UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ___________ to ____________.
Commission file number: 0-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0484097
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
3100 Wilcrest, Suite 140, Houston, Texas 77042
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (713) 789-0070
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
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 number of shares outstanding of the issuer's common stock, par
value $.001 per share, as of July 12, 2006 was 128,710,555.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. - Financial Statements
Balance Sheets as of June 30, 2006 (Unaudited) and
December 31, 2005 3
Statements of Operations for the three months and six months ended
June 30, 2006 and 2005 (Unaudited) 4
Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 11
ITEM 4. Controls and Procedures 12
PART II OTHER INFORMATION 13
ITEM 1. Legal Proceedings 13
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 6. Exhibits 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
BALANCE SHEETS
June 30, 2006 December 31,
(Unaudited) 2005
------------ ------------
ASSETS
Current Assets:
Cash $ 1,169,279 $ 1,307,965
Accounts receivable, net 39,410 --
Inventory 176,719 --
Prepaid expenses 157,730 21,392
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Total Current Assets 1,543,138 1,329,357
Property and equipment, net of $184,345 and $166,789 accumulated
depreciation for June 30, 2006 and December 31, 2005, respectively 245,842 56,287
Deposits 6,399 6,399
Long-term investments - restricted 119,853 117,905
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Total Assets $ 1,915,232 $ 1,509,948
============ ============
LIABILITIES AND STOCKHOLERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 389,720 $ 258,495
Accrued expenses 973,677 843,932
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Total Current Liabilities 1,363,397 1,102,427
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 50,000,000 share authorized,
no shares issued and outstanding -- --
Common stock, $.001 par value; 300,000,000 share authorized,
128,602,864 and 124,460,970 share issued and outstanding as of
June 30, 2006 and December 31, 2005, respectively 128,603 124,461
Additonal paid-in capital 26,063,515 23,971,086
Treasury stock (629,972) (629,972)
Deficit accumulated during the development stage (25,010,311) (23,058,054)
------------ ------------
Total Stockholders' Equity 551,835 407,521
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,915,232 $ 1,509,948
============ ============
The accompanying notes are an integral part of these financial statements
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CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDING JUNE 30, 2006 AND 2005 AND PERIOD
FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH JUNE 30, 2006
(UNAUDITED)
Three Months Ended Six Months Ended Inception
June 30, June 30, Through
2006 2005 2006 2005 June 30, 2006
------------- ------------- ------------- ------------- -------------
REVENUES $ 37,180 $ -- $ 37,180 $ -- $ 119,755
COSTS OF REVENUES 11,656 -- 11,656 -- 276,549
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 25,524 -- 25,524 -- (156,794)
COSTS AND EXPENSES:
Research and development 642,568 232,483 1,141,077 673,661 8,947,265
General and administrative 288,628 219,716 810,986 589,056 13,731,899
Consulting expense 1,035 -- 10,110 -- 1,528,591
Depreciation and amortization 11,037 9,736 17,555 15,274 287,148
Impairment expense -- -- -- -- 345,588
Equity in losses in joint venture -- -- -- -- 10,000
------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (917,744) (461,935) (1,954,204) (1,277,991) (25,007,285)
OTHER INCOME:
Gain on sale of security -- -- -- -- 881
Interest income 981 -- 1,947 -- 4,633
Loss on disposal of property of equipment -- -- -- (368) (10,173)
Dividend income -- -- -- -- 1,633
------------- ------------- ------------- ------------- -------------
NET LOSS $ (916,763) $ (461,935) $ (1,952,257) $ (1,278,359) $ (25,010,311)
============= ============= ============= ============= =============
Net loss per share:
Basic and diluted net loss per share $ (0.01) $ (0.00) $ (0.02) $ (0.01)
============= ============= ============= =============
Weighted average shares outstanding:
Basic and diluted 125,914,952 112,089,772 125,097,661 111,247,633
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements
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CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CASH FLOWS
SIX MONTHS ENDING JUNE 30, 2006 AND 2005 AND PERIOD
FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH JUNE 30, 2006
(UNAUDITED)
Inception
Through
June 30,
2006 2005 2006
------------ ------------ ------------
OPERATING ACTIVITIES:
Net Loss $ (1,952,257) $ (1,278,359) $(25,010,311)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deprecation and amortization 17,556 15,274 283,773
Impairment expense -- -- 345,588
Loss on disposal of property & equipment -- 368 10,173
Gain on long-term investments - restricted (1,948) -- (4,353)
Stock issued for services -- 11,000 7,470,978
Stock option expense -- -- 2,062,193
Equity in losses of joint venture -- -- 10,000
Changes in assets and liabilities:
Accounts receivable (39,410) -- (39,410)
Inventory (176,719) -- (176,719)
Prepaid expenses (136,338) -- (157,730)
Deposits -- -- (6,399)
Accounts payable 131,225 84,682 389,720
Accrued expenses 129,745 -- 1,778,896
------------ ------------ ------------
Net cash used in operation activities (2,028,146) (1,167,035) (13,043,601)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (207,111) (16,987) (510,376)
Issue note receivable -- -- (25,100)
Purchase of long-term investments - restricted -- (115,500) (115,500)
Investment in joint venture -- -- (10,000)
------------ ------------ ------------
Net cash used in investing activities (207,111) (132,487) (660,976)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable -- -- 250,000
Payment on notes payable -- -- (250,000)
Treasury share sold -- -- 1,290,568
Purchase of treasury shares -- -- (60,000)
Buyback of stock warrants -- -- (571)
Sale of common stock 2,096,571 969,580 12,694,360
Sale of common stock for exercised warrants -- -- 796,999
Contributions to capital -- -- 152,500
------------ ------------ ------------
Net cash provided by financing activities 2,096,571 969,580 14,873,856
------------ ------------ ------------
NET CHANGE IN CASH (138,686) (329,942) 1,169,279
CASH, beginning of period 1,307,965 453,235 --
------------ ------------ ------------
CASH, end of period $ 1,169,279 $ 123,293 $ 1,169,279
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ --
============ ============ ============
Income taxes paid $ -- $ -- $ --
============ ============ ============
NONCASH TRANSACTIONS:
Common stock issued for debt $ -- $ 542,126 $ 805,219
Received treasury stock for note receivable -- -- 25,100
Common stock issued for patent -- -- 375,000
The accompanying notes are an integral part of these financial statements
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CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDTIED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of CytoGenix, Inc.
("CytoGenix") have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission ("SEC"), and should be read in conjunction
with the audited financial statements and notes thereto contained in CytoGenix's
latest annual report filed with the SEC on Form 10K. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosure contained in the audited
financial statements for fiscal year ending December 31, 2005, as reported in
the 10K, have been omitted.
NOTE 2 - Reclassifications
Certain amounts in the 2005 financial statements have been reclassified to
conform with the June 30, 2006 financial statement presentation.
NOTE 3 - COMMON STOCK
In the six months ending June 30, 2006, CytoGenix issued a total of 916,400
shares of common stock to financial consultants for the $0.25 per share private
placement. The shares were recorded in the first quarter 2006, as a cost of
capital in conjunction with fourth quarter 2005 fundraising.
The company issued 3,225,494 shares of common stock in a private placement to
accredited investors at a cash price of $.65 per share. The proceeds for these
shares were received in the first six months of 2006 and the shares were issued
on July 12, 2006.
NOTE 4 - INVENTORY
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first out ("FIFO") method. Reserves are established for
excess or obsolete inventories.
NOTE 5 - REVENUE RECOGNITION
The Company earns revenue from the sale of synthetic DNA. In general, revenue is
recognized when all of the following criteria are met: evidence of an
arrangement exits, delivery has occurred, the price is determined, and
collection is reasonably assured.
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CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDTIED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Cytogenix is obligated, per employment agreements, to deliver cash bonuses after
year end based on the increase in average share price of the Company's stock
price from the last 20 trading days of 2005 to the last 20 trading days of 2006.
This bonus is payable when the stock appreciation is at least 15%. The Company
has accrued $89,842 in the first six months of 2006 based on current market
conditions.
CytoGenix filed a Declaratory Judgment action in March, 2004, to obtain a
finding of nonliability with respect to two license agreements, 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, in Willam B. Waldroff and Applied Veterinary
Genomics, Inc. vs. Cytogenix, Inc. 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
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 attorneys fees in an amount of $115,500. 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.
Pending appeal Cytogenix has established a long-term CD in the amount of
$115,500 to comply with the trial court judgment pending appeal. This CD earns
interest at a rate of 3.4% annually. Accrued Interest for the three months
ending March 31, 2006 and for the period ending December 31, 2005 are $967 and
$2,405 respectively.
NOTE 7 - CONCENTRATIONS
The Company had gross sales of $37,180 and $0 for the six months ended June 30,
2006 and 2005, respectively. The Company has one customer that represents 100%
of the gross sales for the six months period. The Company has one supplier that
provides the materials necessary to generate the sales for the six months ended
June 30, 2006.
NOTE 8 - SUBSEQUENT EVENTS
The company issued 107,691 shares of common stock in a private placement to
accredited investors at a cash price of $.65 per share. The proceeds for these
shares were received in the July 7, 2006 and the shares were issued on July 12,
2006.
Cytogenix has entered into a 36 month promissory note on July 18, 2006 with
Frost Bank National to finance the cost of equipment. The note is for $80,000
with payment of $2,569 per month with an interest rate of 9.51%. The bank
required Cytogenix to deposit $50,000 in a CD to guarantee the note.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
IN ACCORDANCE WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT CERTAIN
STATEMENTS IN THIS FORM 10-Q WHICH ARE FORWARD-LOOKING AND WHICH PROVIDE OTHER
THAN HISTORICAL INFORMATION, INVOLVE RISKS AND UNCERTAINTIES THAT MAY IMPACT THE
COMPANY'S RESULTS OF OPERATIONS. THESE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG
OTHERS, STATEMENTS CONCERNING THE COMPANY'S GENERAL BUSINESS STRATEGIES,
FINANCING
DECISIONS, AND EXPECTATIONS FOR FUNDING CAPITAL EXPENDITURES AND OPERATIONS IN
THE FUTURE. WHEN USED HEREIN, THE WORDS "BELIEVE," "PLAN," "CONTINUE," "HOPE,"
"ESTIMATE," "PROJECT," "INTEND," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, NO STATEMENTS CONTAINED IN THIS FORM 10-Q SHOULD BE
RELIED UPON AS PREDICTIONS OF FUTURE EVENTS. SUCH STATEMENTS ARE NECESSARILY
DEPENDENT ON ASSUMPTIONS, DATA OR METHODS THAT MAY BE INCORRECT OR IMPRECISE AND
MAY BE INCAPABLE OF BEING REALIZED. THE RISKS AND UNCERTAINTIES INHERENT IN
THESE FORWARD-LOOKING STATEMENTS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPRESSED IN OR IMPLIED BY THESE STATEMENTS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE INFORMATION CONTAINED IN THIS FORM 10-Q IS BELIEVED BY THE COMPANY
TO BE ACCURATE AS OF THE DATE HEREOF. CHANGES MAY OCCUR AFTER THAT DATE, AND THE
COMPANY WILL NOT UPDATE THAT INFORMATION EXCEPT AS REQUIRED BY LAW IN THE NORMAL
COURSE OF ITS PUBLIC DISCLOSURE PRACTICES.
IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE EXPECTATIONS REFLECTED IN ANY FORWARD-LOOKING STATEMENT
HEREIN INCLUDE AMONG OTHER THINGS: (1) THE ABILITY OF THE COMPANY TO QUICKLY
PENETRATE THE MARKET WITH ITS CURRENT THERAPEUTIC PRODUCTS AGAINST LARGER,
WELL-FINANCED COMPETITORS WITHIN THE MARKETPLACE; (2) THE ABILITY OF THE COMPANY
TO GENERATE REVENUES IS SUBSTANTIALLY DEPENDENT UPON CONTINUED RESEARCH AND
DEVELOPMENT
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FOR, AND FDA APPROVAL OF, THERAPEUTIC PRODUCTS; (3) THE ABILITY OF THE COMPANY
TO ATTRACT AND RETAIN KEY OFFICERS, KNOWLEDGEABLE SALES AND MARKETING PERSONNEL
AND HIGHLY TRAINED TECHNICAL PERSONNEL; (4) THE ABILITY OF THE COMPANY TO OBTAIN
ADDITIONAL FINANCING FROM PUBLIC AND PRIVATE EQUITY MARKETS TO FUND OPERATIONS
AND FUTURE GROWTH; AND (5) THE ABILITY OF THE COMPANY TO GENERATE REVENUES TO
COVER OPERATING LOSSES AND POSITION THE COMPANY TO ACHIEVE POSITIVE CASH FLOW.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
For the three months ended June 30, 2006, we reported a net loss of
$916,763, or less than
one cent per share, and revenue of $37,180 as compared with a net loss of
$461,935, or less than one cent per share, and no revenue for the three months
ended June 30, 2005.
Revenues. Revenue increased to $37,180 for the second quarter of 2006
as compared to no revenues during the same period in 2005. The increase is a
result of our commencement of sale of synthetic DNA.
Research and Development Expenses. Research and development expenses
increased to $642,568 for the second quarter of 2006 as compared to $232,483
during the same period in 2005 due to an increase in R&D payroll and employment
costs and increased DNA production research activity. Approximately $80,000 of
the increase is a result of the payroll and employment costs and the remaining
difference of $330,000 results from the increased activity cost of antibacterial
and DNA vaccine research.
General and Administrative Expenses. General and administrative
expenses increased to $288,628 for the second quarter of 2006 compared to
$219,716 for the same period in 2005 primarily due to increase in payroll, and
related employment costs.
Consulting Expenses. Consulting expenses increased to $1,035 for the
second quarter of 2006 compared to no expenses for the same period in 2005 due
to the increased use of consultants on issues of financial planning and
government contracts.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $11,037 for the second quarter of 2006 compared to $9,736
for the same period in 2005 primarily due to the upgrade of hardware and
security software for the network server and additional R&D equipment purchased
for DNA production.
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Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
For the six months ended June 30, 2006, we reported a net loss of
$1,952,257, or less than two cents per share, and revenue of $37,180 as compared
with a net loss of $1,278,359, or less than one cent per share, and no revenue
for the six months ended June 30, 2005.
Revenues. Revenue increased to $37,180 for the six months ended June
30, 2006 as compared to no revenue during the same period in 2005. The increase
is a result of our commencement of sales of synthetic DNA.
Research and Development Expenses. Research and development expenses
increased to $1,141,077 for the six months ended June 30, 2006 as compared to
$673,661 during the same period in 2005 due to the increase in R&D payroll and
employment costs and increased DNA production research activity. Approximately
$259,000 of the increase is a result of the payroll and employment costs and the
remaining difference of $209,000 results from the increased activity cost of
antibacterial and DNA vaccine research.
General and Administrative Expenses. General and administrative
expenses increased to $810,986 for the six month ended June 30, 2006 compared to
$589,056 for the same period in 2005 primarily due to increase in payroll, and
related employment costs.
Consulting Expenses. Consulting expenses increased from $10,110 for the
six month ended June 30, 2006 compared to no expenses for the same period in
2005 due to the increased use of consultants on issues of financial planning and
government contracts.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $17,555 for the six months ended June 30, 2006 compared to
$15,274 for the same period in 2005 primarily due to the upgrade of hardware and
security software for the network server and additional R&D equipment purchased
for DNA production.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted approximately $4,300,000 for operations in
fiscal year 2006, of which approximately $1,300,000 has been allocated for
general and administrative costs and $2,000,000 for research and development and
$1,000,000 for plant facilities. We will rely on equity financing to satisfy our
working capital requirements, and have as of June 30, 2006 $1,169,279 of cash on
hand for fiscal year 2006. Of the $2,000,000 budgeted for research and
development expenses, the Company anticipates $1,800,000 will be utilized for
pre-clinical development.
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There are currently over 800 U.S. patents for Antisense molecules with
therapeutic potential, each holder of which is a prospective licensee for the
Company. The Company anticipates entering into licenses for revenues upon
successful completion of phase I/II FDA (Food and Drug Administration) clinical
studies of its pre-clinical product candidates.
The Company's ability to continue operations through December 31, 2006
depends on its success in obtaining equity financing in an amount sufficient to
support its operations through that date. There is substantial doubt that the
Company will be able to generate sufficient revenues or be able to raise
adequate capital to remain a going concern through December 31, 2006. Based on
historical yearly financial requirements, operating capital of approximately
$4.4 million will be needed for each of the calendar years 2006 and 2007.
The Company expects its sources of revenue for the next several years
to consist primarily of the sale of synthetic DNA (Deoxynbonucleic acid),
payments under future product development joint ventures and of licensing
agreements as well as possible royalties. The process of developing the
Company's future products will require significant additional research and
development, preclinical testing and clinical trials, as well as regulatory
approvals. These activities, together with the Company's general and
administrative expenses, are expected to result in operating losses for at least
two more years. The Company will not receive product revenue from therapeutic
products unless it completes clinical trials and successfully commercializes or
arranges for the commercialization of one or more products, the accomplishment
of which no assurance can be given.
CytoGenix has begun animal testing of its first DNA drug product
candidate. The topical cream to be evaluated will have applications against
genital herpes HSV-2 (Herpes Simplex Virus) and labial herpes or cold sores
(HSV-1). The HSV virus is known to be highly evolved and its genome contains
instructions for several phases of viral activity including infection,
replication, production, and latency. CytoGenix proprietary gene regulation
technology is being applied to inhibit key genes that control one or more of
these functions, which are critical for the Herpes virus survival in the body.
During the past few months, the Company has continued to refine its
course of developing applications for its core technology. Most significant is
the pre-clinical program for an anti-viral HSV topical preparation. We have
teamed-up with a group of leading herpes and STD (Sexually Transmitted Diseases)
investigators at a large academic medical center to conduct a comprehensive cell
and animal study program designed to yield safety and efficacy data in
preparation for an IND (Investigational New Drug) submission planned for October
2007 and subsequent human trials.
The Genomics field has expanded the number of potential drug targets to
several thousand. The CytoGenix proprietary gene down-regulation system is a
powerful tool in confirming gene target function. In July 2002, we 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 a 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.
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CytoGenix is confident about the Company's technology's ability to
inhibit these genes. This six to nine month program includes extensive
toxicology and efficacy studies in various model animals.
The Company is subject to risks common to biopharmaceutical companies,
including risks inherent in its research and development efforts and clinical
trials, reliance on collaborative partners, enforcement of patent and
proprietary rights, the need for future capital, potential competition and
uncertainty in obtaining required regulatory approval. In order for a product to
be commercialized, it will be necessary for the Company and its collaborators to
conduct pre-clinical tests and clinical trials, demonstrate efficacy and safety
of the Company's product candidates, obtain regulatory clearances and enter into
distribution and marketing arrangements either directly or through sublicenses.
From the Company's inception through the date of this document, the major role
of management has been to obtain sufficient funding for required research,
monitoring research progress and developing and licensing intellectual property.
The Company expects to incur losses for the foreseeable future due to
the ongoing activities of the Company to develop new products through research
and development and to develop joint ventures and licensing agreements with
third parties. The Company expects its existing operations to continue to result
in negative cash flow and working capital deficiencies that will require the
Company to continue to obtain additional capital. There can be no assurance that
the necessary financing will be available to the Company or, if available, that
the same will be on terms satisfactory or favorable to it. It is possible that
additional equity financing will be highly dilutive to existing shareholders.
The Company is currently operating at a loss and expects to continue to
depend on cash generated from the sale of debt and equity securities to fund its
operating deficit. There can be no assurance that the Company will be able to
generate sufficient revenues to meet its operating cash and growth needs or that
any equity or debt funding will be available or at terms acceptable to the
Company in the future to enable it to continue operating in its current form.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of June 30, 2006 the Company has a restricted long-term CD (Certificate of
Deposit) investment per the Waldroff litigation matter discussed below. Pending
appeal of this case the Company 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. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the
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Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end
of the period covered by this report. Based on this evaluation, our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures were effective as of March 31, 2006.
CHANGES IN INTERNAL CONTROLS
There has been no change in our internal control over financial reporting
during the six months ended June 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WILLIAM B. WALDROFF AND APPLIED VETERINARY GENOMICS, INC. V. CYTOGENIX, INC.
CytoGenix filed a Declaratory Judgment action in March, 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 $115,500. 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. Pending appeal Cytogenix has
established a long-term CD in the amount of $115,500 to comply with the trial
court judgment pending appeal. This CD earns interest at a rate of 3.4%
annually.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the six months ending June 30, 2006, CytoGenix issued a total of 916,400
shares of common stock for fundraising efforts in the last quarter of 2005 to
financial consultants at a value of $.25 per share.
The company has agreed to issue 3,225,494 shares of common stock in a private
placement to accredited investors at a cash price of $.65 per share. The
proceeds for these shares were received in the first six months of 2006 and the
shares were issued on July 12, 2006.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 31, 2006, the Company held the 2006 annual meeting of the shareholders
for purposes of the following:
(1) ELECTION OF DIRECTORS. To elect two directors to hold office until the 2009
Annual Meeting of Shareholders or until their successors are elected and
qualified;
(2) RATIFICATION AND APPROVAL OF THE APPOINTMENT OF INDEPENDENT AUDITORS. To
ratify and approve the appointment of Lopez, Blevins, Bork & Associates, LLP. as
the independent auditors for the Company for the fiscal year ending December 31,
2006.
A majority of the shares entitled to vote, present in person or represented by
proxy, constituted a quorum at the Annual Meeting. For the approval of Proposal
No.1 (the election of directors), the two candidates receiving the greatest
number of affirmative votes were elected. The affirmative vote of a majority of
the shares present in person or represented by proxy at the Annual Meeting was
required to ratify and approve Proposal No. 2 (appointment of independent
auditors).
On May 2, 2006, the record date for the annual shareholder meeting held on May
31, 2006, there were 12,377,370 shares of the Company's common stock issued and
outstanding. All outstanding shares were entitled to vote on the three
proposals. On May 31, 2006, a quorum was reached totaling 81,928,969 shares
voted.
The results of the voting on the above matters presented to the shareholders
were as follows:
(1) ELECTION OF DIRECTORS. The three directors submitted to the shareholders for
approval were elected as follows:
Malcolm H. Skolnick, Ph.D, J.D.: 81,701,870 shares voting for, no shares voting
against and 227,099 shares abstaining.
Scott E. Parazynski, M.D.: 81,742,870 shares voting for, no shares voting
against and 186,099 shares abstaining.
(2) RATIFICATION AND APPROVAL OF THE APPOINTMENT OF INDEPENDENT AUDITORS. The
appointment of Lopez, Blevins, Bork & Associates, LLP as the independent
auditors for the Company for the fiscal year ending December 31, 2006 was
approved by the shareholders, with 81,727,806 shares voting for, 156,863 shares
voting against and with 44,300 shares abstaining.
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ITEM 6. EXHIBITS.
Exhibit Number Description
3.1* Articles of Incorporation of Cryogenic Solutions, Inc.
3.2* Certificate of Amendment dated November 1, 1995 of Articles of
Incorporation of Cryogenic Solutions, Inc.
3.3* Certificate of Amendment dated January 13, 2000 of Articles of
Incorporation of CytoGenix, Inc.
3.4 Certificate of Amendment dated April 6, 2004 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
Exhibit 3.5 to the Company's annual report of Form 10-KSB for
the year ended December 31, 2004)
3.5 Certificate of Amendment dated March 7, 2001 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
Annex II of the definitive proxy statement on Schedule 14A
filed with the Securities and Exchange Commission on December
23, 2003)
3.6* Bylaws of Cryogenic Solutions, Inc.
3.7 Amendments to Bylaws of CytoGenix, Inc. (incorporated by
reference to Annex I of the definitive proxy statement on
Schedule 14A filed with the Securities and Exchange Commission
on December 23, 2003)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
* Incorporated by reference to the corresponding Exhibit in the Form 10-SB of
the Company filed on January 31, 2001.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYTOGENIX, INC.
Date: August 14, 2006 By: /s/ Malcolm Skolnick
------------------------------
MALCOLM SKOLNICK
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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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:
1. I have reviewed this quarterly report on Form 10-Q of CytoGenix, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
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6. The registrant's other certifying officers and I have indicated in this
quarterly 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: August 14, 2006
/s/ Malcolm Skolnick
- --------------------
MALCOLM SKOLNICK
PRESIDENT & CEO
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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 quarterly report on Form 10-Q of CytoGenix, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
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6. The registrant's other certifying officers and I have indicated in this
quarterly 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: August 14, 2006
/s/ Lawrence Wunderlich
- ------------------------
LAWRENCE WUNDERLICH
CHIEF FINANCIAL OFFICER
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EXHIBIT 32.1
CERTIFICATION 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 Quarterly Report of CytoGenix, Inc. (the
"Company") on Form 1O-Q for the period ending March 31, 2006 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. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report 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 the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Malcolm H. Skolnick
- -----------------------
MALCOLM H. SKOLNICK
CHIEF EXECUTIVE OFFICER
August 14, 2006
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EXHIBIT 32.2
CERTIFICATION 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 Quarterly Report of CytoGenix, Inc. (the "Company") on
Form 1O-Q for the period ending March 31, 2006 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. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report 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 the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/Lawrence Wunderlich
- -----------------------
LAWRENCE WUNDERLICH
CHIEF FINANCIAL OFFICER
August 14, 2006
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