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, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0484097
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
3100 WILCREST, SUITE 140, HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 713-789-0070
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK WITH $.001 PAR VALUE
(Title of Class)
Indicate by check mark if the Registrant is a well known seasoned issuer as
defined in Rule 405 of the Securties Act. Yes |_| No |X| Indicate by check mark
if Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated Filer |_| Non-accelerated filer |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, 2005(the last business day of the Registrant's most
recently completed second fiscal quarter) was approximately $113,436,970. The
number of outstanding shares of the Registrant's Common Stock as of the close of
business on March 16, 2006 was 125,377,370.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the definitive Proxy Statement of CytoGenix, Inc., which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2005, are incorporated by reference in Part III of this Form 10-K.
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CYTOGENIX, INC.
FORM 10-K INDEX
PART I
Page
----
Item 1. Description of Business ............................................................... 4
Item 1A. Risk Factors .......................................................................... 15
Item 1B. Unresolved Staff Comments ............................................................. 19
Item 2. Description of Property ............................................................... 19
Item 3. Legal Proceedings .................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................................... 19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ............................. 21
Item 6. Selected Financial Data .............................................................. 22
Item 7. Management's Discussion and Analysis or Financial Conditions and Results of Operations. 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................ 27
Item 8. Financial Statements .................................................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 42
Item 9A. Controls and Procedures ............................................................... 42
Item 9B. Other Information ..................................................................... 42
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PART III
Item 10. Directors and Executive Officers of the Registrant .................................... 42
Item 11. Executive Compensation ................................................................ 43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ............................................................................... 43
Item 13. Certain Relationships and Related Transactions ........................................ 43
Item 14. Principal Accountant Fees and Services ................................................ 43
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................... 43
Signatures ............................................................................ 43
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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
technology for identifying and silencing disease causing genes and expressing
proteins for applications such as vaccines. The Company's technology includes
gene silencing techniques applicable to genes from pathogenic organisms or
selected genes from a host to prevent the expression of harmful proteins,
thereby preventing or ameliorating disease. The Company also has developed a
novel process to produce cell free, plasmid DNA for use in its own products and
for sale to the biopharmaceutical market. 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 sell and/or
license its technology to biotechnology companies seeking determination of
specific genes' function and purpose 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 only 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 we have
dedicated ourselves to engineering DNA-based molecules for therapeutic and drug
target identification purposes. Our expertise in nucleic acid technology enables
us to focus on the development of new types of nucleic acid-based therapeutics.
Our proprietary technology has beem designed to express single stranded DNA
inside target cells of living organisms to induce synthetic DNA mimetic
constructs into the target cells and thereby either silence selected genes or to
express proteins that can act as antigens to stimulate the immune system.
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 from pathogens such as viruses,
bacteria or funguses. This genetic activity causes the production of harmful
proteins that lead to the symptoms and destructive results of disease. 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 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. Fortunately, this genetic activity can be
interrupted and controlled at three levels with the introduction of a specific
sequence of ssDNA into the cells; at the level of the genome itself, interfering
with the messenger RNA (mRNA) produced by the genome leading to the production
of the protein for which the mRNA is encoded and at the protein level where a
single strand of DNA may be made that will bind with the protein and disable it.
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CYTOGENIX GENE SILENCING TECHNOLOGY
CYTOGENIX OWNS PATENTED INTRACELLULAR EXPRESSION SYSTEM TECHNOLOGY (CYGXES(TM))
TO PRODUCE ANY DESIRED SEQUENCE-SPECIFIC, SSDNA(SINGLE STRANDED DNA) 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, a 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" that, after introduction into the cell, actually
produces many copies of specific ssDNA molecules in the cell. The business of
CytoGenix is to refine this technology and apply it to the delivery of various
patented DNA molecules for the development of effective therapeutic drugs.
DEVELOPMENT 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. This breakthrough technology
was originally 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. Shortly after acquisition of the foregoing patent, worldwide
protection was pursued by filing two applications under the Patent Cooperation
Treaty (PCT) entitled, "Enzymatic Synthesis of ssDNA" (World Publication No.
WO00/22113), and "Production of ssDNA in vivo" (World Publication No.
WO00/22114). 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. In addition to the
original issued patent, Cytogenix currently holds a patent portfolio including
46 domestic and foreign issued or pending patent applications protecting our
technologies. This assertive approach to protection of the Company's technology
has enabled CytoGenix to expand and refine the development of therapeutics for
human, animal and agricultural use.
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 Antisense
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 to target mRNA using DNA enzyme formulations.
The technology can also be used to (i) generate triplex forming
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oligonucleotides that bind to specific sites in the genome itself to inhibit
expression by the gene at that site, (ii) generate ssDNA that will bind to
specific, targeted proteins to neutralize them and (iii) competitively inhibit
genetic expression/transcription of targeted genes. The Company has extended the
results achieved in cell cultures to cells in live animals.
The genomics field has vastly expanded the number of potential drug targets. The
Company has utilized its ssDNA expression technology to develop a library
screening technique for gene target identification and validation. The CytoGenix
proprietary gene neutralization system is a powerful tool in confirming gene
target function. The screening library technique enables efficient testing of
multiple oligonucleotide sequences. When a sequence silences a targeted gene,
the construct for introducing the identified sequence in cellular and animal
experiments is readily produced. Use of the screening library has led to the
discovery of sequences that have been useful in several of the Company's
products under development.
The Company has developed a separate technology 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.
The Company has also developed a novel technique for producing cell free plasmid
DNA thus bypassing the fermentation process. The cell free synthesis of plasmid
DNA has numerous advantages: CytoGenix, synthetic DNA (SynDNA(TM)) is free of
the endotoxins, bacteriAL DNA, RNA and proteins that must be laboriously removed
in the fermentation process using live bacteria. More importantly, synthetic DNA
can be produced more rapidly and less expensively than in the traditional
fermentation method.
In July 2002, the Company inaugurated a service geared towards assisting
pharmaceutical and biotech companies improve drug discovery efficiency. In
addition to our work on in-house targets, we are conducting pilot studies for
several companies. For a fixed fee, we will knockdown a gene in a cell system.
This will confirm the gene's relevance to the disease of interest. Those genes
found to be highly disease-related become targets for new drug or molecular
therapies.
Using its expanding technological base, the Company is seeking to develop drugs
that address significant and unmet medical needs. The Company is conducting
research and/or preclinical development with product candidates in the following
areas: infectious disease (anti-virals and anti-bacterials), inflammation,
cancer and vaccines.
PRODUCTS UNDER DEVELOPMENT INCLUDE:
INFECTIOUS DISEASE PROGRAM
CY301 (SIMPLIVIR(TM)) anti-herpes topical is anticipated to 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. Our proprietary plasmid DNA sequences
turn-off the HSV ICP4 and ICP47 genes. Found in HSV-1, -2 and Herpes Zoster, 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 were initiated in August, 2003 and are continuing.
Pre-clinical toxicology studies are being designed and will enable the filing of
an Investigational New Drug (IND) application with the Food & Drug
Administration (FDA) in the next 2008.
CY401 targets multi-drug resistant bacteria including methicillin-resistant
staphylococcus aureus (MRSA). Recently, MRSA strains that had previously been
confined to hospitals are now appearing in the community. Clinicians are
encountering difficulty in treating MRSA infections, and CY401 is anticipated to
be a leading product in a new class of antibacterial compounds. Studies
conducted in cell culture indicate that CY401 has potent killing capability even
against the most resistant bacterial pathogens such as MRSA. Animal testing has
confirmed this and CytoGenix is preparing to conduct the required safety and
toxicology studies to support the filing of an IND within the next 2008.
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CY403 specifically targets only the staphylococcus species.
INFLAMMATORY DISEASE PROGRAM
CY303 is a topical anti-inflammatory product that blocks the activity of an
adhesion molecule known as intercellular adhesion molecule or ICAM-1. The
initial medical condition for this topical anti-inflammatory product is moderate
to severe psoriasis. Other medical conditions where CY303 could be
therapeutically beneficial include contact dermatitis, acne, decubitus, rosacea
and joint swelling. Studies to test the ability of CY303 to inhibit the
expression of ICAM-1 are ongoing and assuming success, CY303 will be the third
IND application submitted by CytoGenix.
CANCER PROGRAM
Investigators have used the Company's ssDNA expression vector technology to
knockdown cancer genes as part of projects supported by the National Institutes
of Health Small Business Innovative Research, SBIR program. Some of this work
has progressed to the level of preclinical studies, and success in these studies
will allow progression to clinical applications.
Aerosol Delivery of Anti Metastatic Tumors in Lungs
According to information from MedLinePLus at
http://www.nlm.nih.gov/medlineplus/ency/article/000097.htm: "Metastatic tumors
in the lungs are malignancies (cancers) that developed at other sites and spread
via the blood stream to the lungs. Common tumors that metastasize to the lungs
include breast cancer, colon cancer, prostate cancer, sarcoma, bladder cancer,
neuroblastoma, and Wilm's tumor. However, almost any cancer has the capacity to
spread to the lungs."
The Company has received a federal government grant from the National Institutes
of Health (the National Cancer Institute) to support the Company's work with a
researcher at a major medical school who is using the Company's ssDNA expression
vector with a propietary aerosol delivery system against a cancer gene common to
metatastic tumor cells.
Anti- Solid Tumor Gene Therapy
The Company has entered into an agreement with scientists at a university gene
therapy center for preclinical experiments using the company's ssDNA expression
vector technology to silence a gene that has been shown to cause malignant
transformation of tumor cells.
The combination of a proprietary delivery technology and CytoGenix' gene
silencing technology has great potential for new treatments of malignancies,
particularly in breast, head, neck, and prostate tumors.
NUCLEIC ACID DELIVERY TECHNOLOGY
DNA delivery into cells is a rapidly developing area in gene therapy and
biotechnology. Viral methods of DNA delivery are well-characterized and
efficient, but little is known about the toxicity and immunogenecity of viral
vectors. As a result, the Company is continuing investigation of viral vectors
but concentrating its efforts on non-viral, transfection methods of DNA
delivery. The Company is investigating targeted delivery using synthetic DNA
delivery systems containing histidine-rich peptides and polypeptides and
self-assembled delivery systems based on cationic lipids and polymers.
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SYNTHETIC DNA PROCESS
Scientists at CytoGenix have developed a novel method for producing large
amounts of high quality therapeutic circular DNA with significant reductions in
residual contaminants compared to traditional fermentation methods.
Specifically, we have identified and optimized a method for in vitro DNA
synthesis and amplification for the production of good manufacturing practices
(GMP) drug substances.
Cell-free amplification of c-DNA has many important benefits beginning with the
size and composition of the plasmid. Under this system, there is no need for
bacterial replication genes or selection markers such as antibiotic resistant
genes. In most cases, this will reduce the size and weight of the therapeutic
c-DNA by at least 3,000 base pairs or a molecular weight of approximately 2,000
kilo Daltons. 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.
Greater biological activity
Our experiments have shown that the biological response to c-DNAs with no vector
backbone is approximately one and one-half times higher than traditional
plasmids. Other investigators have reported greater activity levels of in vivo
studies using "DNA mini circles". At the molecular level, 100nano grams of
traditional plasmid DNA is equal to 60ng of bacteria-free c-DNA. This may
explain the result of our transfection experiments and suggest that less in
vitro synthesized DNA may be required to generate the same biological effect as
its plasmid counterpart. In terms of cost, this would translate in substantial
savings.
Low risk, low cost and fast cycle time
Our novel process is bench-scale and requires little equipment, space or human
intervention in comparison to bioprocess manufacturing facilities. No cell banks
are needed and no yield optimization steps that can add weeks or months to the
production process. This process lends itself to liquid-handling automation and
one technician can synthesize gram quantities in a matter of days working in
custom manufacturing suites. The capital costs for physical plant and on-going
fixed and variable operating expenses are a fraction of the costs of large-scale
bioprocess methods. We believe that this synthetic process will be more
consistent, yield material of higher purity, and will enable delivery of higher
concentrations of Active Pharmaceutical Ingredient (API) if needed.
Improved regulatory profile
Benefits provided by the cell-free synthesis from a regulatory agency review and
compliance perspective are significant. By beginning with a well-characterized
synthetic master construct, there is no need for cell bank systems (master or
working cell banks), thus reducing the risk and amount of documentation, space
and cost. Similarly, product cGMP manufacturing procedures detailing methods for
cell collection, processing and culture conditions would no longer be necessary
and would substantially reduce quality assurance and quality control ( QA/QC)
and compliance overhead costs. The synthetic DNA process yields DNA free of
endotoxins, bacterial genomic DNA, DNA or proteins. As such it may encounter
improved regulatory acceptance.
Cytogenix is carrying out a multi-pronged strategy with the objective of
commercializing this technology within the next year. The following summarizes
our plans:
o PROCESS OPTIMIZATION AND SCALE-UP, continued experimentation to
achieve yield optimization, reduced reagent usage and reduced
costs. Manufacture milligram quantities consistently, conduct
several animal studies with various plasmids to verify
bioactivity equal to or greater than plasmids produced via
traditional methods. Scale-up to produce gram quantities.
o DEVELOP REAGENT SUPPLIERS AND SOURCING, establish relationships
with manufacturers of enzymes. Develop quality parameters.
8
o CONSTRUCT CGMP PRODUCTION SUITE, build and equip a side-by-side
manufacturing suite for simultaneous production of batches cGMP
pDNA.
o BUSINESS DEVELOPMENT, we are currently evaluating options for
industry partnership for continued development of the process
including contract manufacturing
All primary research and development at CytoGenix is conducted in the on-site
laboratory located adjacent to the executive offices at the same address. The
Company's primary research and development experiments are being conducted in
human lung cancer cells (A549 cells) and human liver cells (HepG2 cells) to
determine the expression levels of single-stranded catalytic DNA and
single-stranded Antisense DNA targeting c-raf kinase mRNA transcripts, bcl-2mRNA
transcripts, and mouse double minute oncogene 2 (MDM2) MRNA transcripts
The Company is currently supporting four Sponsored Research Agreements (SRA):
1. Dr. Cy Stein's lab at Albert Einstein College of Medicine is using
Cytogenix's proprietary gene silencing DNA technology against a gene
found in melanoma cells that produces a protein known to counteract the
effect of several chemotherapeutic agents in difficult to treat
cancers.
2. Dr. Frank Orson's lab at Baylor College of Medicine is conducting
animal trials to determine the effect of CytoGenix's gene silencing
technology on cancer in the lungs of mice using aerosol gene delivery
system.
3. Dr. Jeffrey Actor's lab at University of Texas Health Science Center in
Houston is conducting animal trials to determine efficacies of
CytoGenix's antimicrobial ODN compounds.
4. Dr. David Weiner's lab at University of Pennsylvania is conducting
animal trials to determine efficacies of CytoGenix's synthetic DNA
vaccines against Smallpox and other targets.
Other research is contemplated to explore various plasmid delivery systems.
The Company and its cooperating university scientists have published a number of
scientific papers and presented at scientific meetings. These publications
include:
1. Tan, X. & Chen, Y., A novel genomic approach identifies bacterial
DNA-dependent RNA polymerase as the target of an antibacterial
oligodeoxynucleotide, RBL-1 Biochemistry, 2005 (in press).
2. 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,
(submitted), 2005.
3. Tan, X, & Chen, Y. Discovery of novel antibiotics using cell-based
screening (Review), Current Drug Discovery, pp. 21-23, April, 2004.
4. 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.
5. 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.
6. Chen, Y. and McMicken, H. Intracellular production of DNA enzyme by a
novel single-stranded DNA expression vector, Gene Therapy,
10:1776-1780, 2003.
7. Chen, Y. , Ji, Y., and Conrad, C. Expression of single-stranded DNA in
mammalian cells, Biotechniques, 34:167-171, 2003.
8. Chen, Y., Novel Technologies for target validation, Genetic Engineering
News, 23(11):7-9, 2003.
9. Chen, Y. A novel single-stranded DNA (ssDNA) expression vector
(Review), Expert Opinion on Biological Therapy, 2:735-740, 2002.
10. Chen, Y. Meeting highlights, 10th International conference on gene
therapy of cancer, Expert Opinion on Biological Therapy, 2:443-445,
2002.
11. Chen, Y., Growth of oligo-based drugs, Genomics & Proteomics, October,
2002.
9
12. Datta, H., and Glazer, P. Intracelullar 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.
13. 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.
OUR BUSINESS STRATEGY
The goal and the focus of the Company are to leverage its proprietary technology
to maximize investor value. The Company is developing skin creams that should be
safer and more effective than systemic drugs (pills) for these diseases. Upon
successful completion of Phase I/II clinical trials, the Company intends to seek
distribution agreements with domestic and foreign pharmaceutical companies.
o We intend to independently develop oligonucleotide mediated therapeutic
applications in several disease areas.
o We will pursue partnerships with other pharmaceutical or biotechnology
companies to develop DNA expression-based therapeutics.
o We will seek to maintain and expand our patent portfolio and proprietary
technology. We aggressively o pursue patent protection to maintain
worldwide rights relating to the development, manufacture and sale of
oligodeoxynucleotide mediated therapeutics and gene target validation.
o We intend to leverage our oligonucleotide expertise through licensing,
process development and pilot manufacturing. We believe that we have
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. We believe that we will be able to
capitalize on our 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 our own drug development.
COLLABORATIVE AGREEMENTS
PARTNERSHIPS
The Company currently has several industry and government agency partnerships
and is actively seeking out-licensing opportunities in the application of our
core technologies to promote the development of new therapeutic products in the
fields of infectious diseases, inflammation and cancer. CytoGenix is also
seeking partnerships in the development of products in the areas of animal
health and agriculture. Our cell-free method for the cGMP production of
therapeutic-grade DNA is also available for licensing. Our currents partners
include:
GE HEALTHCARE, FAST TRAK BIODEFENSE GROUP
CytoGenix has entered into an agreement with the Fast Trak BioDefense Group of
GE Healthcare to collaborate in seeking, securing and executing bio-defense
related Federal contracts. GE Healthcare will provide highly qualified technical
and regulatory affairs expertise and will coordinate the application process to
various departments within the U.S. government.
ALDEVRON, LLC.
CytoGenix has teamed up with Aldevron LLC, a leader in the field of DNA
vaccines, to evaluate a synthetic DNA vaccine derived from a plasmid provided by
Aldevron. The synDNA(TM) vaccine was designed to produce a Hepatitis
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B viral surface antigen and was evaluated in a rabbit model using Aldevron's
proprietary Genetic Immunization and Antibody (GIA(TM)) technology. The pilot
study was successful and further testing is ongoing.
COLLABORATIONS
The Company currently has several academic and government agency collaborations
to promote the research and development of new therapeutic products. Our current
collaborators include:
NATIONAL INSTITUTES OF HEALTH
CytoGenix was given a non-exclusive license to a HIV DNA vaccine construct to be
used as a proof of principle for the synDNA production method. The HIV DNA
vaccine construct was prepared using CytoGenix' proprietary process and the
product was tested in an animal model. The results of this pilot study showed
bioactivity indicating that the synthetic DNA vaccine was able to induce an
immune response. Further investigations are currently being explored to expand
this collaboration.
BAYLOR COLLEGE OF MEDICINE
Several collaborative projects are ongoing with investigators at Baylor College
of Medicine in the Texas Medical Center. A long standing collaboration is
ongoing with Drs. Sheldon Kaplan, Ed Mason and Jesus Vallejo in the Infectious
Disease Group of the Department of Pediatrics. The focus of the project has been
to identify clinical candidates for the treatment of methicillin-resistant
staphylococcus aureus (MRSA).
Another collaboration is ongoing with Dr. Frank Orson to evaluate the effects of
several DNA vaccines in preclinical models. The goal of these studies is to
identify a novel DNA vaccine for the treatment of influenza in human beings.
Preliminary studies have shown that a synDNA(TM) influenza vaccine was of
greater potency than a standard plasmid in generating an immunologic response.
Research continues to apply the information learned from the pilot studies to
design and produce a synDNA(TM) vaccine to be used in the event of a pandemic
outbreak of influenza.
UNIVERSITY OF TEXAS HEALTH SCIENCE CENTER AT HOUSTON
CytoGenix has several ongoing collaborations with the University of Texas Health
Science Center at Houston. The Company has entered into an agreement to provide
access to animal care facilities to allow CytoGenix scientists to conduct
exploratory studies for product leads. CytoGenix has also worked extensively
with Dr. Jeffrey Actor to identify novel product candidates for use in
infectious disease applications.
UNIVERSITY OF PENNSYLVANIA
Recently CytoGenix added a University of Pennsylvania scientist, Dr. David
Weiner, to the Scientific Advisory Board. Dr. Weiner is a pioneer and is world
recognized in the field of DNA vaccines and several collaborative projects are
ongoing in the areas of smallpox and influenza. A pilot study conducted in a
murine model demonstrated that a synDNA vaccine targeting smallpox was highly
immunogenic.
Technology - Sponsored Research
It is the policy of the Company to seek outstanding scientific leaders and
independent investigators as collaborators in mutually beneficial projects. The
following projects are sponsored in part by the company:
o DR. JEFFERY ACTOR, ASSOCIATE PROFESSOR AT THE UNIVERSITY OF TEXAS HEALTH
SCIENCE CENTER Houston, Texas is conducting a study entitled, "In vivo
proof of concept experiment for anti-bacterial DNA preparation".
11
o DR. FRANK ORSON, PROFESSOR AT BAYLOR COLLEGE OF MEDICINE, Houston, Texas
is conducting a study entitled, "PEI aerosol delivery of ssDNA expression
vector".
o DRS. LYUBA BENIMETSKAYA AND CY STEIN AT ALBERT EINSTEIN COLLEGE OF
MEDICINE, New York are conducting a study entitled, "Down Regulate Gene
Expression in Melanoma Cells using Antisense ODNs generated by CYGX ssDNA
Expression Vectors".
o DR. DAVID WEINER AT UNIVERSITY OF PENNSYLVANIA is conducting studies to
evaluate the safety and efficacy of DNA vaccines using several animal
models.
MARKETING STRATEGY
We plan to market initial products, when developed, and for which we 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 we
develop, and our financial resources. We do not expect to establish a direct
sales capability for therapeutic compounds for at least the next several years.
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 our 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 thereunder. Although the implementation of initial
aspects of our 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 IND application and our
marketing strategy therefore may not be implemented for several years. See "Drug
Approval Process and Other Governmental Regulation."
PATENTS AND PROPRIETARY RIGHTS
We have developed or acquired a comprehensive body of intellectual rights. The
proprietary nature of, and protection for, our product candidates, processes and
know-how are important to our business. We plan to prosecute and aggressively
defend our patents and proprietary technology. Our policy is to patent the
technology, inventions, and improvements that are considered important to the
development of our business and that are patentable. We also depend upon trade
secrets, know-how, and continuing technological innovation to develop and
maintain our competitive position.
A patent portfolio including 46 domestic and foreign issued or pending patent
applications protects our technologies. We intend to protect our 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. 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.
12
Drug Discovery
In the initial stages of drug discovery before a compound reaches the
laboratory, tens of thousands of potential compounds are randomly screened for
activity against an assay assumed to be predictive for particular disease
targets. This drug discovery process can take several years. Once a company
locates a screening lead, or starting point for drug development, isolation and
structural determination may begin. The development process results in numerous
chemical modifications to the screening lead in an attempt to improve its drug
properties. After a compound emerges from the above process, the next steps are
to conduct further preliminary studies on the mechanism of action, further in
vitro (test tube) screening against particular disease targets and, finally,
some in vivo (animal) screening. If the compound passes these barriers, the
toxic effects of the compound 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. These tests typically take
approximately three and one-half years to complete.
Investigational New Drug Application
During the pre-clinical testing, an IND is filed with the FDA to begin human
testing of the drug. The IND becomes effective if not rejected by the FDA within
30 days. The IND must indicate the results of previous experiments, how, where
and by whom the new studies will be 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. In addition, an Institutional Review Board, comprised of
physicians at the hospital or clinic where the proposed studies will be
conducted, must review and approve the IND. 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 effective, Phase I human clinical trials may begin. These
tests, involving usually between 20 and 80 patients or healthy volunteers,
typically take approximately one year to complete and cost between $300,000 and
$500,000 per trial. The Phase I clinical studies also determine how a drug is
absorbed, distributed, metabolized and excreted by the body, and the duration of
its action. Phase I trials are not normally conducted for anticancer product
candidates. A Phase Ib study involves patients with the targeted disease cancer
and is focused on safety.
Phase II Clinical Trials
In Phase II clinical trials, controlled studies are conducted on approximately
100 to 300 volunteer patients with the targeted disease. The preliminary purpose
of these tests is to evaluate the effectiveness of the drug on the volunteer
patients as well as to determine if there are any side effects. These studies
generally take approximately two years and cost between $500,000 and $4 million
per trial, and may be conducted concurrently with Phase I clinical trials. 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 cost 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.
13
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 and in
conjunction with 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 2005, each NDA with clinical data must be accompanied by a
$672,000 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 average
review time for a New Molecular Entity (NME) has remained static at
approximately 16 months, however, new NME can and have been 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. We face
competition from biotechnology and pharmaceutical companies using more
traditional approaches to treating human diseases. Our competitors may develop
safer, more effective or less costly gene-based therapeutics. In addition, we
face and will continue to face competition from other companies for corporate
collaborations with pharmaceutical and biotechnology companies, for establishing
relationships with academic and research institutions and for licenses to
proprietary technology, including intellectual property.
Many of our 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 our products, or the products
developed by corporate partners using our licensed technologies obsolete, or
non-competitive, or that any product we or our corporate partners develop will
be preferred to any existing or newly developed technologies. In addition, there
can be no assurance that our competitors will not develop safer, more effective
or less costly cardiovascular therapies, gene delivery systems, gene
therapeutics, non-gene therapies, or other therapies, achieve superior patent
protection or obtain regulatory approval or product commercialization earlier
than Company, any of which could have a material adverse effect on our business,
financial condition or results of operations.
RESEARCH AND DEVELOPMENT
The Company expensed $1,731,764, and $831,472 on research and development
activities during the years ended December 31, 2005, and 2004, respectively.
Research and development (R&D) expenses include related salaries, contractor
fees, materials, utilities. R&D expenses consist of independent R&D costs and
costs associated with collaborative development arrangements. In addition, the
Company funded R&D at other companies and research institutions under
agreements. Research and development costs are expensed as incurred.
14
EMPLOYEES
As of December 31, 2005, we had 11employees, 5 of whom hold advanced degrees.
None of our employees are covered by collective bargaining agreements, and we
consider relations with our employees to be good.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are a reporting company and file annual, quarterly and current reports, proxy
statements and other information with the SEC. For further information with
respect to us, you may read and copy our reports, proxy statements and other
information, at the SEC's 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. Our SEC
filings are also available at the SEC's web site at "http://www.sec.gov." In
addition, you can read and copy our SEC filings at the office of the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
Copies of our Annual Report on Form 10-K, 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 our website (www.cytogenix.com) or by sending a request for a
paper copy to: Cytogenix, Inc. 3100 Wilcrest, Suite 140, Houston, TX 77042,
attn. Investor Relations.
ITEM 1A. RISK FACTORS
RISKS AFFECTING FUTURE OPERATING RESULTS
We do not provide forecasts of our future financial performance. While we are
optimistic about our long-term prospects, the following factors should be
considered in evaluating our outlook. If the possibilities described as risks
below actually occur, our operating results and financial condition would likely
suffer and the trading price of our common stock may fall, causing a loss of
some or all of an investment in our common stock.
Our products are in an early stage of development and may not be determined to
be safe or effective.
We are only in the early stages of development with our biopharmaceutical
products. We have devoted almost all of our time to research and development of
our technology and products, protecting our proprietary rights and establishing
strategic alliances. Our proposed products are in the pre-clinical stages of
development and will require significant further research, development, clinical
testing and regulatory clearances. Our proposed products are subject to
development risks. These risks include the possibilities that any of the
products could be found to be ineffective or toxic, or could fail to receive
necessary regulatory clearances. We have not received any significant revenues
from the sale of products and we may not successfully develop marketable
products that will increase sales and, given adequate margins, make us
profitable. Our competitors may develop superior or equivalent, but less
expensive, products.
We have incurred net losses since our inception, and we may not achieve or
sustain profitability.
We incurred a net loss of $3.53 million in 2005 and of $2.36 million in 2004. As
of December 31, 2005, our total shareholder's equity was $407,521. Our losses
have resulted principally from expenses incurred in research and development of
our technology and products, general and administrative expenses that we have
incurred while building our business infrastructure. We expect to continue to
incur significant operating losses in the future as we continue our research and
development efforts and seek to obtain regulatory approval of our products. Our
ability to achieve profitability depends on our ability to raise additional
capital, complete development of our products, obtain regulatory approvals and
market our products. It is uncertain when, if ever, we will become profitable.
If we fail to attract significant additional capital, we may be unable to
continue to successfully develop our products.
15
Since we began operations, we have obtained operating funds primarily by selling
our company common stock. Based on our current plans, we do not believe that
current cash balances will be sufficient to meet our operating needs in 2006.
Furthermore, the actual amount of funds that we will need will be determined by
many factors, some of which are beyond our control. These factors include the
success of our research and development efforts, the status of our pre-clinical
and clinical testing, costs relating to securing regulatory approvals and the
costs and timing of obtaining new patent rights, regulatory changes, competition
and technological developments in the market. We may need funds sooner than
currently anticipated.
If necessary, potential sources of additional funding could include strategic
relationships, public or private sales of shares of our common stock or debt or
other arrangements. We may not obtain additional funding when we need it on
terms that will be acceptable to us or at all. If we raise funds by selling
additional shares of our common stock or securities convertible into our common
stock, the ownership interest of our existing shareholders will be diluted. If
we are unable to obtain financing when needed, our business and future prospects
would be materially adversely affected.
If we fail to receive necessary regulatory approvals, we will be unable to
commercialize our products. All of our products are subject to extensive
regulation by the United States Food and Drug Administration, or FDA, and by
comparable agencies in other countries. The FDA and comparable agencies require
new pharmaceutical products to undergo lengthy and detailed clinical testing
procedures and other costly and time-consuming compliance procedures. We do not
know when or if we will be able to submit our products for regulatory review.
Even if we submit a new drug application, there may be delays in obtaining
regulatory approvals, if we obtain them at all. Sales of our products outside
the United States will also be subject to regulatory requirements governing
clinical trials and product approval. These requirements vary from country to
country and could delay introduction of our
products in those countries. We cannot assure you that any of our products will
receive marketing approval from the FDA or comparable foreign agencies.
We may fail to compete effectively, particularly against larger, more
established pharmaceutical companies, causing our business to suffer.
The biotechnology industry is highly competitive. We compete with companies in
the United States and abroad that are engaged in the development of
pharmaceutical technologies and products. They include: biotechnology,
pharmaceutical, chemical and other companies; academic and scientific
institutions; governmental agencies; and public and private research
organizations.
Many of these companies and many of our other competitors have much greater
financial and technical resources and production and marketing capabilities than
we do. Our industry is characterized by extensive research and development and
rapid technological progress. Competitors may successfully develop and market
superior or less expensive products which render our products less valuable or
unmarketable.
We have limited operating experience.
We have engaged solely in the development of biopharmaceutical technology.
Although some members of our management team have experience in biotechnology
company operations, we have limited experience in manufacturing or selling
biopharmaceutical products. We also have only limited experience in negotiating
and maintaining strategic relationships, and in conducting clinical trials and
other later-stage phases of the regulatory approval process. We may not
successfully engage in some or all of these activities.
We have limited manufacturing capability.
While we believe that we can produce materials for clinical trials and produce
products for human use at our recently completed synDNA production suite, we may
need to expand our commercial manufacturing capabilities for products in the
future if we elect not to or cannot contract with others to manufacture our
16
products. This expansion may occur in stages, each of which would require
regulatory approval, and product demand could at times exceed supply capacity.
We have not selected a site for any expanded facilities and do not know what the
construction cost will be for such facilities and whether we will have the
financing needed for such construction. We do not know if or when the FDA will
determine that such facilities comply with Good Manufacturing Practices. The
projected location and construction of any facilities will depend on regulatory
approvals, product development, pharmaceutical partners and capital resources,
among other factors. We have not obtained regulatory approvals for any
productions facilities for our products, nor can we assure investors that we
will be able to do so.
If we lose key personnel or are unable to attract and retain additional, highly
skilled personnel required for our activities, our business will suffer.
Competition for qualified personnel in our industry is intense, and our success
will depend on our ability to attract and retain highly skilled personnel. To
date, we have been successful in attracting and retaining key personnel. We are
not aware of any key personnel who plan to retire or otherwise leave the Company
in the near future.
Asserting, defending and maintaining our intellectual property rights could be
difficult and costly, and our failure to do so will harm our ability to compete
and the results of our operations.
Our success will depend on our existing patents and licenses, and our ability to
obtain additional patents in the future. A patent portfolio including 46
domestic and foreign patents issued or pending patent applications protects our
technologies.
We cannot assure investors that our pending patent applications will result in
patents being issued in the United States or foreign countries. In addition, the
patents which have been or will be issued may not afford meaningful protection
for our technology and products. Competitors may develop products similar to
ours which do not conflict with our patents. Others may challenge our patents
and, as a result, our patents could be narrowed or invalidated. The patent
position of biotechnology firms generally is highly uncertain, involves complex
legal and factual questions, and has recently been the subject of much
litigation. No consistent policy has emerged from the United States Patent and
Trademark Office (USPTO), or the courts regarding the breadth of claims allowed
or the degree of protection afforded under biotechnology patents. In addition,
there is a substantial backlog of biotechnology patent applications at the USPTO
and the approval or rejection of patents may take several years.
Our success will also depend partly on our ability to operate without infringing
upon the proprietary rights of others, as well as our ability to prevent others
from infringing on our proprietary rights. We may be required at times to take
legal action to protect our proprietary rights and, despite our best efforts, we
may be sued for infringing on the patent rights of others. We have not received
any communications or other indications from owners of related patents or others
that such persons believe our products or technology may infringe their patents.
Patent litigation is costly and, even if we prevail, the cost of such litigation
could adversely affect our financial condition. If we do not prevail, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. Any required license may not be
available to us on acceptable terms, or at all. If we fail to obtain a license,
our business might be materially adversely affected.
To help protect our proprietary rights in unpatented trade secrets, we require
our employees, consultants and advisors to execute confidentiality agreements.
However, such agreements may not provide us with adequate protection if
confidential information is used or disclosed improperly. In addition, in some
situations, these agreements may conflict with, or be subject to, the rights of
third parties with whom our employees, consultants or advisors have prior
employment or consulting relationships. Further, others may independently
develop substantially equivalent proprietary information and techniques, or
otherwise gain access to our trade secrets.
If our strategic relationships are unsuccessful, our business could be harmed.
Our strategic relationships with GE Healthcare and others are important to our
success. The development, improvement and marketing of many of our key
therapeutic products are or will be dependent, in part, on the efforts of our
strategic partners. For example, under the GE Healthcare relationship, we may
fail to achieve product development milestones; GE Healthcare may fail to
perform its obligations under our agreement, such as failing to produce an
adequate supply of sufficient quality raw materials to produce synDNA ; and our
agreement with GE Healthcare may be terminated against our will. We may not be
17
commercially successful in our effort to produce and/or sell synDNA. The
transactions contemplated by our agreements with strategic partners, including
equity purchases and cash payments, are subject to numerous risks and
conditions. The occurrence of any of these events could severely harm our
business.
Our near-term strategy is to develop our own products as well as co-develop
products with strategic partners, or to license the marketing rights for our
products to pharmaceutical partners after we complete one or more Phase II
clinical trials. In this manner, the extensive costs associated with late-stage
clinical development and marketing will be shared with, or the responsibility
of, our strategic partners.
To fully realize the potential of our products, including development,
production and marketing, we may need to establish other strategic
relationships.
We have limited sales capability and may not be able to successfully
commercialize our products.
We have been engaged solely in the development of biopharmaceutical technology.
Although some of our management have experience in biotechnology company
operations, we have limited experience in manufacturing or selling
pharmaceutical products. We also have only limited experience in negotiating and
maintaining strategic relationships, and in conducting clinical trials and other
later-stage phases of the regulatory approval process. To the extent we rely on
strategic partners to fully commercialize our products, we will be dependent on
their efforts. We may not successfully engage in any of these activities.
We may be subject to product liability lawsuits and our insurance may not be
adequate to cover damages.
We believe we carry adequate insurance for the product development research we
currently conduct. In the future, when we have products available for commercial
sale and use, the use of our products will expose us to the risk of product
liability claims. Although we intend to obtain product liability insurance
coverage, product liability insurance may not continue to be available to us on
acceptable terms and our coverage may not be sufficient to cover all claims
against us. A product liability claim, even one without merit or for which we
have substantial coverage, could result in significant legal defense costs,
thereby increasing our expenses, lowering our earnings and, depending on
revenues, potentially resulting in additional losses.
Continuing efforts of government and third party payers to contain or reduce the
costs of health care may adversely affect our revenues and future profitability.
In addition to obtaining regulatory approval, the successful commercialization
of our products will depend on our ability to obtain reimbursement for the cost
of the product and treatment. Government authorities, private health insurers
and other organizations, such as health maintenance organizations are
increasingly challenging the prices charged for medical products and services.
Also, the trend toward managed health care in the United States, the growth of
healthcare organizations such as HMOs, and legislative proposals to reform
healthcare and government insurance programs could significantly influence the
purchase of healthcare services and products, resulting in lower prices and
reducing demand for our products. The cost containment measures that healthcare
providers are instituting and any healthcare reform could affect our ability to
sell our products and may have a material adverse effect on our operations.
Reimbursement in the United States or foreign countries may not be available for
any of our products, any reimbursement granted may be reduced or discontinued,
and limits on reimbursement available from third-party payers may reduce the
demand for, or the price of, our products. The lack or inadequacy of third-party
reimbursements for our products would have a material adverse effect on our
operations. Additional legislation or regulation relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future
that adversely affects our products and our business.
If we fail to establish strategic relationships with larger pharmaceutical
partners, our business may suffer.
We do not intend to conduct late-stage (Phase III) human clinical trials
ourselves. We anticipate entering into relationships with larger pharmaceutical
companies to conduct later pharmaceutical trials and to market our products
18
and we also plan to continue to use contract manufacturing for late stage
clinical and commercial quantities of our products. We may be unable to enter
into corporate partnerships which could impede our ability to bring our products
to market. Any such corporate partnerships, if entered, may not be on favorable
terms and may not result in the successful development or marketing of our
products. If we are unsuccessful in establishing advantageous clinical testing,
manufacturing and marketing relationships, we are not likely to generate
significant revenues and become profitable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
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 new condition and is adequate for the Company's current operations. Rent
on the facility averages to be $5,701.00 per month with a lease term ending
September 2009. We believe our facilities are suitable and adequate for our
present operational requirements.
ITEM 3. LEGAL PROCEEDINGS
PHANUEL PURSUITS, LLC
Phanuel Pursuits, LLC had entered into option agreements pursuant to obtaining
licenses to commercialize the Company's anti-herpes product in China and India.
The Company allowed Phanuel to withdraw from their original China option,
applying the option fees towards the India option. Phanuel owed unpaid sums to
the Company under the remaining India Option Agreement including a specific
payment due to purchase the Company's data they would need for submission to the
Indian authorities for approval. Although the unpaid sums remained outstanding,
Phanuel filed suit October 8, 2004 alleging the Company withheld the data and
therefore breached the agreement. The suit has been dismissed on the merits from
the trial court with the Court's granting of the Company's Motion for Summary
Judgment. The Company dropped its Counterclaim against Phanuel, and Phanuel's
Motion for New Trial has been denied. Because Phanuel failed to file a Notice of
Appeal with the trial court within the permissible time period, this action is
final.
WILLIAM B. WALDROFF AND APPLIED VETERINARY GENOMICS, INC. V. CYTOGENIX, INC.
CytoGenix filed a Declaratory Judgment action in February, 2004, to obtain a
finding of nonliability with respect to two license agreements for single
stranded DNA; one for shrimp, and one for horses, originally issued in 1998 to
William B. Waldroff. Waldroff and Applied Veterinary Genomics, Inc. (AVGI), a
party in interest as a sublicensee of Waldroff's, counterclaimed for damages,
attorneys fees, unrelated torts, and a permanent injunction to honor the
purported licenses. A jury trial was held in February 23, 2005. Both Waldroff
and AVGI also sued three directors of CytoGenix for interfering with the
licenses. The jury did not make any findings of liability, nor assess any
damages against any of the directors or against CytoGenix. The court has
preliminarily entered a judgment ordering CytoGenix to perform according to the
licenses, and for attorney's fees in the amount of $115,500. Pending appeal
Cytogenix has established a long-term CD in the amount of $115,500 to comply.
This CD earns interest at a rate of 3.4% annually.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the quarter ended
December 31, 2005.
EXECUTIVE OFFICERS OF THE COMPANY AND OTHER KEY EMPLOYEES
19
Set forth below are the names, ages (as of March 31, 2006) and titles of
the persons currently serving as executive officers of the Company. All
executive officers hold office until their successors are elected and qualified.
NAME AGE TITLE
- -----------------------------------------------------------------------------
Malcolm H
Skolnick........................70 Chief Executive Officer and President
Lawrence
Wunderlich......................47 Chief Financial Officer
Frank
Vazquez ........................65 Chief Operating Officer
Yin
Chen............................43 Vice President of Research & Development
DR. MALCOLM H. SKOLNICK has been the Chief Executive Officer and President of
the Company since September 1, 1999. Prior to that time and for the last 30
years Dr. Skolnick was a Professor in the University of Texas Health Sciences
Center at Houston. Dr. Skolnick received a Ph.D. in physics from Cornell
University and a J.D. from the University of Houston. He is licensed to practice
law in Texas and is a registered patent attorney. He has practiced intellectual
property law, been active in technology transfer and licensing activities and
serves on the Boards of Biodyne, Inc., Public Health Services, Inc., QBIT, Inc
MR. LAWRENCE WUNDERLICH worked as a financial consultant at the investment
banking firm of Josephthal and Company from October 1996 until August 1998. At
that time, Mr. Wunderlich became the Company's Chief Financial Officer. Prior to
his employment with Josephthal, Mr. Wunderlich co-owned The Language Loop, a
translation service from 1991 to 1996 and held the position of President. Mr.
Wunderlich attended the University of Vienna and Manhattan College in Riverdale,
New York.
MR. FRANK VAZQUEZ is a consultant specializing in life science start-up
enterprises. He was President/CEO of Lark Technologies, Inc. from 1989 to 1999
and Medical Metrics, Inc. from 2000 to 2001. Mr. Vazquez has been engaged by
BCMT, Inc. the commercialization subsidiary of Baylor College of Medicine, the
University of Texas Health Science Center-Houston and individual clients to
organize and start new medical and biotechnology companies. Mr. Vazquez
previously held management positions with Cooper Vision, Inc., Booz Allen and
Hamilton, ITT Corporation and IBM. He holds a B.S. from Columbia University.
DR. YIN CHEN earned this Ph.D. in Molecular Biology & Biochemistry at the
University of Maine in 1996. Subsequently, he was a post-doctoral fellow at Beth
Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School.
In 1999, he joined InGene, Inc. of St. Louis as senior research scientist and
then Cytogenix, as chief research scientist in February 2000. He is one of
co-inventors of our company's proprietary ssDNA expression systems. He was
appointed to this position by the Board of Directors on November 7, 2001 to
replace Dr. Jonathan Elliston. Dr. Yin Chen has also been promoted to Executive
Secretary of the Scientific Advisory Committee.
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our authorized capital stock consists of $300,000,000 shares of common stock,
par value $0.001 per share, and 50,000,000 share of preferred stock, par value
$0.001 per share. There were 125,377,370 share of common stock and no share of
preferred stock outstanding as of March 16, 2006. Our common stock is traded on
the OTC Bulletin Board under the ticker symbol CYGX.
The high and low bid prices for the Company's common stock for each quarter
within the last two fiscal years, as quoted by the OTC Bulletin Board, were as
follows. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Fiscal Year Ending December 31, 2004
Quarter 1 $0.55 $0.94
Quarter 2 $0.41 $0.80
Quarter 3 $0.21 $0.45
Quarter 4 $0.22 $0.81
Fiscal Year Ending December 31, 2005
Quarter 1 $0.95 $0.43
Quarter 2 $0.79 $0.46
Quarter 3 $0.67 $0.34
Quarter 4 $1.15 $0.44
================================================================================
Quarter 1 to March 31, 2006 $1.54 $0.72
STOCKHOLDERS
As of March 27, 2006 there were approximately 651 shareholders of record of our
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 our securities sold during 2005 have been either previously reported on
our Form 10-Qs filed with the Securities and Exchange Commission or are
described below.
On October 11, 2005 the Company issued 5,226,000 shares of common stock for an
aggregate cash price of $1,306,500 (or $0.25per share) in a private placement to
accredited investors pursuant to the exemption from registration provided by
Section 3(b) of the Securities Act of 1933 and Rule 504 thereunder.
On October 11, 2005 the Company issued 50,000 shares of common stock. Of these
shares, 50,000 were issued to an employees of the Company for compensation for
an aggregate price of $24,500 or an average of $0.49 per share (based on 25% of
annual gross salary period) in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 for transactions not
involving a public offering.
The Company issued 5,248,000 shares of common stock for an aggregate cash price
of $1,312,000 (or $0.25per share) in a private placement to accredited investors
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 for transactions not involving a public offering. The
compensation for this stock was received in the 4th quarter of 2005.
21
(based on 25% of annual gross salary period) in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for
transactions not involving a public offering.
The Company issued 5,248,000 shares of common stock for a cash price of
$1,312,000 (or $0.25per share) in a private placement to accredited investors
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 for transactions not involving a public offering. The
compensation for this stock was received in the 4th quarter of 2005.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following selected financial data should be read in conjunction with Item 7.
"Management's Discussion and Analysis or Plan of Operation" and Item 8.
"Financial Statements."
As of December 31,
2005 2004 2003 2002 2001
Net Revenues
$ -- $ -- $ (184,891) $ 1,700 $ 875
Research and development 1,724,317 831,472
454,433 187,040 2,207,736
General and administrative 1,495,454 1,434,893
1,213,783 1,386,218 1,548,509
Consulting Expense 290,000 60,926
415,868 816,947 --
Depreciation 25,391 38,125
38,445 40,699 63,465
Other Income/Expense 2,037
40 9,905 345,588
----------- ----------- ------------- ------------- -------------
Net loss
(3,533,125) (2,365,376) (2,317,225) (2,427,204) (4,164,423)
Weighted Average number of common
shares outstanding basic and
diluted $ (0.03) $ (0.02) $ (0.03) $ (0.04) $ (0.11)
Balance sheet data:
Cash and Cash equivalents 1,307,965 453,235 257,236 -- 15,688
Working capital 226,930 (586,518) (339,865) (658,561) 72,997
Total assets 1,509,948 524,693 353,958 101,329 972,111
Total Liabilities 1,102,427 1,039,753 597,202 666,755 899,814
Shareholders' equity 407,525 (515,060) (243,242) (565,426) (541,313)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Our 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. We have based these forward-looking statements largely on our
expectations. Forward-looking statements in this report include, but are not
necessarily limited to, those relating to:
o our intention to introduce new products,
o receipt of any required FDA or other regulatory approval for our
products,
o our expectations about the markets for our products,
o acceptance of our products, when introduced, in the marketplace,
o our future capital needs, and
22
o success of our patent applications.
Forward-looking statements are subject to risks and uncertainties, certain of
which are beyond our control. Actual results could differ materially from those
anticipated as a result of the factors described in the "Risk Factors" and
detailed in our 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 our inability to obtain, approval by the FDA or
other regulatory authorities for our products,
o research and development efforts, including delays in developing, or
the failure to develop, our 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 acceptance of our products,
o problems that we may face in manufacturing, marketing, and distributing
our products,
o our inability to raise additional capital when needed,
o delays in the issuance of, or the failure to obtain, patents for
certain of our 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 our inception in 1995, we have devoted our resources primarily to fund our
research and development efforts. We have been unprofitable since inception and,
other than limited interest and grant revenue, we have had no material revenues
from the sale of products or from other sources, and we do not expect material
revenues for the foreseeable future. We expect to continue to incur losses for
the foreseeable future as we continue to expand our research and development
efforts and enter additional collaborative efforts. As of December 31, 2005, our
accumulated equity was $407,521.
RESULTS OF OPERATIONS
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
For the year ended December 31, 2005, we reported a net loss of $3,533,125, or
less than $0.03 per share, and no revenue as compared with a net loss of
$2,365,376, or less than $0.02 per share, and no revenue for the twelve months
ended December 31, 2004.
Research and Development Expenses. Research and development expenses increased
to $1,724,317 for the twelve months ending December 31, 2005 compared to
$831,472 for the same period in 2004 primarily due to hiring of additional R&D
employees and increased research activity. Approximately $673,000 of the
increase is a result of the
23
increased staff and the remaining difference of 220,000 results from the
increased activity cost of antibacterial and DNA vaccine research.
General and Administrative Expenses. General and administrative expenses
increased to $1,495,454 for the twelve months ending December 31, 2005 compared
to $1,434,893 for the same period in 2004. The increase is partially due to an
increase in legal fees of $244,000 of which $199,000 is due primarily to
increased patent attorney fees and litigation fees for the legal proceeding
described in Part II, Item 3 above. An increase in staff along with increases in
officer salaries contributed to an increase of $305,000 in payroll costs. These
costs were offset by a decrease in third party investor relations and
advertising fees of approximately $489,000.
Consulting Expenses. Consulting expenses increase to $290,000 for the twelve
months ending December 31 2005 compared to $60,276 for the same period in 2004.
This increase is primarily attributed to a one year consulting contract where
Cytogenix engaged a firm to consult on various financial business matters.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
decreased to $25,391 for the twelve months ending December 31, 2005 compared to
$38,125 for the same period in 2004 primarily due to office furnishings
purchased in previous years becoming fully depreciated in 2005.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through equity sales
totaling $11,000,000, and from grants and contract research funding of $200,000
from various sources. We expect to continue to incur losses as we continue and
expand our research and development activities and related regulatory work and
increase our collaborative efforts. For 2006, we expect our expenditures for
operations, including our collaborative efforts, and our GMP facilities to be
approximately $6 to $7 million. The increase compared to 2005 expenditures is
expected to result from the purchase of additional building for synthetic DNA
manufacturing coupled with additional production staff and expansion of
preclinical product development efforts. However, if need be in 2006, we could
reduce our expenditures because the vast majority of our costs are variable.
Those estimated expenditures include amounts necessary to fulfill our
obligations under our various collaborative, research and licensing agreements
during 2006.
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 where FDA approval for human sales is received, our business strategy
is to develop our products to initial Phase III human 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. We also look for collaborative and other efforts utilize other
technology to increase shareholder value. We currently use this strategy to
limit the potential cost we would incur in developing a product. Our 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 results and research results Because of the
various factors noted above and the expectation that, until we establish revenue
sources, we will license to, or jointly develop our prospective products with,
strategic partners, we review, at least annually, each research program and
clinical trial, based on results and progress during the prior year and estimate
our needs for that program or trial for the coming year, making adjustments
based on the progress of the program during the year. We do not set long-term
development budgets or development schedules for bringing our products to market
or track our research costs on a product basis.
Our cash, cash equivalents were $1,307,965 at December 31, 2005, compared with
$453,235 at December 31, 2004. The increase of $854,730 was due primarily to net
proceeds from a private placement of 6,538,000 shares of its common stock at
$.25 per share. The sale closed December 31, 2005. The securities were sold in a
private placement to accredited investors pursuant to the exemption from
registration provided by Section 4(a) of the Securities Act of 1933.
24
We do not expect any material revenues in 2006 from our business activities. To
fund our operations in 2006 and beyond we will need to raise additional capital.
We will continue to look for opportunities to finance our ongoing activities and
operations through accessing corporate partners or the public equity markets, as
we currently have no credit facility, nor do we intend to seek one.
CONTRACTUAL PAYMENT OBLIGATIONS
The Company's off-balance sheet arrangements are limited to rents on its primary
facility. These off-balance sheet arrangements are expensed as incurred. A
summary of our contractual commitments and obligations as of December 31, 2005
is as follows:
PAYMENTS DUE BY PERIOD
CONTRACTUAL 2008 AND
OBLIGATION TOTAL 2005 2006 2007 BEYOND
GE Healthcare Contract $ 4,300,000 $ - $ 350,000 $ 750,000 $ 3,200,000
Operating leases $ 355,494 $ 72,158 $ 74,144 $ 74,806 $ 134,386
Our future expenditures and capital requirements depend on numerous factors,
most of which are difficult to project beyond the short term, including, without
limitation, the progress of our research and development programs, the progress
of our pre-clinical and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, competing
technological and market developments, our ability to establish collaborative
arrangements and the terms of any such arrangements, and the costs associated
with commercialization of our products. Our cash requirements are expected to
continue to increase each year as we expand our activities and operations. There
can be no assurance, however, that we will ever be able to generate product
revenues or achieve or sustain profitability.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Financial Statements included under Part II, Item 8.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our 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, we evaluate our estimates, including those related to valuation
of investments, long-lived assets, and revenue recognition. We base our
estimates on historical experience and on various other assumptions. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies and the
related judgments and estimates affect the preparation of our financial
statements.
Long-Lived Asset Impairment
We regularly evaluate long-lived assets and certain identified intangible assets
for impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which requires us to review our long-lived assets and certain
identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable and exceeds its fair value. Recoverability is assessed utilizing an
un-discounted cash flow analysis and if less then the carrying value is compared
to the fair value for assessing impairment. Based on this analysis, we did not
recognize an impairment on long-lived assets during the year ended December 31,
2005. If circumstances related to our long-lived assets change, we may record an
impairment charge in the future.
25
RISKS RELATED TO SHARE OWNERSHIP
Our right to issue preferred stock and, our classified Board of Directors may
delay a takeover attempt and prevent or frustrate any attempt to replace or
remove the then current management of the Company by shareholders.
Our authorized capital consists of 300,000,000 shares of common stock and
50,000,000 shares of preferred stock. Our board of directors, without any
further vote by the shareholders, has the authority to issue preferred shares
and to determine the price, preferences, rights and restrictions, including
voting and dividend rights, of these shares. The rights of the holders of shares
of common stock may be affected by the rights of holders of any preferred shares
that our board of directors may issue in the future. For example, our board of
directors may allow the issuance of preferred shares with more voting rights,
higher dividend payments or more favorable rights upon dissolution, than the
shares of common stock or special rights to elect directors.
In addition, we have a "classified" board of directors, which means that only
one-third of our directors are eligible for election each year. Therefore, if
shareholders wish to change the composition of our Board of Directors, it could
take at least two years to remove a majority of the existing directors or three
years to change all directors. Having a classified board of directors may, in
some cases, delay mergers, tender offers or other possible transactions which
may be favored by some or a majority of our shareholders and may delay or
frustrate action by shareholders to change the then current Board of Directors
and management.
Our stock price is volatile and may fluctuate due to factors beyond our control.
Historically, the market price of our stock has been highly volatile as
reflected in the table in Part II, Item 5 of this report. The following types of
announcements could have a significant impact on the price of our common stock:
positive or negative results of testing and clinical trials by ourselves or
competitors; delays in entering into corporate partnerships; technological
innovations or commercial product introductions by ourselves or competitors;
changes in government regulations; developments concerning proprietary rights,
including patents and litigation matters; public concern relating to the
commercial value or safety of any of our products; financing or other corporate
transactions; or general stock market conditions.
Further, the stock market experiences significant price and volume fluctuations.
These fluctuations have particularly affected the market prices of equity
securities of many biopharmaceutical companies that are not yet profitable.
Often, the effect on the price of such securities is unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the ability of a shareholder to dispose
of his or her shares at a price equal to or above the price at which the shares
were purchased.
The significant number of our shares of Common Stock eligible for future sale
may cause the price of our common stock to fall.
We have outstanding 124,460,970 shares of common stock as of December 31, 2005
and all are or will be after the date of issuance eligible for sale under Rule
144 or are otherwise freely tradeable.
Our employees have been granted options to buy a total of 35,004,000 shares of
common stock as of December 31, 2005. The options granted have exercise prices
between $.185 to $1.01 per share. The issuance of the shares of common stock to
be issued upon exercise of these options, has not been registered as December
31, 2005
We may issue options to purchase up to an additional 996,000 shares of common
stock at December 31, 2005 under our stock option plans.
Sales of substantial amounts of shares into the public market could lower the
market price of our common stock.
We do not expect to pay dividends in the foreseeable future.
26
We have never paid dividends on our shares of common stock and do not intend to
pay dividends in the foreseeable future. Therefore, you should only invest in
our common stock with the expectation of realizing a return through capital
appreciation on your investment. You should not invest in our common stock if
you are seeking dividend income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
As of December 31, 2005 have a restricted long-term CD investment per the
litigation matter discussed in Note 8 to the financial statements. . Pending
appeal of this case Cytogenix has established a long-term CD in the amount of
$115,500 to comply. This CD earns interest at a rate of 3.4% annually.
27
ITEM 8. FINANCIAL STATEMENTS
- -----------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
CytoGenix, Inc.
A Development Stage Company
Houston, Texas
We have audited the accompanying balance sheet of CytoGenix, Inc. as of December
31, 2005 and 2004, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years then ended and the
period from February 10, 1995 (Inception) through December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements for the period February 10, 1995
(inception) through December 31, 2002, were audited by other auditors whose
reports expressed unqualified opinions on those statements. The financial
statements for the period February 10, 1995 (inception) through December 31,
2002, include total revenues and net loss of $2,575 and $14,842,328,
respectively. Our opinion on the statements of operations, stockholders' equity
(deficit), and cash flows for the period February 10, 1995 (inception) through
December 31, 2005, insofar as it relates to amounts for prior periods through
December 31, 2002, is based solely on the report of other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CytoGenix, Inc. as of December
31, 2005, and the results of its operations and its cash flows for each of the
two years then ended and the period from February 10, 1995 (Inception) through
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 to the financial statements, the Company's recurring
losses from operations and the need to raise additional financing in order to
satisfy its vendors and other creditors and execute its Business Plan raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 2. The 2005 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Lopez, Blevins, Bork & Associates, LLP
- -------------------------------------------
Lopez, Blevins, Bork & Associates, LLP
Houston, Texas
March 31, 2006
28
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
Balance Sheets
December 31,
----------------------------------------
2005 2004
------------------- ------------------
ASSETS
CURRENT ASSETS:
$
Cash $ 1,307,965 453,235
Prepaid Expense 21,392 -
------------------- ------------------
------------------- ------------------
Total current assets 1,329,357
453,235
Property and Equipment, net of $166,789 and $151,6490 accumulated
$ $
Depreciation for December 31, 2005 and December 31, 2004 respectively 56,287 65,059
Deposits 6,399 6,399
Long-term investment - Restricted 117,905 -
------------------- ------------------
Total assets $ 1,509,948 $
524,693
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 258,495 $ 237,833
Accrued expenses 843,932 801,920
------------------- ------------------
Total current liabilities 1,102,427 1,039,753
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 50,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.001 par value; 300,000,000 shares authorized,
124,460,970 and 109,204,339 shares issued and outstanding as of
December 31, 2005 and December 31, 2004, respectively 124,461 109,204
Common stock, $.001 par value; 300,000,000 shares authorized,
124,460,970 and 109,204,339 shares issued and outstanding as of
December 31, 2005 and December 31, 2004, respectively 124,461 109,204
Additional paid-in capital 23,971,086 19,530,637
Treasury stock (629,972) (629,972)
Deficit accumulated during the development stage (23,058,054) (19,524,929)
------------------- ------------------
Total stockholders' equity (deficit) 407,521 (515,060)
------------------- ------------------
Total liabilities and stockholders' equity (deficit) $ 1,509,948 $ 524,693
=================== ==================
See accompanying summary of accounting policies and notes to financial
statements
29
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
Statement of Operations
February 10, 1995
YEAR ENDED YEAR ENDED YEAR ENDED (Inception)Through
2005 2004 2003 December 31,2005
------------- ------------- ------------- -------------
REVENUES $ -- $ -- $ 80,000 $ 82,575
Cost of Revenues -- -- 264,893 264,893
------------- ------------- ------------- -------------
Gross Margin -- -- (184,893) (182,318)
Costs and Expenses:
Research and development 1,724,317 831,472 454,433 7,806,188
General and administrative 1,495,454 1,434,893 1,214,023 12,920,913
Consulting Expense 290,000 60,926 415,869 1,518,481
Depreciation and amortization 25,391 38,125 38,445 269,593
Impairment expense -- -- -- 345,588
Equity in losses of joint venture -- -- -- 10,000
------------- ------------- ------------- -------------
Loss From Operations (3,535,162) (2,365,416) (2,307,663) (23,053,081)
Other Income:
Gain on sale of security -- -- -- 881
Interest Income 2,405 40 243 2,686
Loss on disposal of property of
equipment (368) -- (9,805) (10,173)
Dividend income -- -- -- 1,633
------------- ------------- ------------- -------------
$ (3,533,125) $ (2,365,376) $ (2,317,225) $ (23,058,054)
Net Loss ============= ============= ============= =============
Net loss per share:
Basic and diluted net loss per share $ (.03) $ (.02) $ (.03)
============= ============= =============
Weighed average shares outstanding:
Basic and diluted 114,181,072 101,817,083 81,413,585
============= ============= =============
See accompanying summary of accounting policies and notes to financial
statements
30
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
Statement of Stockholders' Equity (Deficit)
Additiona Total
Common Stock Paid in Treasury Retained Stockholders
Capital Stock Deficit Deficit
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2002 61,045,611 61,046 14,845,828 (629,972) (14,842,328) (565,426)
Shares issued for cash, net fundraising 31,662,784 31,663 1,289,686 -- -- 1,321,349
Shares issued for services 4,295,315 4,295 729,056 -- -- 733,351
Shares issued for debt 121,284 121 95,693 -- -- 95,814
Shares issued for exercised warrants 1,599,999 1,600 222,400 -- -- 224,000
Share rights issued as revenue incentive -- -- 264,893 -- -- 264,893
Net loss -- -- -- -- (2,317,225) (2,317,225)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2003 98,724,993 98,725 17,447,556 (629,972) (17,159,553) (243,244)
Shares issued for cash, net fundraising 8,715,191 8,715 1,542,886 -- -- 1,551,601
Shares issued for services 482,032 482 -- -- 163,242
162,760
Shares issued for debt 39,267 39 31,250 -- -- 31,289
Shares issued for exercised warrants 1,242,856 1,243 346,185 -- -- 347,428
Net loss -- -- -- -- (2,365,376) (2,365,376)
------------ ------------ ------------ ------------ ------------ ------------
33
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
Statement of Stockholders' Equity (Deficit)
BALANCE, December 31, 2004 109,204,339 $ 109,204 $ 19,530,637 $ (629,972) $(19,524,929) $ (515,060)
Shares issued for cash, net fundraising 13,928,967 13,929 3,571,151 -- -- 3,585,080
Shares issued for debt 647,701 648 -- -- 542,126
541,478
Shares issued for services 679,963 680 -- -- 328,500
327,820
Net loss -- -- -- -- (3,533,125) (3,533,125)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005 124,460,970 $ 124,461 $ 23,971,086 $ (629,972) $(23,058,054) $ 407,521
============ ============ ============ ============ ============ ============
See accompanying summary of accounting policies and notes to financial
statements
34
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 10, 1995
(Inception)Through
2005 2004 2003 December 31,2005
------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $ (3,533,125) $ (2,365,376) $ (2,317,225) $(23,058,054)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 25,391 38,128 38,445 266,218
Impairment expense -- -- -- 345,588
Loss on disposal of property & equipment 368 -- 9,805 10,173
Gain on long term investments - restricted
(2,405) (2,405)
Stock issued for services 328,500 163,242 733,351 7,470,978
Stock option expense -- -- 264,891
2,062,193
Equity in losses of joint venture -- -- --
10,000
Changes in operating assets and liabilities:
Prepaid expenses (21,392) 20,374 (12,160)
(21,392)
Deposits -- -- (6,399) (6,399)
Accounts payable & accrued expenses 604,800 473,839 31,263 1,907,646
------------ ------------ ------------ ------------
Net cash used in operating activities (2,597,863) (1,669,793) (1,258,029) (11,015,454)
------------ ------------ ------------ (11,015,454)
INVESTING ACTIVITIES:
Purchase of property and equipment (16,987) (12,964) (45,358) (303,266)
Issue note receivable -- -- -- (25,100)
Investment in long-term CD
(115,500) -- -- (115,500)
Investment in joint venture -- --
------------ ------------ ------------
(10,000)
Net cash provided by used in investing activities (134,487) (12,964) (45,358) (453,866)
------------ ------------ ------------
FINANCING ACTIVITIES PROVIDED BY:
Proceeds from notes payable -- -- -- 250,000
Payments on notes payable -- -- -- (250,000)
Treasury shares sold -- -- -- 1,290,568
Purchase of treasury shares -- -- -- (60,000)
Buyback of stock warrants -- (571) -- (571)
Sale of common stock, net fundraising 3,585,080 1,551,601 1,321,349 10,597,789
Sale of common stock for exercised warrants -- 348,000 224,000 796,999
Loans from related parties, net -- -- (5,000) --
Contributions to capital -- -- -- 152,500
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,585,080 1,899,030 1,540,349 12,777,285
------------ ------------ ------------ ------------
NET CHANGE IN CASH 854,730 216,273 236,962
1,307,965
CASH, beginning of period 453,235 236,962 --
------------ ------------ ------------
------------
CASH, end of period $ 1,307,965 $ 453,235 $ 236,962 $ 1,307,965
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ -- $ --
============ ============ ============ ============
------------
Income taxes paid $ -- $ -- $ -- $ --
============ ============ ============ ============
NONCASH TRANSACTIONS:
Common stock issued for debt $ 542,126 $ 31,289 $ 95,814 $ 805,219
Received treasury stock for note receivable -- -- -- 25,100
Common stock issued for patent -- -- -- 375,000
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
35
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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
dedifferentiation and transdifferentiation processes. CytoGenix has acquired the
rights for applications to a specialized expression vector capable of producing
single stranded DNA (ssDNA) in both eukaryotes and prokaryotes.
Basis of Presentation
These financial statements are prepared in conformity with accounting principles
generally accepted in the United State 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.
Revenue Recognition
CytoGenix's revenues are derived from selling research kits. CytoGenix
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collectibility is
probable.
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.
Research and Development
Internal research and development costs are expensed as incurred. Research and
development costs include salaries and personnel-related costs, supplies and
materials, facility costs, depreciation of facility property, and outside
services required to conduct the preclinical development.
36
Income Taxes
The asset and liability approach is used to account for income taxes by
recognizing deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. CytoGenix records a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be
realized.
Earnings Per Common Share
Basic and diluted net loss per share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period presented
Stock-Based Compensation
CytoGenix accounts for stock-based compensation issued to employees under the
intrinsic value method. Under this method, the Company recognizes no
compensation expense for stock options granted when the number of underlying
shares is known and exercise price of the option is greater than or equal to the
fair market value of the stock on the date of grant. No options have been
granted.
CytoGenix accounts for non-cash stock-based compensation issued to non-employees
in accordance with the provisions of SFAS No. 123. Common stock issued to
non-employees and consultants is based upon the value of the services received
or the quoted market price, whichever value is more readily determinable.
Recent Accounting Pronouncements
In December 2004, the FASB, issued a revision to SFAS 123, also known as SFAS
123R, that amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using APB 25 and generally requires such transactions be accounted
for using a fair-value-based method. SFAS 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in
cash in interim or annual periods beginning after June 15, 2005. SFAS 123R
includes three transition methods: one that provides for prospective application
and two that provide for retrospective application. The Company intends to adopt
SFAS 123R prospectively commencing in the third quarter of the fiscal year
ending December 31, 2005. It is expected that the adoption of SFAS 123R will
cause the Company to record, as expense each quarter, a non-cash accounting
charge approximating the fair value of such share based compensation meeting the
criteria outlined in the provisions of SFAS 123R.
In May 2005 the FASB issued FAS 154 which establishes retrospective applications
as the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. FAS154 also provides guidance for determining whether
retrospective application of ca change in accounting principle is impracticable
and for reporting a change when retrospective application is impracticable. FAS
154 is effective in fiscal years beginning after December 15, 2005. The Company
does not expect the adoption of FAS 154 to significantly affect its financial
condition or results of operations.
37
NOTE 2 - GOING CONCERN
CytoGenix has had negligible revenues since inception and none in the last two
year, has incurred losses totaling $23,058,054 from inception through December
31, 2005. 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
revenues adequate to generate sufficient cash flow from operations or obtain
additional financing through private placements, public offerings and/or bank
financing necessary to support CytoGenix's working capital requirements. To the
extent that funds generated from any private placements, public offerings and/or
bank financing are insufficient, CytoGenix will have to raise additional working
capital. No assurance can be given that additional financing will be available,
or if available, will be on terms acceptable to CytoGenix. If adequate working
capital is not available CytoGenix may not increase its operations.
These conditions raise substantial doubt about CytoGenix's ability to continue
as a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should
CytoGenix be unable to continue as a going concern.
NOTE 3 - PROPERTY
Property consisted of the following as of December 31, 2005 and December 31,
2004 respectively:
Lab equipment 5 years $ 104,635 $ 114,514
Office Furniture & Fixtures 3-7 years 57,759 56,461
Office Equipment 3-7 years 57,518 45,733
Leasehold Improvements Lease Term 3,167 -
Less: accumulated depreciation (166,789) (151,649)
---------- ----------
Net book value $ 56,287 $ 65,059
=========== ===========
Depreciation expense totaled $25,391, $38,125, and $38,445 for 2005, 2004, and
2003 respectively.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses mainly consists of unpaid salaries and unpaid payroll taxes on
cash compensation and stock based compensation. Total accrued payroll taxes as
of December 31, 2005 and 2004 was $207,154 and $207,154, respectively. Accrued
bonus compensation per employment agreements was $395,946 as of December 31,
2005.
38
NOTE 5 - COMMON STOCK ISSUANCES
CytoGenix common stock issuances since inception have been as follows:
STOCK ISSUED FOR SERVICES:
Year Shares Amount
---- ------------ -------------
1995 4,584,500 $ 47,383
1996 500,000 375,000
1997 3,687,425 691,392
1998 3,601,021 2,820,826
1999 544,348 468,322
2000 546,171 491,473
2001 1,780,009 334,742
2002 3,162,535 1,016,747
------------- ------------
Sub-total 18,406,009 6,245,885
2003 4,295,315 733,351
2004 482,032 163,242
2005 679,963 328,500
STOCK ISSUED FOR CASH:
Year Shares Amount
---- ------------ -------------
1995 110,000 $ 21,000
1997 825,974 129,132
1998 2,964,000 593,800
1999 317,220 130,026
2000 1,268,989 610,800
2001 14,496,853 1,283,958
2002 12,992,411 1,596,043
------------- -----------
Sub-total 32,975,447 4,364,759
2003l 31,662,784 1,321,349
2004 8,715,191 1,551,601
2005 13,928,967 3,585,080
In 2006, restricted common stock sold for cash was consistently sold through
private placement memorandums at a discount. The difference between the selling
price and the fair market value on the date sold was approximately $6,645,275
for the year.
STOCK ISSUED FOR DEBT:
In 2005, 647,701 shares were issued for debt totaling $542,126. In 2004, 39,267
shares were issued for debt totaling $31,289.
In 1998, 212,780 shares were issued for debt totaling $135,990 and in 2000,
500,000 shares were issued for a patent, recorded at the fair value of the stock
issued totaling $375,000. In 1999, 20,000,000 shares were put into treasury and
8,229,288 were retired from treasury. In 2001, 2,819,337 shares were retired. In
2003, 121,284 shares were issued for debt totaling $95,814.
39
NOTE 6 - STOCK OPTIONS AND WARRANTS
In 2004 CytoGenix issued 1,242,856 warrants as part of a private placement
memorandum. The warrants vest immediately and expire one year from the grant
date. The exercise price on 1,242,856 is $0.28 per share. As of December 31,
2004 all but 285,714 of the $0.14 warrants have been exercised, and all but
642,857 of the $0.28 warrants have been exercised.
NOTE 7 - INCOME TAXES
For the period from inception through December 31, 2005, CytoGenix has incurred
net losses and, therefore, has no tax liability. The net deferred tax asset
generated by the loss carry-forward has been fully reserved. The valuation
allowance increased approximately $800,000. The cumulative net operating loss
carry-forward is approximately $10,500,000 at December 31, 2005, and will expire
in the years 2010 through 2025.
Deferred income taxes consist of the following at December 31, 2005:
Long-term:
Deferred tax assets $ 3,550,000
Valuation allowance (3,550,000)
----------------
$ -
================
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Commitments
CytoGenix leases office facilities under an operating lease that expires on
December 31, 2009. Rent expense was $66,455 and $68,407 for 2005 and 2004,
respectively. Monthly rent payments are as follows:
Period Rent per Month
------------------------------------------- ------------------
December 1, 2003 - March 30, 2004 $ 0
April 1, 2004 - September 30, 2004 2,979
October 1, 2004 - September 30, 2005 5,958
October 1, 2005 - September 30, 2007 6,179
October 1, 2007 - September 30, 2009 6,399
Over the term of the lease the rent works out to an average of $5,701 per month
starting December 2003 and ending September 2009. As of December 31, 2005
$32,656 of deferred rent has been recorded.
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, 2005, unbilled amounts under the SRA's
totaled approximately $0.
Per the employment agreements of the CEO, COO, CFO, Chief Scientist and Lab
Manager a severance pay obligation for early termination "without cause"
provides for (a) lump sum cash payment within 10 of termination an amount equal
to the employees base salary for the balance of the year of termination; a
prorata portion of the incentive bonus, if any, earned plus unreimbursed
expenses accruing to the date of termination. In addition the CEO, COO, and CFO
agreement stipulate a lump sum cash payment equal to the employee's annual base
salary should be paid upon termination. The cash obligation if all of the
employee under this arrangement were to be termination on 1/1/06 could result in
a cash outflow of approximately $1.063 million.
40
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 has committed
under this agreement to spending $350,000 for the year ended December 31, 2006
with the option to purchase $750,000 in 2007, $1,200,000 in 2008, and $2,000,000
in 2009.
Litigation
Phanuel Pursuits, LLC v. CytoGenix, Inc.
Phanuel Pursuits, LLC had entered into option agreements pursuant to obtaining
licenses to commercialize the Company's anti-herpes product in China and India.
The Company allowed Phanuel to withdraw from their original China option,
applying the option fees towards the India option. Phanuel owed unpaid sums to
the Company under the remaining India Option Agreement including a specific
payment due to purchase the Company's data they would need for submission to the
Indian authorities for approval. Although the unpaid sums remained outstanding,
Phanuel filed suit October 8, 2004 alleging the Company withheld the data and
therefore breached the agreement. The suit has been dismissed on the merits from
the trial court with the Court's granting of the Company's Motion for Summary
Judgment. The Company dropped itsCounterclaim against Phanuel, and Phanuel's
Motion for New Trial has been denied. Because Phanuel failed to file a Notice of
Appeal with the trial court within the permissible time period, this action is
final.
William B. Waldroff and Applied Veterinary Genomics, Inc. v. CytoGenix, Inc.
CytoGenix filed a Declaratory Judgment action in February, 2004, to obtain a
finding of nonliability with respect to two old license agreements for single
stranded DNA; one for shrimp, and one for horses, originally issued in 1998 to
William B. Waldroff. Waldroff and Applied Veterinary Genomics, Inc. (AVGI), a
party in interest as a sublicensee of Waldroff's, counterclaimed for damages,
attorneys fees, unrelated torts, and a permanent injunction to honor the
purported licenses. A jury trial was held in February, 2005. Both Waldroff and
AVGI also sued three directors of CytoGenix for interfering with the licenses.
The jury did not make any findings of liability, nor assess any damages against
any of the directors or against CytoGenix. The court has preliminarily entered a
judgment ordering CytoGenix to perform according to the licenses, and for
attorney's fees in the amount of $110,000. After receiving the trial transcript,
the Company has appealed the court's judgment and has filed the record and
appellant's brief in the Court of Civil Appeals.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer, President, and our
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934 as of December 31, 2005. Based on that review,
the Chief Executive Officer, President, and the Chief Financial Officer have
concluded that our disclosure controls and procedures are effective, in all
material respects, to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Securities and Exchange Act
of 1934 is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Internal Controls and Procedures
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company's fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Except for the information relating to Executive Officers of the Registrant,
which is included in Part 1, Item 4 of this Report, the information required by
Item 10 of Form 10-K is incorporated herein by reference to the definitive proxy
statement for the Company's Annual Meeting of Shareholders to be held on May 24,
2006 (the "Proxy Statement").
The Company has not adopted a Code of Ethics that applies to the Company's
principal executive officers, the principal financial officer, the principal
accounting officer or the controller. No Code of Ethics has been adopted because
the Company and the board of directors chose to devote its working capital to
the Company's research and development projects instead of reducing to writing
standards designed to deter wrongdoing and promote honest and ethical conduct.
The Board of Directors believes that the Company's very small size and the
limited number of personnel who are responsible for its operations make a formal
Code of Ethics unnecessary.
42
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by Item 12 of Form 10-K is incorporated herein by
reference to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 15 of Form 10-K is incorporated by reference to
the Company's Proxy Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(A) (1) and (2) Financial Statements and Financial Statement Schedules See
"Index to Consolidated Financial Statements" on page F-1
(A) (3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ---------------- ---------------------------------------------------------------------
3.1* -- Articles of Incorporation of Cryogenic Solutions, Inc.
(incorporated by reference to exhibit 3.1 to
the registrant's registration statement on
Form 10-SB, as amended (File No. 000-26807),
filed with the Securities & Exchange
Commission 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)
3.5 Certificate of Amendment dated April 6, 2004 of Articles of
Incorporation of CytoGenix, Inc.
3.4* -- Bylaws of Cryogenic Solutions, Inc. (incorporated by reference to
exhibit 3.4 of the Form 10-SB)
10.1* -- Employment Agreement dated September 1, 1999 between Cryogenic
Solutions, Inc. and Malcolm H. Skolnick (incorporated by reference
to exhibit 10.2 of the Form 10-SB).
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)
43
10.4* -- Employment Agreement dated February 1, 2000 between CytoGenix, Inc.
and Lawrence Wunderlich (incorporated by reference to exhibit 10.5
of the Form 10-SB).
10.5* -- 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).
10.6* -- Loan Agreement dated April 6, 2001, between CytoGenix, Inc. and
HEMPCO.
10.7* -- Consulting Agreement dated February 15, 2001 between Cryogenic
Solutions, Inc. and Mike Skillern.
10.8* -- Consulting Agreement dated October 27, 2001 between CytoGenix, Inc.
and Origenesis, LLC.
10.9* -- Consulting Agreement between CytoGenix, Inc. and EuroTrade
Financial, Inc. as of March 19, 2002
10.10* -- Stock Option Plan (incorporated by reference to Annex III of the
definitive proxy statement on schedule 14A filed with the
Securities and Exchange Commission on December 23, 2003.
10.11* -- Stock Option Plan(incorporated by reference to Annex I of the
definitive proxy statement on schedule 14A filed with the
Securities and Exchange Commission on
June 17, 2005
10.12* -- 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
Securities and Exchange Commission on March 28, 2006.
16.1* -- Letter re: change in certifying accountant (incorporated by
reference to exhibit 16 to the registrant's Current Report on Form
8-K/A filed with the Securities & Exchange Commission on February
21,2002).
31.1 -- Certifications of Principal Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, the "Act".
31.2 -- Certifications of Principal Financial Officer pursuant to Rule
13a-14(a) of the Act
32.1 -- Certifications of Principal Executive Officer pursuant to 18
U.S.C. Section 1350.
32.2 -- Certifications of Principal Financial Officer pursuant to 18
U.S.C. Section 1350.
- ----------------------
*Incorporated by reference as indicated.
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with Section 13 or 15(d) Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYTOGENIX, INC.
By: /s/ Malcolm Skolnick
--------------------------------------------
MALCOLM SKOLNICK, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: April 17, 2006
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 17, 2006 By: /s/ Malcolm Skolnick
--------------------------------------------
MALCOLM SKOLNICK, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR)
44
Date: April 17, 2006 By: /s/ Raymond L. Ocamp0, Jr.
--------------------------
RAYMOND L.OCAMPO, JR.
DIRECTOR
Date: April 17, 2006 By: /s/ Frank Vazquez
-------------------------
FRANK VAZQUEZ
DIRECTOR, EXECUTIVE VP
Date: April 17, 2006 By: /s/ Scott E. Parazynski
--------------------------
SCOTT E. PARAZYNSKI
DIRECTOR
Date: April 17, 2006 By: /s/ Cy A. Stein
--------------------------
CY A. STEIN
DIRECTOR
Date: April 17, 2006 By: /s/ John J. Rossi
--------------------------
JOHN J. ROSSI
DIRECTOR
Date: April 17, 2006 By: /s/ Lawrence Wunderlich
---------------------------
LAWRENCE WUNDERLICH
CHIEF FINANCIAL OFFICER, CONTROLLER AND
DIRECTOR (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER AND DIRECTOR)
45
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Malcolm Skolnick, President and Chief Executive Officer certify that:
2. I have reviewed this annual report on Form 10-K of CytoGenix, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 17, 2006
/s/ Malcolm Skolnick
- --------------------
MALCOLM SKOLNICK
PRESIDENT & CEO
(PRINCIPAL EXECUTIVE OFFICER)
46
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lawrence Wunderlich, Chief Financial Officer certify that:
1. I have reviewed this annual report on Form 10-K of CytoGenix, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 17, 2006
/s/ Lawrence Wunderlich
- ------------------------
LAWRENCE WUNDERLICH
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
47
EXHIBIT 32
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CytoGenix, Inc. (the "Company")
on Form 1O-K for the year ending December 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Malcolm H.
Skolnick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Annual Report of CytoGenix, Inc. on form 10-K for the year ended
December 31, 2005 fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in such Annual Report of CytoGenix, Inc. on Form
10-K fairly presents, in all material respects, the financial condition and
result of operations of the Company.
/s/ Malcolm H. Skolnick
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MALCOLM H. SKOLNICK
CHIEF EXECUTIVE OFFICER
APRIL 17, 2006
48
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CytoGenix, Inc. (the "Company")
on Form 1O-K for the year ending December 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Lawrence
Wunderlich, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Annual Report of CytoGenix, Inc. on form 10-K for the year ended
December 31, 2005 fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in such Annual Report of CytoGenix, Inc. on form
10-K fairly presents, in all material respects, the financial condition and
result of operations of the Company.
/s/ Lawrence Wunderlich
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LAWRENCE WUNDERLICH
CHIEF FINANCIAL OFFICER
APRIL 17, 2006
49