the Company's Board of Directors approved the dismissal
of LBB Associates Ltd., LLP as the Company's independent registered accountants.
Except as described below, the audit report of LBB & Associates Ltd., LLP on the
financial statements of the Company as of and for the fiscal years ended
December 31, 2007 and 2006 did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to audit scope or accounting
principles. LBB & Associates Ltd., LLP's 2007 audit report relating to LBB &
Associates Ltd., LLP's financial statements for the fiscal year ended December
31, 2007 included an emphasis paragraph relating to an uncertainty as to the
Company's ability to continue as a going concern.
36
In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 2007 and through the date of this current report,
there were: (1) no disagreements between the Company and LBB & Associates Ltd.,
LLP on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to the satisfaction of LBB & Associates Ltd., LLP, would have caused
LBB & Associates Ltd., LLP to make reference to the subject matter of the
disagreement in their reports on the Company's financial statements for such
years, and (2) no reportable events within the meaning set forth in Item 304
(a)(1)(iv)(B) of Regulation S-B or Item 304 (a)(1)(v) of Regulation S-K.
The Company has provided LBB & Associates Ltd., LLP a copy of the disclosures
and LBB & Associates Ltd., LLP has furnished the Company with a letter addressed
to the Securities and Exchange Commission stating that LBB & Associates Ltd.,
LLP agrees with the Company's statement in this Item 304 (a). On March 2, 2008,
the Board of Directors of the Company approved the engagement of The Hall Group
CPAs to assume the role of its new independent registered accountant.
During the periods ended December 31, 2007, and the subsequent interim periods
ended September 30, 2008, and through the date of the firm's engagement the
Registrant did not consult with The Hall Group, CPAs with regard to:
(1) the application of accounting principles to a specified transaction,
either completed or proposed: or the type of audit opinion that might
be rendered on Registrant's financial statements; or
(2) any matter that was either the subject of a disagreement or a
reportable event (as described in Item 304(a) (1) (iv) of Regulation
S-B.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), the effectiveness
of the design/operation of its disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) as of December 31, 2008.
Disclosure controls and procedures refer to controls and other procedures
designed to ensure that information required to be disclosed in the reports we
file or submit under the Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under
the supervision of our principal executive officer and our principal financial
officer. Based on that evaluation, management concluded that our financial
disclosure controls and procedures were not effective related to the preparation
of the 10-K filing as of December 31, 2008.
Material Weaknesses Identified
We identified the following deficiencies which together constitute a material
weakness in our assessment of the effectiveness of internal control over
financial reporting as of December 31, 2008:
o The Company has inadequate segregation of duties within its cash
disbursement control design.
o The Company's physical inventory controls are not operating
effectively and inventory is prone to misstatement.
o During the year ended December 31, 2008, the company internally
performed all aspects of our financial reporting process, including,
but not limited to, access to the underlying accounting records and
systems, the ability to post and record journal entries and
responsibility for the preparation of the financial statements. Due to
the fact these duties were performed oftentimes by the same people, a
lack of review was created over the financial reporting process that
might result in a failure to detect errors in spreadsheets,
calculations, or assumptions used to compile the financial statements
and related disclosures as filed with the SEC. These control
deficiencies could result in a material misstatement to our interim or
annual financial statements that would not be prevented or detected.
o The Company does not have a sufficient number of independent directors
for our board and audit committee. We currently only have one
independent director on our board, which is comprised of 4 directors,
and we do not have a functioning audit committee. As a publicly-traded
company, we should strive to have a majority of our board of directors
be independent.
37
The Company is continuing the process of remediating its control deficiencies.
However, the material weakness in internal control over financial reporting that
has been identified will not be remediated until numerous internal controls are
implemented and operate for a period of time, are tested, and the Company is
able to conclude that such internal controls are operating effectively. The
Company cannot provide assurance that these procedures will be successful in
identifying material errors that may exist in the financial statements. The
Company cannot make assurances that it will not identify additional material
weaknesses in its internal control over financial reporting in the future.
Management plans to provide future investments in the continuing education of
our accounting and financial professionals. Specifically, we plan to seek
specific public company accounting training during 2009.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our management is also required to assess and report on
the effectiveness of our internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"). Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control - Integrated Framework. During our assessment of the
effectiveness of internal control over financial reporting as of December 31,
2008.
Changes in Internal Controls over Financial Reporting
Other than the matters discussed above, during the period covered by this
report, there were no significant changes in the Company's internal controls
over financial reporting that have materially affected or are reasonably likely
to materially affect the Company's internal controls over financial reporting.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control system, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
Auditor Attestation
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit the company to provide only management's report.
During the most recently completed fiscal quarter, there has been no change in
our internal control over financial reporting that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The directors and officers of the Company as of December 31, 2008, are set forth
below. The directors hold office for their respective term and until their
successors are duly elected and qualified. The officers serve at the will of the
Board of Directors.
38
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE COMPANY.
Set forth below are the names, ages and positions of the persons currently
serving as Director, Executive Officers and Significant Employees of the
Company:
NAME AGE TITLE
Lex M. Cowsert, Ph.D. 57 Chief Executive Officer, President
and Director
Term of office - at will of Board
Randy Moseley 61 Principal Financial Officer
and Director
Term of office - at will of Board
Cy A. Stein, M.D., Ph.D. 56 Director
Term of Office: 2007-2010
John J. Rossi, Ph.D. 62 Director
Term of Office: 2008-2012
DR. LEX COWSERT has been the Chief Executive Officer and President of the
Company since November 17, 2008. Dr.. Cowsert has over 19 years of experience in
drug discovery and development. He is currently a co-founder and serves as the
Chief Scientific Officer of BellairePharma, Inc., founded in 2007, and is
co-founder and CSO of HoustonPharma, Inc., founded in 2005. From 2002 to 2006
Dr. Cowsert served as CSO of Automated Cell, Inc., an imaging-based technology
company engaged in drug discovery and development. From 2000 to 2002 he was VP
of Functional Genomics for VistaGen Therapeutics, Inc., a stem cell-based
technology company engaged in drug discovery and development. From 1989-2000 Dr.
Cowsert held a series of positions of increasing responsibility in the
scientific and clinical development programs at Isis Pharmaceuticals, Inc. Dr.
Cowsert is sole inventor on 19 issued US Patents and a named inventor on 119
issued US Patents. Dr. Cowsert received his BS in biology from the University of
Florida and earned his PhD in Molecular Biology from Georgetown University. Dr.
Cowsert completed his post-doctoral work at the National Cancer Institute where
he successfully competed for and was awarded an NCI Intramural Research Training
Award (1987), National Research Service Award (1988), and an NCI Biotechnology
Training Fellowship (1989).
Dr. Cowsert has a broad range of experience and expertise in both
entrepreneurial and public company settings including: technology development;
drug discovery and development; regulatory reports; FDA interactions; venture
capital and private equity; US and foreign patent applications; negotiating and
managing industrial and academic collaborations; and identifying, negotiating
and in-licensing technologies for commercial development. He has successfully
applied for and managed SBIR and RO1 government grants.
MR. RANDY MOSELEY was appointed Chief Executive Officer and Chairman of the
Board on August 18, 2008 and Principal Financial Officer on September 18, 2008.
On November 17, 2008, Mr. Moseley relinquished the Chief Executive Officer
position as the Company appointed Dr. Lex Cowsert as the Company's Chief
Executive Officer. Mr. Moseley is also the Chief Financial Officer and Director
( 2007 to present) for Freight Feeder Aircraft Corporation, a manufacturer of a
freight airplane. Mr. Moseley is also a director, Executive Vice President and
Chief Financial Officer of Urban Television Network Corp. (OTC BB: UATV), a
network of independent broadcast television stations and cable operators; he has
served Urban Television in various offices and as a director since 2001. In 2005
and 2006, Mr. Moseley served as Executive Vice President and the Chief Financial
Officer for The Furia Organization, Inc. (OTC BB: FURA). From 1999 to 2001, Mr.
Moseley served as Executive Vice President and Chief Financial Officer for
Tensor Information Systems, Inc., a private Fort Worth company in the business
of developing custom software applications. From1993 to 1999, Mr. Moseley served
in the same capacity for American Independent Network Corporation, a Fort Worth
based public company that provided generic programming to independent television
stations across the country. Mr. Moseley, a Certified Public Accountant, earned
a BBA degree from Southern Methodist University. He is a member of the Texas
Society of CPAs and the AICPA.
CY A. STEIN, M.D., PH.D. Dr. Stein is currently Professor of Medicine, Urology
and Molecular Pharmacology in the Oncology Department of Albert Einstein College
of Medicine, New York. In addition to his clinical and faculty activities, he is
co-editor-in-chief of Oligonucleotides, sits on seven editorial advisory boards,
serves on eight scientific advisory boards and is an ad hoc reviewer for
numerous peer reviewed journals. He has authored 115 peer reviewed journal
articles. He has written 75 book chapters, reviews and editorials, and he holds
13 patents issued and a patent pending. He attended Brown University (BA),
Stanford University (PhD in Organic Chemistry), Albert Einstein College of
Medicine (MD), and New York Hospital-Cornell Medical Center (Internship and
Residency in Internal Medicine). Dr Stein was a Clinical Associate and Senior
Staff Fellow at The National Cancer Institute, Bethesda, Maryland.
39
JOHN J. ROSSI, PH.D., Associate Director for Laboratory Research, City of Hope
Comprehensive Cancer Center. Dr. Rossi began his employment with City of Hope
(COH) in 1980 as an assistant research scientist in the Department of Molecular
Genetics. He was promoted to chairman of the Division of Biology in 1992. In
1993, COH bestowed its highest honor upon him by naming him to its Gallery of
Medical and Scientific Achievement for his pioneering work at the molecular
level in the battle against AIDS and other major diseases. In 1998, Dr. Rossi
was appointed as the Dean of the City of Hope Graduate School of Biological
Sciences. Dr. Rossi is an expert in ribozymes (molecular scissors). One of his
most notable projects is in the area of ribozyme research in AIDS. He led the
research team that first suggested applying ribozymes to treat HIV. His research
in molecular genetics and microbiology has resulted in eight patents being
granted and has served as the basis for more than 120 scientific papers. Dr.
Rossi received his bachelor's degree from the University of New Hampshire and
earned his doctorate at the University of Connecticut. Prior to his working at
COH, Dr. Rossi completed four years of post Ph.D. training at Brown University
in Providence, Rhode Island.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires the Company's officers, directors and persons who own more than
10% of the Company's common stock to file reports of ownership and changes in
ownership with the SEC.
Officers, directors and greater than 10% stockholders are required by regulation
to furnish the Company with copies of all forms they file pursuant to Section
16(a) of the Exchange Act.
We have reviewed the Section 16(a) filings made in connection with the Company's
stock. We believe that all persons subject to Section 16(a) of the Exchange Act
in connection with their relationship with us have complied on a timely basis.
CORPORATE GOVERNANCE
The Company has adopted a Code of Business Conduct and Ethics that applies to
all of the Company's officers, directors and employees, including our principal
executive officer, principal financial officer and principal accounting officer.
The Company's Code of Business Conduct and Ethics covers all areas of
professional conduct including, but not limited to, conflicts of interest,
disclosure obligations, insider trading, confidential information, as well as
compliance with all laws, rules and regulations applicable to the Company's
business. If the Board adopts an amendment to the Company's Code of Business
Conduct and Ethics (other than technical, administrative, or other
non-substantive amendments) that applies to any of the Company's executive
officers (including the principal executive officer, principal financial officer
and principal accounting officer) or directors, the Company will post such
information on its website.
A copy of the Company's Code of Business Conduct and Ethics is posted on its
website at www.cytogenix.com. To obtain a copy of the Company's Code of Business
Conduct and Ethics, without charge, any person may submit a written request to
the Company, c/o Corporate Secretary, CytoGenix, Inc., 3100 Wilcrest, Suite 140,
Houston, Texas 77042.
AUDIT COMMITTEE
The Company does not have an audit committee. The entire Board of Directors
instead acts as the Company's audit committee. Our Board does not have an audit
committee financial expert as defined by Securities and Exchange Commission
rules.
The Company has not yet adopted a written procedure for the review of Related
Party Transactions. The Board of Directors was responsible in 2007 for reviewing
transactions, series of transactions or proposed transactions involving the
Company and a related person, which includes our executive officers and
directors, or any member of his or her immediate family. The CGC will begin
reviewing such transactions in 2008. Examples of the types of transactions
reviewed include payments made by the Company directly to a related person
(other than in their capacity as a director or employee) or to an entity in
which the related person serves an officer, director, employee or owner, and any
other transaction where a potential conflict of interest may exist. Any
transactions identified are evaluated based on the requirements as set forth in
Item 404 of Regulation S-K of the rules of the Securities & Exchange Commission.
The Board of Directors has conducted the review procedure with respect to the
year ended December 31, 2007 and has determined that there are no reportable
related party transactions.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION FOR 2008
The following table sets forth information for the years ended December 31, 2008
and 2007 regarding the compensation of the President and Chief Executive
Officer, the Chief Financial Officer, and our three next most highly compensated
executive officers during 2008. (As noted in the Compensation Discussion and
Analysis, we refer to these persons as our Named Executive Officers.)
40
- ------------------------------------------------------------------------------------------------------------------------
Executive Year Base Bonus Stock Options All Other Total
Name and Principal Salary Awards(7) Awards7 Compensation
($) ($) ($) ($) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------
Malcolm Skolnick,
President, CEO and 2008(1) 227,500 - - - - 227,500
Chairman to the Board 2007(2) 240,000 - - - - 240,000
- ------------------------------------------------------------------------------------------------------------------------
Lex Cowsert, President,
CEO, Director 2008(3) 15,000 - - - 27,750 42,750
- ------------------------------------------------------------------------------------------------------------------------
Randy Moseley,
Principal Financial 2008(4) 30,000 - - - - 30,000
Officer, Director
- ------------------------------------------------------------------------------------------------------------------------
Greg Taylor,
Vice President of Finance, 2008(5) 105,000 - - 305,688 272,500 683,188
CFO and Treasurer 2007(6) 54,000 - 150,000(7) 439,620 52,400 696,020
- ------------------------------------------------------------------------------------------------------------------------
Cindee Ewell,
Vice President -Legal, 2008(8) 115,050 - - - 183,899 298,949
Corporate Secretary(9)
- ------------------------------------------------------------------------------------------------------------------------
Yin Chen,
Vice President of Research 2008(10) 78,490 - - - - 78,490
and Development and CSO 2007 137,500 - - - - 137,500
- ------------------------------------------------------------------------------------------------------------------------
(1) Of the $227,500, Dr. Skolnick has .not yet been paid $211,000 to which he is
entitled as compensation for his employment by the Company in 2008. Dr. Skolnick
resigned his position as Chairman of the Board, President and Chief Executive
Officer on August 18, 2008. On April 24, 2009 Dr. Skolnick executed a Release
Agreement in which he forfeited the unpaid amount.
(2) Of the $240,000, Dr. Skolnick has not yet been paid $64,000 to which he is
entitled as compensation for his employment by the Company in 2007. On April 24,
2009, Dr. Skolnick executed a Release Agreement in which he forfeited the unpaid
amount.
(3) Of the $15,000, Mr. Cowsert has not yet been paid $12,000 to which he is
entitled as compensation for his employment by the Company in 2008.
(4) Of the $30,000, Mr. Moseley has not yet been paid $27,000 to which he is
entitled as compensation for his employment by the Company in 2008.
(5) Of the $105,000, Mr. Taylor has not yet been paid $68,750 to which he is
entitled as compensation for his employment by the Company in 2008.
(6) Greg Taylor became chief financial officer in September 2007. All other
compensation represents amounts paid to Mr. Taylor as a Consultant to the
Company prior to joining the Company.
(7) Represents the dollar value recognized in the indicated year as compensation
expense for financial statement reporting purposes of restricted shares and
options awarded in that year or earlier. See Note 10 - STOCK OPTIONS AND
WARRANTS, to our Notes to Consolidated Financial Statements for a description of
the assumptions made in the valuation of the restricted shares and options.
Options to acquire 3,400,000 shares of common stock were granted to Greg Taylor
on November 12, 2007 under the 2003 Stock Option Plan. As of December 31, 2008,
approximately two-thirds of these options had vested. The fair value of the
stock award was determined by the closing price of $0.30 per share on August 31,
2007, the date the employment agreement was executed.
(8) Of the $115,050, Mrs. Ewell has not yet been paid $92,512.50 to which she
is entitled as compensation for her employment by the Company in 2008.
(9) Mrs. Ewell resigned as Vice President - Legal Affairs and Secretary on March
22, 2009.
(10) Of the $78,490, Mr. Chen has not yet been paid $60,156 to which he is
entitled as compensation for his employment by the Company in 2008. Mr. Chen
resigned as Vice President of Research and Development and CSO on August 7,
2008.
41
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company uses employment agreements only in very select cases, generally when
it is necessary to secure the services of an existing or a newly hired
executive. As of December 31, 2008, the Company has only three employment
agreements; one with President and CEO, Lex Cowsert which became effective
November 12, 2008, one with its Vice President of Finance and Administration and
CFO, Greg Taylor, which became effective September 1, 2007 and the third one
with its Vice President-Legal Council, which became effective July 3, 2008. Ms.
Ewell resigned as Vice President -Legal Council on March 22, 2009. The Board of
Directors passed a resolution in August 2008 that stopped the accrual of
compensation for the Company's employees at that time. In September of 2008, the
Board of Directors reinstated the accrual and payment if funds are available for
its Vice President-Legal Council and two lab technicians. As the date of this
Form 10-K, these three employees are no longer employed by the Company.
The Company entered into a six month employment agreement with Dr. Cowsert
effective November 12, 2008 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.
On April 17, 2008, CytoGenix, Inc. (the "Company") entered into an "at will"
employment agreement ("Employment Agreement") with its Chief Financial Officer,
Greg S. Taylor, as contemplated by the Employment Letter (the "Employment
Letter") effective September 1, 2007. Under the terms of the Employment
Agreement, Mr. Taylor's employment will be at-will and the employment may be
terminated at any time, with or without cause, by either Mr. Taylor or
CytoGenix. The employment agreement stated that Mr. Taylor would receive (i) an
initial annual base salary of $180,000; (ii) a restricted stock grant to
purchase 500,000 shares of CytoGenix's common stock at a purchase price of
$0.001 per share; (iii) an option to purchase 3,400,000 shares of CytoGenix
common stock at a price per share equal to the fair market value of CytoGenix's
common stock at the date of grant, vesting over four years with 33.3% of such
option shares vesting on the date of grant and thereafter 33.3% of such option
shares vesting at the first and second anniversaries of the date of grant.
The Company's Board of Directors has made the determination that Mr. Taylor
effectively terminated his employment agreement at the end of August 2008 when
he ceased reporting to work and not contributing his services in preparing and
filing of quarterly Securities and Exchange quarterly reports and the financial
management of the Company.
OUTSTANDING GRANT AWARDS AT FISCAL YEAR-END
The following sets forth information regarding the grants of stock options in
2008 to our named executives. (1)
- ------------------------------------------------------------------------------------------------------------
All Other Stock
Awards: Number Number of Grant Date Fair
of Shares of Underlying Exercise Value of Stock
Executive Stock or Units Options Value and Option
Name and Principal Grant Date (#) (#) ($/Share) Awards ($)
- ------------------------------------------------------------------------------------------------------------
Lex Cowsert, President,
CEO, Director
Nov 17, 2008 500,000 - $0.001 $22,500
- ------------------------------------------------------------------------------------------------------------
Cindee Ewell,
Vice President - Legal
Council July 3, 2008 3,000,000 - $0.06 $177,899
- ------------------------------------------------------------------------------------------------------------
(1) These columns show the restricted stock grants and warrant awards as
described in the in the Compensation Discussion and Analysis. The dollar amount
recognized by us for these awards in 2008 is shown in the Summary Compensation
Table in the column entitled "Other Compensation," and their valuation
assumptions are referenced in footnote 5 of that table.
OPTIONS HELD AT YEAR END
The following presents information concerning outstanding equity awards held by
the named executive officers as of December 31, 2008.
42
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
- -------------------------------------------------------------------------------------------------------------------
Option Awards
- -------------------------------------------------------------------------------------------------------------------
Named Executive Number of Securities Number of Securities Option Exercise Option
Underlying Unexercised Underlying Price ($/share) Expiration Date
Options (#) Exercisable Unexercised Options
(#) Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Cindee Ewell, Vice President - 3,000,000 - $0.06 07/03/18
Legal, Corporate Secretary
- -------------------------------------------------------------------------------------------------------------------
Greg Taylor,
Vice President of Finance, CFO and
Treasurer 2,266,666 1,333,334(1) $0.27 09/12/17
- -------------------------------------------------------------------------------------------------------------------
(1) The options were granted pursuant to the CytoGenix, Inc. 2003 Stock Option
Plan vesting over a two year period, with one-third of the awarded options
vesting at the date of grant, another one-third on the first anniversary of the
grant date and another one-third on the second anniversary of the grant date.
COMPENSATION OF DIRECTORS
The Company pays directors who are not employees annual compensation for 2008 as
set forth the following table for attending Board of Director meetings which
primarily comprises cash compensation, but has at times included compensation
with stock options. The Board of Directors may also make discretionary option
grants to its non-employee directors under the Company's 2003 and 2005 Stock
Option Plans.
- -----------------------------------------------------------------------------------------------
Compensation
- -----------------------------------------------------------------------------------------------
Named Director Year Cash Stock Options Total Earnings
Earned ($) Awards (1) ($)
- -----------------------------------------------------------------------------------------------
Raymond L. Ocampo Jr. 2008 $12,623 $0 $29,575 42,198
- -----------------------------------------------------------------------------------------------
Scott E. Parazynski, MD 2008 $12,623 0 $29,575 42,198
- -----------------------------------------------------------------------------------------------
John J. Rossi, PhD 2008 $39,291 0 $29,575 68,866
- -----------------------------------------------------------------------------------------------
Cy A. Stein, MD, PhD 2008 $29,291 0 $29,575 58,866
- -----------------------------------------------------------------------------------------------
(1) Represents Black Sholes valuation calculation for 500,000 options granted to
Directors in 2nd quarter of 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
SECURITY OWNERSHIP OF PRINCIPAL HOLDERS
The following table sets forth the name and address, as of March 28, 2009 and
the approximate number of shares of Common Stock of the Company owned directly
and holding more than 5% of the Company's Common Stock. The amounts set forth
are based solely on the Company's record holder list as neither holder has filed
with the SEC any document under Section 13 of the Securities Exchange Act of
1934.
- --------------------------------------------------------------------------------
Name and Address of Number of Shares Held Percent of Class
Beneficial Owner
- --------------------------------------------------------------------------------
KV Mechanical Construction and 12,762,208 8.2%
Restoration Company, Inc.
275 Park Avenue,
East Hartford, Connecticut 06108
- --------------------------------------------------------------------------------
43
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as of
March 28, 2009, by (i) the executive officers set forth in the summary
compensation table below who are employed by the Company as of March 28, 2009
(the "Named Executives"); (ii) each director and nominee; and (iii) all
directors and executive officers as a group. All persons listed have sole
disposition and voting power with respect to the indicated shares except as
otherwise noted.
- ---------------------------------------------------------------------------------------------------------
Name Executive / Director (1) Number of Shares Held Number of Option Percent of Class (2)
Equivalents
- ---------------------------------------------------------------------------------------------------------
Lex Cowsert 500,000 *
- ---------------------------------------------------------------------------------------------------------
Randy Moseley 485,000 0 *
- ---------------------------------------------------------------------------------------------------------
Greg Taylor 500,000 2,266,666 1.7%
- ---------------------------------------------------------------------------------------------------------
John Rossi 16,016 500,000 *
- ---------------------------------------------------------------------------------------------------------
Cy Stein 40,468 500,000 *
- ---------------------------------------------------------------------------------------------------------
All directors and executive 1,041,484 3,766,666 2.9%
officers as a group (total of 8
persons)
- ---------------------------------------------------------------------------------------------------------
*Less than 1% of the 167,071,257 shares outstanding at March 28, 2009.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
based on factors including voting and investment power with respect to shares.
Percentage of beneficial ownership is based on the number of shares of Common
Stock outstanding as of March 28, 2009.
(2) Stock issuable upon exercise of options within 60 days after March 28, 2009,
are deemed outstanding for the purpose of percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership for any other persons.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2008, Capital Equity Partners, LLC, of which
the Company's Chairman of the Board and Principal Financial Officer is a member,
advanced the Company approximately $105,000 and purchased 283,333 shares of
restricted common stock for $17,000.
In January 2008, the Company entered into a loan agreement 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%. During 2008,
the $300,000 note plus accrued interest of $48,102 was converted to 5,801,705
shares of the Company's common stock.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES; CHANGES IN ACCOUNTANTS FEES AND EXPENSES OF INDEPENDENT ACCOUNTANTS
The following table sets forth the amount of audit fees, audit related fees
billed or expected to be billed by LBB & Associates LTD., LLP, our independent
auditors, for the years ended December 31, 2008 and 2007, respectively:
- -------------------------------------------------------------------------
2008 2007
- -------------------------------------------------------------------------
Audit Fees(1) $99,835 $33,920
- -------------------------------------------------------------------------
Audit-Related Fees 0 0
- -------------------------------------------------------------------------
All Other Fees 0 0
- -------------------------------------------------------------------------
TOTAL Fees $99,835 $33,920
- -------------------------------------------------------------------------
(1) Includes the annual financial statement audit, review of quarterly reports
on Form 10-Q and other services associated with the audit. Audit fees for 2007
include fees incurred for the audits of management's assessment of the
effectiveness of internal controls over financial reporting and the
effectiveness of internal controls over financial reporting.
44
BOARD POLICY ON PRE-APPROVAL OF PERMISSIBLE NON-AUDIT SERVICES
The Board of Directors requires management to seek Board of Director
pre-approval for the engagement of an independent public accountant to perform
audit, audit-related and non-audit services. The Company's Board of Directors
approved the engagement of The Hall Group, CPA's on March 2, 2009.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of Cryogenic Solutions, Inc. (incorporated by
reference to exhibit 3.1 to the registrant's registration statement on
Form 10-SB, as amended (File No. 000-26807), filed with the Securities &
Exchange Commission ("SEC") initially on July 23, 1999 the ("Form
10-SB").
3.2 Certificate of Amendment dated November 1, 1995 of Articles of
Incorporation of Cryogenic Solutions, Inc. (incorporated by reference to
exhibit 3.2 of the Form 10-SB).
3.3 Certificate of Amendment dated January 13, 2000 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to exhibit
3.3 of the Form 10-SB).
3.4 Certificate of Amendment dated March 7, 2001 of Articles of Incorporation
of CytoGenix, Inc. (incorporated by reference to Annex II of the
definitive proxy statement on Schedule 14A filed with the SEC on December
23, 2003).
3.5 Certificate of Amendment dated April 6, 2004 of Articles of Incorporation
of CytoGenix, Inc. (incorporated by reference to Exhibit 3.5 to the
registrant's Form 10-KSB for the year ended December 31, 2003 filed with
the SEC on April 14, 2004).
3.6 Bylaws of Cryogenic Solutions, Inc (incorporated by reference to exhibit
3.4 of the Form 10-SB).
3.7 Amendments to Bylaws of CytoGenix, Inc. (incorporated by reference to
Annex I of the definitive proxy statement on Schedule 14A filed with the
SEC on December 23, 2003).
10.1 Employment Agreement dated January 1, 2005 between CytoGenix,Inc. and
Malcolm H. Skolnick (incorporated by reference to exhibit 10.1 of the
Form 10-K/A for Year ended December 31, 2005 filed with the SEC Inc. on
April 21, 2006).
10.2 License Agreement dated February 3, 2000, between CytoGenix, Inc. and
PharmaGenix, LLC. (incorporated by reference to exhibit 10.3 of the Form
10-SB).
10.3 Technology Transfer Agreement dated June 26, 1998 between Cryogenic
Solutions, Inc. and InGene, Inc. (incorporated by reference to exhibit
10.4 of the Form 10-SB)
10.4 Sponsored Research Agreement between CytoGenix, Inc. and Baylor College
of Medicine as of March 1, 2000 (incorporated by reference to exhibit
10.7 of the Form 10-SB).
10.5 Stock Option Plan (incorporated by reference to Annex III of the
definitive proxy statement on schedule 14A filed with the SEC on December
23, 2003).
10.6 Stock Option Plan (incorporated by reference to Annex I of the definitive
proxy statement on schedule 14A filed with the SEC on June 17, 2005).
10.7 Supply Agreement dated March 22, 2006, between CytoGenix, Inc. and GE
Healthcare Bio-Science Corporation (incorporated by reference to Exhibit
10 to the registrant's current report on Form 8-K filed with the SEC on
March 28, 2006).
31.1* Certifications of Principal Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, the "Act".
31.2* Certifications of Principal Financial Officer pursuant to Rule 13a-14(a)
of the Act".
45
32.1* Certifications of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350.
32.2* Certifications of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.
o Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYTOGENIX, INC.
By: /s/ Lex Cowsert
-----------------------------------------
LEX COWSERT, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 15, 2009
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: May 15, 2009 By: /s/ Lex Cowsert
------------------------------------------
LEX COWSERT, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR)
Date: May 15, 2009 By: /s/ Randy Moseley.
------------------------------------------
RANDY MOSELEY
(PRINCIPAL FINANCIAL OFFICER, DIRECTOR)
Date: May 15, 2009 By: /s/ Cy A. Stein
------------------------------------------
CY A. STEIN
DIRECTOR
Date: May 15, 2009 By: /s/ John J. Rossi
------------------------------------------
JOHN J. ROSSI
DIRECTOR
46