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, 2006
|_| 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 securities Act. Yes |_| No |X| Indicate by check mark
if Registrant is not required to file reports pursuant to Section 13 or Section
15 (d) of the Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated Filer |X| Non-accelerated filer |_|
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, 2006 (the last business day of the Registrant's most
recently completed second fiscal quarter) was approximately $143,119,897. The
number of outstanding shares of the Registrant's Common Stock as of the close of
business on March 30, 2007 was 140,663,961.
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, 2006, 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.......................................... 5
Item 1A. Risk Factors..................................................... 18
Item 1B. Unresolved Staff Comments........................................ 25
Item 2. Description of Property ......................................... 25
Item 3. Legal Proceedings................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.............. 26
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......... 26
Item 6. Selected Financial Data ......................................... 28
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations ............................................ 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 36
Item 8. Financial Statements ............................................ 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 59
Item 9A. Controls and Procedures.......................................... 59
Item 9B. Other Information................................................ 59
PART III
Item 10. Directors and Executive Officers of the Registrant............... 59
Item 11. Executive Compensation........................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters.................................. 63
Item 13. Certain Relationships and Related Transactions................... 63
Item 14. Principal Accountant Fees and Services........................... 63
3
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 64
Signatures ...................................................... 66
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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 cell free process to produce 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 provide the
service of custom DNA manufacturing as well as to sell and/or license its
technology to other research facilities and companies seeking to research or
regulate a specific gene function and to consumers of plasmid DNA.
The Company was formed in 1995 as a biomedical research and development company.
The original name of the Company was Cryogenic Solutions, Inc., until the
Company changed its name to CytoGenix, Inc. in January 2000. Equity funding has
been the primary source of operational, research and commercialization working
capital since the Company's inception. The Company made a transition to research
and development of its present technologies in 1998. Since then, the Company has
dedicated itself to engineering DNA-based molecules for therapeutic and drug
target identification purposes. The Company's expertise in nucleic acid
technology enables it to focus on the development of new types of nucleic
acid-based therapeutics.
GENE EXPRESSION AND HUMAN DISEASE
Widely published scientific studies conducted over the last 20 years by leading
universities, government research laboratories such as the National Institutes
of Health and the National Cancer Institute, and private research laboratories,
have established that most diseases are the result of malfunctioning genes in an
organism's genome, or the activities of genes affected by pathogens such as
viruses, bacteria or fungi. This genetic activity causes the production of
harmful proteins that lead to the symptoms and destructive results of diseases.
Examples of diseases caused by the production of such harmful proteins include
cancer, herpes, sepsis (blood poisoning) and a host of others. To produce a
protein, a cell first makes a positive copy 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.
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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 single stranded DNA ("ssDNA") into the cells at the level of the
genomic DNA itself, interfering with the messenger RNA (mRNA) transcribed by the
genome (antisense regulation); and by directly binding to a protein to disable
it.
CYTOGENIX GENE SILENCING TECHNOLOGY
CytoGenix owns patented intracellular expression system technology to produce
desired sequence-specific, ssDNA molecules in individual cells for the purpose
of triplex, antisense, catalytic DNA, and aptamer applications.
1. Triplex: As mRNA is transcribed and the DNA strands are still
separated, a single strand of complementary DNA is inserted
into the gap forming a triple helix (triplex) structure, thus
preventing the future production of mRNA from that segment.
2. Antisense: Messenger RNA is intercepted en route by a
complementary ssDNA sequence that it binds to and results in
the destruction of the mRNA by enzymes within the cell, thus
preventing the mRNA from producing the undesired protein.
3. Catalytic DNA: Similar to antisense, an ssDNA sequence
containing sequence regions binds to the mRNA, but also
contains a unique sequence region that acts to cut and destroy
the mRNA, thus preventing it from producing the undesired
protein.
4. Aptamer: The ssDNA binds to the protein itself in the cell and
causes the undesired protein to become inactivated or
dysfunctional.
The key to success with these genetic interventions is to insure that sufficient
quantities of the ssDNA molecules ultimately are produced in targeted cells or
induced from external sources. CytoGenix has invented a compound that functions
as a tiny biological "factory" and after its introduction into the cell,
actually produces many copies of specific ssDNA molecules in the cell. A major
element of CytoGenix's business is to refine this technology and apply it to the
delivery of various patented DNA molecules for the development of effective
therapeutic drugs.
DEVELOPMENTS TO DATE (RESEARCH AND DEVELOPMENT)
The ssDNA expression vector technology originated with the work of Dr. Charles
Conrad, which he developed while at InGene, Inc. This technology is 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.
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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 of approximately 46
domestic and foreign issued or pending patent applications protecting its
technology. 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. The Company currently has eleven granted
patents which protect the Company's broad-based single stranded DNA expression
technology.
These patents are important to the Company because they help form the basis of
the technology needed for the production of the Company's complementary
technology and other products. The technology has been proven in numerous
laboratory and animal experiments and has been widely published as set forth
below. It has been reported in scientific literature, such as in Reuters
Business Insight 2000 publication, Antisense Therapy: Technical Aspects and
Commercial Opportunities by Prof. Dr. K.K. Jain, M.D. that other molecule
delivery methods have failed to provide sufficient quantities to be
therapeutically effective except in limited applications. Laboratory cell
culture studies have demonstrated that the Company's ssDNA expression vector can
adequately deliver sequence specific DNA molecules in sufficient quantities in
virtually all cell types, thereby overcoming many of the challenges previously
experienced. As described under "CytoGenix Gene Silencing Technology" above, the
Company's technology is not limited to only antisense applications, but can
target and enzymatically cleave target mRNA using DNA enzyme formulations. As
described above, the technology can also be used to (i) generate triplex forming
oligonucleotides that bind to specific sites in the genome itself to inhibit
expression by the gene at that site, (ii) generate ssDNA that bind to specific,
targeted proteins to neutralize them and (iii) competitively inhibit genetic
expression/transcription of targeted genes. The Company has successfully
extended the results achieved in cell cultures to cells in live animals.
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 DNA
thus bypassing the fermentation process. The cell free synthesis of DNA has
numerous advantages: CytoGenix's synDNA(TM) is virtually free of bacterial
endotoxins, as well as bacterial DNA, RNA and protein which must be laboriously
removed from DNA manufactured using traditional fermentation process using live
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bacteria. CytoGenix's process does not require the use of antibiotic markers and
does not require genetic sequences comprising the usual bacterial backbone of
plasmid DNA. Elimination of the bacterial backbone enables production of
synDNA(TM) construct that are approximately half the size of the plasmid DNA.
More importantly, synDNA(TM) can be produced more rapidly and with fewer
complications than in the traditional fermentation methods.
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:
INFECTIOUS DISEASE PROGRAM
CY301 SIMPLIVIR(TM) anti-herpes topicals are 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. The Company's proprietary plasmid DNA
sequences are believed to turn-off the expression of the HSV ICP4 and ICP47
genes. Found in HSV-1, -2 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 2008.
The Company is also in the process of developing compounds against methicillin
resistant staphylococcus aureaus (MRSA).
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.
CANCER PROGRAM
The Company has entered into a sponsored research agreement with scientists at a
university medical 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.
NUCLEIC ACID DELIVERY TECHNOLOGY
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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 immunogenicity 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 established as
well as innovative DNA delivery systems containing histidine-rich peptides and
polypeptides and self-assembled delivery systems based on cationic lipids and
polymers.
synDNA(TM) PROCESS
As briefly noted above, the Company has developed a novel method for producing
large amounts of high quality therapeutic DNA (synDNA(TM)) with significant
reductions in residual contaminants compared to traditional fermentation
methods. Specifically, the Company has identified and optimized a method for in
vitro DNA synthesis and amplification for the production of good manufacturing
practice-grade (GMP) drug substances.
Cell-free amplification of DNA sequences has many important benefits beginning
with the size and composition of the 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 DNA by at least 3,000 base pairs or a molecular weight of
approximately 2,000 kilo Daltons (kDa). The Dalton is a measure of molecular
weight or mass. 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
The Company's experiments have shown that the biological response to 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, a 100
nanogram of traditional plasmid DNA is equal to 60ng of synDNA(TM). This may
explain the result of the Company's transfection experiments and suggest that
less synDNA(TM) may be able to generate the same biological effect as its
plasmid counterpart. This would translate in to substantial savings and lower
costs.
Low risk, low cost and fast cycle time
The Company's novel process is bench scale and requires less equipment, space or
human intervention in comparison to bioprocess manufacturing facilities. This
process lends itself to liquid-handling automation and one technician can in
most cases synthesize gram quantities in a matter of days working in custom
manufacturing suites. The Company believes 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.
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Improved regulatory profile
Benefits provided by the cell-free synthesis from a regulatory agency review and
compliance perspective are significant. Similarly, product certified good
manufacturing practice (cGMP) 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 synDNA(TM) process yields DNA with markedly lower
levels of endotoxin, bacterial genomic DNA, RNA and proteins.
CytoGenix is carrying out a multi-pronged strategy with the objective of
commercializing this technology within the next year. The following summarizes
the Company's 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.
o CONSTRUCT CGMP PRODUCTION FACILITY, build and equip a
side-by-side manufacturing lines for simultaneous production
of batches cGMP synDNA(TM).
o BUSINESS DEVELOPMENT, the Company is currently evaluating options
for industry partnership for continued development of the process
including contract manufacturing.
The Company is currently supporting five Sponsored Research Agreements (SRA):
1. Dr. Cy Stein's laboratory at Montefiore Medical Center 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 laboratory 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 laboratory at University of Texas Health
Science Center in Houston is conducting animal trials to
determine efficacies of CytoGenix's antimicrobial
oligodeoxynucleotides (ODN) compounds.
4. Dr. David Weiner's laboratory at University of Pennsylvania is
conducting animal trials to determine efficacies of CytoGenix's
synDNA(TM) vaccines against Smallpox and other targets.
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5. Dr. Slobodan Paessler at the University of Texas Medical Branch
at Galveston is conducting animal trials to test CytoGenix's
synDNA(TM) vaccine against avian flu (H5N1).
COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
The Company is currently working in a cooperative research and development
agreement (CRADA) with the United States Department of Agriculture to develop
and test a DNA vaccine against brucellosis.
The Company has completed the details of protocols for a CRADA with the United
States Army Medical Research Institute for Infectious Diseases to develop and
test DNA vaccines for strains of ebola, equine encephalitis and alpha and beta
subunits of E. coli heat labile toxin.
PARTNERSHIPS
The Company currently has several industry and government agency partnerships
and is actively seeking out-licensing opportunities in the application of the
Company's 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. The Company's cell-free method for the
cGMP production of therapeutic-grade DNA is also available for licensing.
The Company currently has several academic and government agency collaborations
to promote the research and development of new therapeutic products. Current
collaborators include:
USDA
Dr. Steven Olsen at USDA is currently testing DNA vaccines against Brucellosis
Abortus, prepared by CytoGenix using synDNA(TM) technology, in animal models.
ALDEVRON, LLC.
CytoGenix has teamed up with Aldevron, LLC, a leader in the field of DNA
vaccines, to evaluate a synDNA(TM) vaccine derived from a plasmid provided by
Aldevron. The synDNA(TM) vaccine was designed to produce a Hepatitis B viral
surface antigen and was evaluated in a rabbit model using Aldevron's proprietary
immunization process.
GE HEALTHCARE BIO-SCIENCE CORPORATION
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 is in the
process of negotiating with GEHC to renew and extend the Agreement. As of the
date of this filing no agreement has been finalized.
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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 Jeffery Actor, UT Health Science Center in Houston, In vivo and
in vitro studies of oligonucleotide compounds against MRSA and
TB;
o Slobodan Paesseler, UT Medical Center in Galveston, In vivo study
of DNA vaccines against H5N1;
o Cy Stein, Montefiore Medical Center, New York, Inhibition of
cancer genes using single-stranded DNA expression vector;
o Frank Orson, Baylor College of Medicine, In vivo study of DNA
vaccine against H1N1;
o David Weiner, University of Pennsylvania, In vivo studies (mice
and monkeys) of DNA vaccines against HIV and smallpox.
PUBLICATIONS
The Company and its cooperating university scientists have published a number of
scientific papers and presented at scientific meetings. These publications
include:
1. Benimetskaya, L., Ayyanar, K. Kornblum, N., Castanotto, D.,
Rossi, J., Wu, S., Lai, J., Brown, B., Popova, N., Miller, P.,
McMicken, H., Chen, Y. & Stein, C. Bcl-2 protein in 518A2
melanoma cells in vivo and in vitro. Clinical Cancer Research,
12:4940-4948, 2006.
2. Xing-Xin Tan & Yin Chen, Discovery of Novel Antibiotics By
screening of an Oligodeoxynucleotide Expression Library, (invited
review article, submitted) "New Research on Antisense Elements
(Genetics)." Frank Columbus, Editor-in-Chief, Nova Science
Publishers, Inc.
3. Tan, X. & Chen, Y., A novel genomic approach identifies bacterial
DNA-dependent RNA polymerase as the target of an antibacterial
oligodeoxynucleotide, RBL-1 Biochemistry, 44:6708-6714, 2005.
4. Tan, X., Actor, J.K., & Chen, Y., PNA antisense oligomer as a
therapeutic strategy against bacterial infection: proof of
principle using mouse peritonitis model, Antimicrobial Agent and
Chemotherapy, 49: 3203-3207, 2005.
5. Tan, X., & Chen, Y., Discovery of novel antibiotics using
cell-based screening (Review), Current Drug Discovery, pp. 21-23,
April, 2004.
6. 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.
7. 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.
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1
8. Chen, Y. and McMicken, H., Intracellular production of DNA enzyme
by a novel single-stranded DNA expression vector, Gene Therapy,
10:1776-1780, 2003.
9. Chen, Y., Ji, Y. and Conrad, C., Expression of single-stranded
DNA in mammalian cells, Biotechniques, 34:167-171, 2003.
10. Chen, Y., Novel Technologies for target validation, Genetic
Engineering News, 23(11):7-9, 2003.
11. Chen, Y., A novel single-stranded DNA (ssDNA) expression vector
(Review), Expert Opinion on Biological Therapy, 2:735-740, 2002.
12. Chen, Y., Meeting highlights, 10th International conference on
gene therapy of cancer, Expert Opinion on Biological Therapy,
2:443-445, 2002.
13. Chen, Y., Growth of oligo-based drugs, Genomics & Proteomics,
October, 2002.
14. Datta, H. and Glazer, P., Intracellular generation of
single-stranded DNA for chromosomal triplex formation and induced
recombination, Nucleic Acid Research, 29:5140-5147, 2001. A
marvel of biochemical engineering means cells can produce DNA
enzyme to attach cancer, New Scientist, January, 2001.
15. 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.
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 Herpes related
diseases. Upon successful completion of FDA Phase I/II clinical trials, the
Company intends to seek license and distribution agreements with domestic and
foreign pharmaceutical companies.
o The Company intends to independently develop oligonucleotide
mediated therapeutic applications in several disease areas.
o The Company will pursue partnerships with other pharmaceutical or
biotechnology companies to develop DNA expression-based
therapeutics.
o The Company will seek to maintain and expand its patent portfolio
and proprietary technology. The Company aggressively pursues
patent protection to maintain worldwide rights relating to the
development, manufacture and sale of oligodeoxynucleotide
mediated therapeutics and services and products related to the
manufacture of synDNA(TM).
o The Company intends to leverage its oligonucleotide expertise
through licensing, process development and pilot manufacturing.
The Company believes that it has established one of the leading
nucleic acid chemistry groups that can provide medicinal
chemistry, process development and manufacturing to others in
need of this expertise. The Company believes that it will be able
to capitalize on its continuing investment in oligonucleotide and
nucleic acid technology by entering into licensing, process
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development and pilot manufacturing arrangements with
collaborators to generate revenues, while retaining this
capability for its own drug development.
o The Company plans to expand its customer base for sales of
synDNA(TM) as it advances the ability to amplify and purify
diverse sequences. The sales will come from excess capacity above
the material the Company needs for its own product development.
The Company will seek strategic partners to expand the production
and distribution of synDNA(TM) based products.
MARKETING STRATEGY
The Company plans to market initial products, when developed, and for which it
will obtain regulatory approval, through marketing arrangements or other
licensing arrangements with pharmaceutical companies. Implementation of this
strategy will depend on many factors, including the market potential of any
products the Company develops, and its financial resources. To market products
that will serve a large, geographically diverse patient population, we expect to
enter into licensing, distribution, or partnering agreements with pharmaceutical
companies that have large, established sales organizations. The timing of the
Company's entry into marketing arrangements or other licensing arrangements with
large pharmaceutical companies will depend on successful product development and
regulatory approval within the regulatory framework established by the Federal
Food, Drug and Cosmetics Act, as amended, and regulations promulgated there
under. Although the implementation of initial aspects of the Company's marketing
strategy may be undertaken before this process is completed, the development and
approval process typically is not completed in less than three to five years
after the filing of an Investigational New Drug (IND) application and its
marketing strategy therefore may not be implemented for several years. See "Drug
Approval Process and Other Governmental Regulation."
NEW FACILITY
The Company signed an earnest money contract with GSL Constructors, Ltd. to
design and build the project located in the Westchase District of Houston. The
contract is for 2.274 acres of land together with a facility. The Company has
engaged the services of Luwa USA to design and construct the cGMP portion of the
new 20,000 sq ft facility. Groundbreaking for this project is anticipated to
occur in 2007 subject to financing.
INTELLECTUAL PROPERTY RIGHTS
The Company has developed or acquired a comprehensive body of intellectual
rights. The proprietary nature of, and protection for, the Company's technology,
processes and know-how are important to its business. The Company plans to
prosecute and aggressively defend its patents and proprietary technology. The
Company's policy is to patent the technology, inventions, and improvements that
are considered important to the development of its business and that are
patentable. The Company also depends upon trade secrets, know-how, and
continuing technological innovation to develop and maintain its competitive
position.
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A patent portfolio including approximately 46 domestic and foreign issued or
pending patent applications protects the Company's technologies. The Company
intends to protect its proprietary technology with additional filings as
appropriate.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The system of reviewing and approving drugs in the United States is considered
the most rigorous in the world. Estimates of the upper range of costs to bring a
single product from research through market approval and launch into commerce
range from $800 million (Pharmaceutical Research and Manufacturers Association)
to $1.7 billion in 2000 through 2002 (FDA), with the timing to do so typically
ranging between 10 and 15 years. The Pharmaceutical Research and Manufacturers
Association estimates that of every 5,000 medicines tested, on average, only
five are tested in clinical trials, and only one of those is approved for human
use. These estimates may vary depending on the nature of the drug and the
mechanism by which it works.
DRUG DISCOVERY
The drug discovery process can take several years. Once a company locates a
screening lead, or starting point for drug development, isolation and structural
determination may begin. The development process results in numerous chemical
modifications to the screening lead in an attempt to improve its drug
properties. After a compound emerges from the above process, the next steps are
to conduct further preliminary studies on the mechanism of action, further in
vitro (test tube) screening against particular disease targets and, finally,
some in vivo (animal) screening. If the compound passes these barriers, the
toxic effects of the compound, if any, are analyzed by performing preliminary
exploratory animal toxicology. If the results are positive, the compound emerges
from the basic research mode and moves into the pre-clinical phase.
Preclinical Testing
During the pre-clinical testing stage, laboratory and animal studies are
conducted to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety, stability, biodistribution
(where the drug goes in the body and in the case of DNA based drugs,
bioincorporation (where the DNA is incorporated in any of the body's cell's
genome). 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 active if not rejected by the FDA within 30
days. The IND must indicate the results of previous experiments, how, where and
by whom the studies were conducted, the chemical structure of the compound, the
method by which it is believed to work in the human body, any toxic effects of
the compound found in the animal studies and how the compound is manufactured.
Progress reports detailing the results of the clinical trials must be submitted
at least annually to the FDA.
Phase I Clinical Trials
15
After an IND becomes active, Phase I human clinical trials may begin. These
tests, involving usually between 20 and 80 patients or healthy volunteers,
typically take approximately one year to complete and cost between $300,000 and
$500,000 per trial. The 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. In addition, Phase I/ II clinical trials may be conducted to evaluate
not only the efficacy of the drug on the patient population, but also its
safety.
Phase III Clinical Trials
This phase typically lasts about three years, usually involves 1,000 to 3,000
patients and costs between $5 million and $50 million per trial. During the
Phase III clinical trials, physicians monitor the patients to determine efficacy
and to observe and report any reactions that may result from long-term use of
the drug.
New Drug Application
After the completion of the requisite three phases of clinical trials, if the
data indicate that the drug has an acceptable benefit to risk assessment and it
is found to be safe and effective, a New Drug Application (NDA) is filed with
the FDA. The requirements for submitting an NDA are defined by the FDA. These
applications are comprehensive, including all information obtained throughout
all clinical trials as well as all data pertaining to the manufacturing and
testing of the product. In general, these filings can far exceed 100,000 pages.
With the implementation of the Prescription Drug Users Fee Act (PDUFA), review
fees are provided at the time of NDA filing. In 2007, each NDA with clinical
data must be accompanied by a $896,200 review fee. If the NDA is assessed as
unacceptable in the initial 30 day review, it is returned to the submitter, with
50% of the fee. The historical average review time for a New Molecular Entity
(NME) has remained static at approximately 16 months, however, a new NME can be
approved in as little as six months.
Marketing Approval
If the FDA approves the NDA, the drug becomes available for physicians to
prescribe. Periodic reports must be submitted to the FDA, including descriptions
of any adverse reactions reported. The FDA may request additional studies (Phase
IV) to evaluate long-term effects.
16
Phase IV Clinical Trials and Post Marketing Studies
In addition to studies requested by the FDA after approval, these trials and
studies are conducted to explore new indications. The purpose of these trials
and studies and related publications is to broaden the application and use of
the drug and its acceptance in the medical community.
COMPETITION
The pharmaceutical and biotechnology industries are highly competitive. The
Company faces competition from biotechnology and pharmaceutical companies using
more traditional approaches to treating human diseases. The Company's
competitors may develop safer, more effective or less costly gene-based
therapeutics. In addition, the Company faces and will continue to face
competition from other companies for corporate collaborations with
pharmaceutical and biotechnology companies, for establishing relationships with
academic and research institutions and for licenses to proprietary technology,
including intellectual property.
Many of the Company's competitors and potential competitors have substantially
greater product development capabilities and financial, scientific,
manufacturing, managerial and human resources than the Company. There can be no
assurance that research and development by others will not render the Company's
products, or the products developed by corporate partners using its licensed
technologies obsolete, or non-competitive, or that any product the Company or
its corporate partners develop will be preferred to any existing or newly
developed technologies. In addition, there can be no assurance that the
Company's competitors will not develop safer, more effective or less costly
cardiovascular therapies, gene delivery systems, gene therapeutics, non-gene
therapies, or other therapies, achieve superior patent protection or obtain
regulatory approval of product commercialization earlier than the Company, any
of which could have a material adverse effect on its business, financial
condition or results of operations.
RESEARCH AND DEVELOPMENT
The Company expensed $2,199,148, $1,724,317, and $831,472 on research and
development activities during the years ended December 31, 2006, 2005, and 2004,
respectively. Research and development (R&D) expenses include related salaries,
contractor fees, materials, and utilities.
R&D expenses also consist of independent R&D costs and costs associated with
collaborative development arrangements with other companies and research
institutions. Research and development costs are expensed as incurred.
EMPLOYEES
As of December 31, 2006, the Company has 11 employees, 5 of whom hold advanced
degrees. None of the Company's employees are covered by collective bargaining
agreements, and the Company considers relations with its employees to be good.
HOW YOU CAN FIND ADDITIONAL INFORMATION
17
The Company is a reporting company and files annual, quarterly and current
reports, proxy statements and other information with the SEC. For further
information with respect to the Company, you may read and copy its reports,
proxy statements and other information, at the SEC public reference rooms at 100
F. Street, N.E., Washington, D.C. 20549, as well as at the SEC's regional
offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661 and at 233
Broadway, New York, NY 10279. You can request copies of these documents by
writing to the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference
rooms. The Company's SEC filings are also available at the SEC's web site at
http://www.sec.gov. In addition, you can read and copy the Company's SEC filings
at the office of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 2006.
Copies of CytoGenix's Annual Reports on Form 10K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are all available on its website (www.cytogenix.com) or by sending a
request for a paper copy to: CytoGenix, Inc. 3100 Wilcrest, Suite 140, Houston,
TX 77042, attn. Investor Relations.
ITEM 1A. RISK FACTORS
RISKS AFFECTING FUTURE OPERATING RESULTS
The Company does not provide forecasts of its future financial performance.
While the Company is optimistic about its long-term prospects, the following
factors should be considered in evaluating its outlook. If the possibilities
described as risks below actually occur, the Company's operating results and
financial condition would likely suffer and the trading price of its common
stock may fall, causing a loss of some or all of an investment in its common
stock.
CYTOGENIX'S PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY NOT BE
DETERMINED TO BE SAFE OR EFFECTIVE.
The Company is only in the early stages of development with its
biopharmaceutical products. The Company has devoted almost all of its time to
research and development of its technology and products, protecting its
proprietary rights and establishing strategic alliances. The Company's proposed
products are in the pre-clinical stages of development and will require
significant further research, development, clinical testing and regulatory
clearances. The 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.
The Company has not received any significant revenues from the sale of products
and the Company may not successfully develop marketable products that will
increase sales and, given adequate margins, make it profitable. Competitors may
develop superior or equivalent, but less expensive, products. The Company has
incurred net losses since its inception, and the Company may not achieve or
sustain profitability.
18
The Company incurred a net loss of $4.09 million in 2006 and of $3.53 million in
2005. As of December 31, 2006, total shareholder's equity was $2,901,753. Losses
have resulted principally from expenses incurred in research and development of
technology and products, and general and administrative expenses that the
Company has incurred while building its business infrastructure. The Company
expects to continue to incur significant operating losses in the future as it
continues its research and development efforts and seeks to obtain regulatory
approval of its products. The Company's ability to achieve profitability depends
on its ability to raise additional capital, complete development of its
products, obtain regulatory approvals and market those products. It is uncertain
when, if ever, the Company will become profitable.
IF THE COMPANY FAILS TO ATTRACT SIGNIFICANT ADDITIONAL CAPITAL, THE COMPANY MAY
BE UNABLE TO CONTINUE TO SUCCESSFULLY DEVELOP ITS PRODUCTS.
Since the Company began operations, the Company has obtained operating funds
primarily by selling common stock. Based on its current plans, the Company does
not believe that current cash balances will be sufficient to meet its operating
and capital needs throughout 2007. Furthermore, the actual amount of funds that
will be needed will be determined by many factors, some of which are beyond the
Company's control. These factors include the success of its research and
development efforts, the status of its 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. The Company 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 common stock or debt or
other arrangements. The Company may not obtain additional funding when the
Company needs it on terms that will be acceptable to it or at all. If the
Company raises funds by selling additional shares of common stock or securities
convertible into common stock, the ownership interest of existing shareholders
will be diluted. If the Company is unable to obtain financing when needed, its
business and future prospects could be materially adversely affected.
If the Company fails to receive necessary regulatory approvals, the Company will
be unable to commercialize its products. All of the Company's 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. The Company does not know when or if it will be able to
submit its products for regulatory review. Even if the Company submits a new
drug application, there may be delays in obtaining regulatory approvals, if the
Company obtains them at all. Sales of the Company's 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 products in those countries. The Company cannot provide
assurance that any of its products will receive marketing approval from the FDA
or comparable foreign agencies.
19
THE COMPANY MAY FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE
ESTABLISHED PHARMACEUTICAL COMPANIES, CAUSING ITS BUSINESS TO SUFFER.
The biotechnology industry is highly competitive. The Company competes 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 other competitors have much greater financial
and technical resources and production and marketing capabilities than the
Company does. The biopharmaceutical 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
the Company's products less valuable or unmarketable.
THE COMPANY HAS LIMITED OPERATING EXPERIENCE.
The Company has engaged solely in the development of biopharmaceutical
technology. Although some members of the Company's management team have
experience in biotechnology operations, the Company has limited experience in
manufacturing or selling biopharmaceutical products. The Company also has only
limited experience in negotiating and maintaining strategic relationships, and
in conducting clinical trials and other later-stage phases of the regulatory
approval process. The Company may not successfully engage in some or all of
these activities.
THE COMPANY HAS LIMITED MANUFACTURING CAPABILITY.
While the Company believes that it can produce materials for clinical trials and
produce products for human use at its recently completed synDNA(TM) production
suite, the Company may need to expand its commercial manufacturing capabilities
for products in the future if the Company elects not to or cannot successfully
partner with others to manufacture its products. This expansion may occur in
stages, each of which would require regulatory approval, and product demand
could at times exceed supply capacity. The Company has selected a site for any
expanded facilities but it can not be assured whether the Company will have the
financing needed for such construction. The Company does 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. The Company has not obtained regulatory
approvals for any production facilities for its products, nor can the Company
assure investors that it will be able to do so.
IF THE COMPANY LOSES KEY PERSONNEL OR IS UNABLE TO ATTRACT AND RETAIN
ADDITIONAL, HIGHLY SKILLED PERSONNEL REQUIRED FOR ITS ACTIVITIES, ITS BUSINESS
WILL SUFFER.
Competition for qualified personnel in the biopharmaceutical industry is
intense, and the Company's success will depend on its ability to attract and
retain highly skilled personnel. The Company is not aware of any key personnel
20
who plan to retire or otherwise leave the Company in the near future other than
Malcolm Skolnick who has expressed his desire to retire after the Company
identifies a new Chief Executive Officer.
ASSERTING, DEFENDING AND MAINTAINING THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
COULD BE DIFFICULT AND COSTLY, AND FAILURE TO DO SO WILL HARM ITS ABILITY TO
COMPETE.
The Company's success will depend on existing patents and licenses, and its
ability to obtain additional patents in the future. A patent portfolio of
approximately 46 domestic and foreign patents and patent applications protects
the Company technologies.
The Company cannot assure investors that its 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 its technology and products. Competitors may develop
products similar to the Company's which do not conflict with its patents. Others
may challenge the Company's patents and, as a result, the 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.
CytoGenix's success will also depend partly on its ability to operate without
infringing upon the proprietary rights of others, as well as its ability to
prevent others from infringing on its proprietary rights. The Company may be
required at times to take legal action to protect its proprietary rights and,
despite its best efforts, the Company may be sued for infringing on the patent
rights of others. The Company has not received any communications or other
indications from owners of related patents or others that such persons believe
the Company's products or technology may infringe their patents. Patent
litigation is costly and, even if the Company prevails, the cost of such
litigation could adversely affect its financial condition. If the Company does
not prevail, in addition to any damages the Company might have to pay, the
Company could be required to stop the infringing activity or obtain a license.
Any required license may not be available to the Company on acceptable terms, or
at all. If the Company fails to obtain a license, its business might be
materially adversely affected.
To help protect its proprietary rights in unpatented trade secrets, the Company
requires its employees, consultants and advisors to execute confidentiality
agreements. However, such agreements may not provide the Company 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 the Company's 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 the Company's trade secrets.
21
IF CYTOGENIX'S STRATEGIC RELATIONSHIPS ARE UNSUCCESSFUL, ITS BUSINESS COULD BE
HARMED.
The Company's strategic relationship with GE Healthcare and others are important
to its success. The development, improvement and marketing of many of its key
therapeutic products are or will be dependent, in part, on the efforts of the
Company's strategic partners. For example, under the GE Healthcare relationship,
the Company may fail to achieve product development milestones; GE Healthcare
may fail to perform its obligations under the agreement, such as failing to
produce an adequate supply of sufficient quality raw materials to produce
synDNA(TM); and the agreement with GE Healthcare may be subject to termination
in the event of a breach. The Company may not be commercially successful in its
effort to produce and/or sell synDNA(TM). The transactions contemplated by its
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 CytoGenix's business.
The Company's near-term strategy is to develop its own products as well as
co-develop products with strategic partners, or to license the marketing rights
for its products to pharmaceutical partners after the Company completes 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 will
be the responsibility of, the Company's strategic partners.
To fully realize the potential of its products, including development,
production and marketing, the Company may need to establish other strategic
relationships.
THE COMPANY HAS LIMITED SALES CAPABILITY AND MAY NOT BE ABLE TO SUCCESSFULLY
COMMERCIALIZE ITS PRODUCTS.
The Company has been engaged solely in the development of biopharmaceutical
technology. Although some of its management have experience in biotechnology
company operations, the Company has limited experience in manufacturing or
selling pharmaceutical products. The Company also has 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 the Company relies on strategic partners to fully commercialize its
products, the Company will be dependent on their efforts. The Company may not
successfully engage in any of these activities.
THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS AND ITS INSURANCE MAY
NOT BE ADEQUATE TO COVER DAMAGES.
The Company believes it carries adequate insurance for the product development
research it currently conducts. In the future, when the Company has products
available for commercial sale and use, the use of its products will expose it to
the risk of product liability claims. Although the Company intends to obtain
product liability insurance coverage, product liability insurance may not
continue to be available to it on acceptable terms and its coverage may not be
sufficient to cover all claims. A product liability claim, even one without
merit or for which the Company has substantial coverage, could result in
22
significant legal defense costs, thereby increasing expenses, lowering 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 THE COMPANY'S REVENUES AND FUTURE
PROFITABILITY.
In addition to obtaining regulatory approval, the successful commercialization
of its products will depend on the Company's 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 products. The cost containment measures that healthcare
providers are instituting and any healthcare reform could affect the Company's
ability to sell its products and may have a material adverse effect on
operations. Reimbursement in the United States or foreign countries may not be
available for any of the Company's 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, its products. The lack or
inadequacy of third-party reimbursements for its products could have a material
adverse effect on the Company's 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 the Company's products and
its business.
IF THE COMPANY FAILS TO ESTABLISH STRATEGIC RELATIONSHIPS WITH LARGER
PHARMACEUTICAL PARTNERS, ITS BUSINESS MAY SUFFER.
The Company does not intend to conduct late-stage (Phase III) human clinical
trials on its own. The Company anticipates entering into relationships with
larger pharmaceutical companies to conduct later trials and to market its
products. The Company also plans to continue to use contract manufacturing for
late stage clinical and commercial quantities of its products. The Company may
be unable to enter into corporate partnerships which could impede its ability to
bring its products to market. Any such corporate partnerships, if entered into,
may not be on favorable terms and may not result in the successful development
or marketing of the Company's products. If the Company is unsuccessful in
establishing advantageous clinical testing, manufacturing and marketing
relationships, it is not likely to generate significant revenues and become
profitable.
RISKS RELATED TO SHARE OWNERSHIP
CYTOGENIX'S RIGHT TO ISSUE PREFERRED STOCK AND/OR ITS 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.
Authorized capital consists of 300,000,000 shares of common stock and 50,000,000
shares of preferred stock. The Company's board of directors, without any further
23
vote by the shareholders, has the authority to issue preferred shares and to
determine the price, preference, 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 the
board of directors may issue in the future. For example, the 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.
The Company has a "classified" board of directors, which means that only
one-third of its directors are eligible for election each year. Therefore, if
shareholders wish to change the composition of the 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 the Company's shareholders and may delay
or frustrate action by shareholders to change the then current Board of
Directors and management.
CYTOGENIX'S STOCK PRICE IS VOLATILE AND MAY FLUCTUATE DUE TO FACTORS BEYOND ITS
CONTROL.
Historically, the market price of the Company's 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 the Company's
common stock: positive or negative results of testing and clinical trials by the
Company or its competitors; delays in entering into corporate partnerships;
technological innovations or commercial product introductions by the Company or
its 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 the Company's 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 THE COMPANY'S SHARES OF COMMON STOCK ELIGIBLE FOR
FUTURE SALE MAY CAUSE THE PRICE OF ITS COMMON STOCK TO FALL.
The Company has outstanding 140,663,961 shares of common stock as of December
31, 2006 and substantially all are eligible for sale under Rule 144 or are
otherwise freely tradable.
CytoGenix's employees have been granted options to buy a total of 22,179,000
shares of common stock as of December 31, 2006. The options granted have
exercise prices between $.185 and $1.01 per share. The shares of common stock
24
granted in the options under the stock option plan have not been registered as
of December 31, 2006. The options for these shares may not be exercised until
such registration.
The Company may issue options to purchase up to an additional 13,821,000 shares
of common stock as of December 31, 2006 under its stock option plans.
Sales of substantial amounts of shares into the public market could lower the
market price of the common stock.
THE COMPANY DOES NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
The Company has never paid dividends on its shares of common stock and does not
intend to pay dividends in the foreseeable future. Therefore, an investment
should only be made with the expectation of realizing a return through capital
appreciation. An investment should not be made with the expectation of dividend
income.
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 per month with a lease term ending
September 2009. The Company believes it's current and contracted for facilities
are suitable and adequate for its present and foreseeable future operational
requirements.
ITEM 3. LEGAL PROCEEDINGS
PHANUEL PURSUITS, LLC
Phanuel Pursuits - Suit was filed in October 2004 claiming that CytoGenix
(licensor) had breached a license agreement with Phanuel Pursuits (licensee) for
use of the CytoGenix ssDNA expression technology in Indian and Chinese
therapeutics. The licenses were dependent upon foreign regulatory approval. The
case was dismissed prior to trial for lack of evidence and no appeal was filed.
Action on this matter was therefore finalized in March of 2006.
WILLIAM B. WALDROFF AND APPLIED VETERINARY GENOMICS, INC. V. CYTOGENIX, INC.
Waldroff and Applied Veterinary Genomics, Inc. - Litigation initiated in March
2004 over the validity of license agreements between CytoGenix (licensor) and
William Waldroff (licensee) for use of CytoGenix ssDNA expression technology in
25
shrimp and horse therapeutic applications. AVGI, as sublicensee, was a third
party in this action. A jury trial held in February 2005 resulted in entry of a
judgment against CytoGenix requiring performance on the contracts and payment of
attorney fees. CytoGenix subsequently appealed this decision and in December
2006 the 1st Court of Appeals reversed the trial court's judgment, finding no
need for CytoGenix to perform on the contracts and no need for either party to
pay the opposing party's attorney fees. Waldroff and Applied Veterinary Genomics
filed a motion for a rehearing and CytoGenix filed a timely response to that
motion. On March 3, 2007, the Court of Appeals denied Waldroff/AVGI's Motion for
Rehearing. As of the date of this filing, Waldroff/AVGI has not filed a petition
for review by the Supreme Court of Texas.
DEFAMATORY ACTIONS
The Company is actively pursuing legal action against various parties involved
in the posting of defamatory comments about the Company and several of its
officers on public investor chat-room websites. A settlement proposal was
completed with one of the parties who has published an apology on Investor's Hub
(www.investorshub.com)
EMPLOYMENT ACTIONS
In November of 2006, the former Chief Financial Officer (CFO), Lawrence
Wunderlich, and the former Chief Operations Officer (COO), Frank Vazquez,
resigned from the Company. The Company and former officers are currently
pursuing arbitration to resolve claims by Messrs Vazquez and Wunderlich and
counterclaims by the Company. In conjunction with the former officers'
resignations, the former CFO filed a SOX Whistleblower Complaint with the
Department of Labor in January of 2007. The action is against the Company and
the Chief Executive Officer, Malcolm Skolnick. The SEC has requested information
from the Company addressing the allegations and the Company has responded in
compliance with that request. The Company's Board of Directors instituted a
special committee of independent directors who have appointed an independent,
outside counsel to conduct an independent investigation. As of March 30, 2007
this investigation is in progress. Management intends to vigorously defend the
actions brought by the former CFO and COO.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securities holders during the
fourth quarter of our fiscal year ended December 31, 2006.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Authorized capital stock consists of 300,000,000 shares of common stock, par
value $0.001 per share, and 50,000,000 shares of preferred stock, par value
$0.001 per share. There were 140,663,961 shares of common stock and no shares of
preferred stock outstanding as of March 16, 2007. The Company's common stock is
traded on the NASDAQ, OTC Bulletin Board under the ticker symbol CYGX.OB.
26
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 $0.94 $0.55
Quarter 2 $0.80 $0.41
Quarter 3 $0.45 $0.21
Quarter 4 $0.81 $0.22
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
Fiscal Year Ending December 31, 2006
Quarter 1 $1.54 $0.73
Quarter 2 $1.54 $0.85
Quarter 3 $1.09 $0.67
Quarter 4 $0.88 $0.56
===============================================================================
Quarter 1 to March 19, 2007 $0.66 $0.37
STOCKHOLDERS
As of March 19, 2007 there were approximately 660 shareholders of record of
Common Stock, one of which is Cede & Co., a nominee for Depository Trust Company
(or DTC). All of the shares of Common Stock held by brokerage firms, banks, and
other financial institutions as nominees for beneficial owners are deposited
into participant accounts at DTC, and are considered to be held of record by
Cede & Co. as one shareholder. The Company has not paid any dividends on its
Common Stock and the Board does not intend to declare any dividends in the
foreseeable future.
CHANGES IN SECURITIES
All of the Company's securities sold during 2006 have been either previously
reported on its Form 10-Qs and Form 8-Ks filed with the Securities and Exchange
Commission.
The Company issued 966,751 shares of common stock to individuals in
consideration for their services in a $.40 per share private placement completed
in the fourth quarter of 2006. The shares were recorded as a cost of capital in
conjunction with the fourth quarter fundraising.
27
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."
Operating Data: As of December 31,
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Gross Margin $ 31,446 $ -- $ -- $ (184,893) $ 1,700
Research and Development (2,199,148) (1,724,317) (831,472) (454,433) (187,040)
General and administrative (1,534,830) (1,495,454) (1,434,893) (1,213,780) (1,386,218)
Consulting Expense (345,637) (290,000) (60,926) (415,869) (816,947)
Depreciation (48,754) (25,391) (38,125) (38,445) (40,699)
Other Income/ Expense 1,389 2,037 40 (9,805) --
----------- ----------- ----------- ----------- -----------
Net Loss (4,095,534) (3,533,125) (2,365,376) (2,317,225) (2,429,204)
Weighted Average number of common
shares outstanding basic and diluted $ (0.03) $ (0.03) $ (0.02) $ (0.03) $ (0.04)
Balance sheet data:
Cash and Cash Equivalents 2,854,197 1,307,965 453,235 236,962 --
Capital Expenditures 254,846 16,987 12,964 45,358 10,387
Working Capital 2,030,112 226,930 (586,518) (339,866) (658,541)
Total assets 4,209,684 1,509,948 524,693 353,958 101,329
Total liabilities 1,307,931 1,102,427 1,039,753 597,202 666,755
Shareholders' Equity 2,901,753 407,525 (515,060) (243,244) (565,426)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements regarding the Company's plans,
expectations, estimates and beliefs. Actual results could differ materially from
those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. The Company has based these forward-looking statements largely on
its expectations. Forward-looking statements in this report include, but are not
necessarily limited to, those relating to the Company's:
o intention to introduce new products,
o receipt of any required FDA or other regulatory approval for its
products,
o expectations about the markets for its products,
28
o acceptance of its products, when introduced, in the marketplace,
o future capital needs, and
o success of its patent applications.
Forward-looking statements are subject to risks and uncertainties, certain of
which are beyond the Company's control. Actual results could differ materially
from those anticipated as a result of the factors described in the "Risk
Factors" and detailed in the Company's other Securities and Exchange Commission
filings, including among others:
o the effect of regulation by the FDA and other governmental
agencies,
o delays in obtaining, or its inability to obtain, approval by the
FDA or other regulatory authorities for its products,
o research and development efforts, including delays in developing,
or the failure to develop, its products,
o the development of competing or more effective products by other
parties,
o the results of pre-clinical and clinical testing,
o uncertainty of market of acceptance of its products,
o problems that it may face in manufacturing, marketing, and
distributing its products,
o inability to raise additional capital when needed,
o delays in the issuance of, or the failure to obtain, patents for
certain of its products and technologies, and
o problems with important suppliers and business partners.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report or incorporated by reference might not
transpire. Factors that cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this report.
OVERVIEW
From its inception in 1995, the Company has devoted its resources primarily to
fund its research and development efforts. The Company has been unprofitable
since inception and, other than limited interest and grant revenue, has had
minimal revenues from the sale of products and other sources. The Company
anticipates an increase in revenues for 2007. The Company expects to continue to
incur losses for the foreseeable future as it continues to expand its research
and development efforts and enter additional collaborative efforts. As of
December 31, 2006, the Company's accumulated deficit was $27,153,588.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
For the year ended December 31, 2006, the Company reported a net loss of
$4,095,534, or less than $0.03 per share, and $76,993 of revenue as compared
with a net loss of $3,533,125, or less than $0.03 per share, and no revenue for
the twelve months ended December 31, 2005.
29
Research and Development Expenses. Research and development expenses increased
approximately 28% to $2,199,148 for the twelve months ended December 31, 2006
compared to $1,724,317 for the same period in 2005 primarily due to increased
research activity and consultant assistance in obtaining communications with
several federal agencies of the US Government. Approximately $310,660 of the
additional amount results from the increased activity costs of antibacterial and
DNA vaccine research and the remaining $164,171 of the increase were additional
costs incurred for R&D consultants.
General and Administrative Expenses. General and administrative expenses
increased to $1,534,830 for the twelve months ended December 31, 2006 compared
to $1,495,454 for the same period in 2005. The increase of $39,376 is due
primarily to the increased costs in accounting fees for Sarbanes-Oxley
compliance.
Consulting Expenses. Consulting expenses increased to $345,637 for the twelve
months ended December 31, 2006 compared to $290,000 for the same period in 2005.
This increase is primarily attributed to the services of Jacobs Engineering
relating to the proposed construction of office and manufacturing facility.
Other costs included commissions paid for synDNA(TM) sales referrals and
consulting cost used to evaluate development of existing research platforms and
business directives for the Company. In 2006 the Company issued 320,000 shares
of common stock valued at $.86 per share for services for preparing and
coordinating with the Company and others in the development of business plans,
investor presentations, and financial models, which represents $275,200 of the
$345,637. In 2005, the Company issued 500,000 shares of common stock valued at
$.58 per share for service for preparing and coordinating with the Company and
others in the development of business plans, investor presentations, and
financial models, which represents the entire $290,000.
Depreciation and Amortization Expense. Depreciation and amortization expenses
increased to $48,754 for the twelve months ended December 31, 2006 compared to
$25,391 for the same period in 2005 primarily due to equipment purchased to
expand the lab to accommodate synDNA(TM) sales production. In 2006, the Company
also installed a new server to optimize security and data retention.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
For the year ended December 31, 2005, the Company 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 ended 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 increased staff and the remaining $220,000 of the increase results
from the increased activity cost of antibacterial and DNA vaccine research.
30
General and Administrative Expenses. General and administrative expenses
increased to $1,495,454 for the twelve months ended December 31, 2005 compared
to $1,434,893 for the same period in 2004. The increase includes an increase in
legal fees of $244,000, of which $199,000 is due 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 increased to $290,000 for the twelve
months ended December 31, 2005 compared to $60,926 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 investor relations and financial
business matters.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
decreased to $25,391 for the twelve months ended 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
The Company has financed its operations since inception primarily through equity
sales totaling $17,000,000, and from grants and contract research funding of
$200,000 from various sources. The Company expects to continue to incur losses
as it expands its research and development activities and related regulatory
work and increases its collaborative efforts. For 2007, the Company expects
expenditures for operations, including its collaborative efforts, and its
building of a GMP facility to be approximately $5 to $6 million. The increase
compared to 2006 expenditures is expected to result from the purchase of an
additional building for the GMP facility coupled with additional production
staff and expansion of preclinical product development efforts. However, if need
be in 2007, the Company could reduce its expenditures because the vast majority
of its costs are variable. Those estimated expenditures include amounts
necessary to fulfill its obligations under various collaborative, research and
licensing agreements during 2007.
On December 4, 2006, Lawrence Wunderlich, the Company's former Chief Financial
Officer and a former director, and Frank Vazquez, the Company's former chief
operating officer and a former director, filed a complaint with the American
Arbitration Association to recover over $800,000 in severance payments that they
allege the Company owes them. In the event Messrs. Wunderlich and Vazquez are
successful in their claims against the Company or the dispute continues for a
lengthy period of time, which would result in the Company incurring additional
legal fees defending itself, it would have a material adverse impact on the
liquidity of the Company. See Part I, Item 3, Legal Proceedings for a more
detailed description of this dispute.
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, the Company's
business strategy is to develop its products to initial Phase III human clinical
31
trials and look for third parties to fund completion of development of the
product and market the product through strategic partnerships, license
agreements or other relationships. The Company also looks for collaborative and
other efforts utilizing its technology to increase shareholder value. The
Company currently uses this strategy to limit the potential cost the Company
would incur in developing a product. The Company's expected costs under our
various contracts and for various drug development products can be estimated for
the next year or two, but not much beyond that due to the uncertainty of
clinical trial results and research results. Because of the various factors
noted above and the expectation that, until the Company establishes revenue
sources, the Company will license to, or jointly develop its prospective
products with, strategic partners, the Company reviews, at least annually, each
research program and clinical trial, based on results and progress during the
prior year and estimates its needs for that program or trial for the coming
year, making adjustments based on the progress of the program during the year.
The Company does not set long-term development budgets or development schedules
for bringing its products to market or track its research costs on a product
basis.
Cash and cash equivalents were $2,854,197 at December 31, 2006, compared with
$1,307,965 at December 31, 2005. The increase of $1,546,232 was due primarily to
net proceeds from a private placement of 10,369,990 shares of its common stock
at $.40 per share. The sale closed November 30, 2006. The securities were sold
in a private placement to accredited investors pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
To fund operations in 2007 and beyond the Company will need to raise additional
capital. The Company will continue to look for opportunities to finance its
ongoing activities and operations through accessing corporate partners or the
equity markets, as the Company currently has no credit facility, nor does the
Company currently intend to seek one.
CONTRACTUAL PAYMENT OBLIGATIONS
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 contractual commitments and obligations as of December 31, 2006 is as
follows:
PAYMENTS DUE BY PERIOD
CONTRACTUAL
OBLIGATION Total 2007 2008 2009
Operating leases $ 228,390 $ 74,806 $ 76,792 $ 76,792
GSL Earnest Money Contract $3,322,315 $ 474,572 $2,847,743 $ --
The Company's 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 research and development
programs, the progress of 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, its ability to
establish collaborative arrangements and the terms of any such arrangements, and
the costs associated with commercialization of its products. Cash requirements
32
are expected to continue to increase each year as the Company expands its
activities and operations. There can be no assurance, however, that the Company
will ever be able to generate product revenues or achieve or sustain
profitability.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact SFAS No. 157 will have on the Company's financial
position, results of operations, and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
statement No. 115." This Statement permits all entities to choose, at specified
election dates, to measure eligible items at fair value (the "fair value
option"). A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another
performance indicator if the business entity does not report earnings) at each
subsequent reporting date. Upfront costs and fees related to items for which the
fair value option is elected shall be recognized in earnings as incurred and not
deferred. If an entity elects the fair value option for a held-to-maturity or
available-for-sale security in conjunction with the adoption of this Statement,
that security shall be reported as a trading security under Statement 115, but
the accounting for a transfer to the trading category under paragraph 15(b) of
Statement 115 does not apply. Electing the fair value option for an existing
held-to-maturity security will not call into question the intent of an entity to
hold other debt securities to maturity in the future. This statement is
effective as of the first fiscal year that begins after November 15, 2007. The
Company is currently analyzing the effects of SFAS 159 but does not expect its
implementation will have a significant impact on the Company's financial
condition or results of operations.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for
Uncertainly in Income Taxes - An Interpretation of FASB Statement No. 109. FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement, and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006, and the provisions of FIN 48 will be applied to all positions
upon the adoption of the Interpretation. The cumulative effect of this applying
the provisions of this Interpretation will be reported as an adjustment to the
opening balance of retained earnings for that fiscal year. Management is
currently evaluating the impact of FIN 48 on the financial statements but does
not believe that its adoption will have a material effect on the Company's
financial position, results of operations, or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
33
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006, and will be adopted by the Company in the first quarter of 2007. The
Company does not expect the adoption of this interpretation to have an impact on
its financial position or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company's financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to
valuation of investments, long-lived assets, and revenue recognition. The
Company bases their estimates on historical experience and on various other
assumptions. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies and the related judgments and estimates affect the
preparation of its financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, temporary cash investments
having original maturity dates of three months or less. For reporting purposes,
such cash equivalents are stated at cost plus accrued interest which
approximates fair value.
Accounts Receivable
The company's accounts receivable primarily consist of trade receivables.
Management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The company includes any accounts
receivable balances that are determined to be uncollectible in its allowance for
doubtful accounts. As of December 31, 2006 and 2005 the allowance for doubtful
accounts is zero.
Inventory
34
Inventory includes raw materials (liquid buffers and enzyme mix) that are used
to produce enzymatically synthesized DNA (synDNA(TM)). Inventory is stated at
the lower of cost or market, cost being determined using the first-in, first out
("FIFO") method. Reserves are established for excess or obsolete inventories.
Inventory is included in the cost of revenue when sold.
Property and Equipment
Property and equipment is recorded at cost and depreciation is computed using
the straight-line method over the useful lives of the assets. Major renewals and
improvements are capitalized; minor replacements, maintenance and repairs are
charged to current operations.
Impairment of Long-lived Assets
CytoGenix performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment of or Disposal of Long-Lived Assets, sets forth guidance as to when
to recognize an impairment of long-lived assets and how to measure such
impairment. The standards require certain assets be reviewed for impairment
whenever events or circumstances indicate the carrying amount may not be
recoverable.
Revenue Recognition
CytoGenix's revenues are primarily derived from selling synDNA(TM). CytoGenix
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collectibility is
probable.
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.
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
35
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
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised),
"Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach.
Prior to the adoption of SFAS 123(R) we accounted for stock option grant in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and accordingly, recognized compensation expense for stock option grants using
the intrinsic value method.
Under the modified prospective approach, SFAS 123(R) applies to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the first quarter of fiscal 2006 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation cost for
all share-based payments granted subsequent to January 1, 2006 based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). For all quarters after the first quarter of fiscal 2006, compensation
costs recognized will include compensation costs for all share-based payments
granted based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). As of December 31, 2006 no options have been granted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2006 the Company has a restricted long-term CD investment for
the Waldroff 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.
This CD must be maintained until a mandate is issued by the 1st Court of
Appeals. Only upon issuance of the mandate can we petition for the refund of the
CD.
36
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CytoGenix, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
CytoGenix, Inc. did not maintain effective internal control over financial
reporting as of December 31, 2006, because of the effect of significant control
deficiencies which, collectively, represent a material weakness, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organization of the Treadway Commission (COSO).
CytoGenix, Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
37
or detected. The following control deficiencies which, in combination,
constitute a material weakness have been identified and included in management's
assessment:
o The Company has inadequate segregation of duties within various
accounting processes and lacks sufficient monitoring controls
over these processes to mitigate the risk. The accounting
processes lacking sufficient monitoring controls include the
signing of checks, bank statement reconciliation, and review of
data used to prepare the financial statements.
o The Company lacks procedures to properly account for non-routine
or complex accounting issues.
o The Company lacks controls to ensure that agreements are provided
to, and reviewed by, accounting and financial reporting personnel
on a timely basis.
o The Company lacks a well-defined process for the financial
reporting process including review and approvals. There is no
standard and consistent financial reporting package; there is not
a process in place for evaluating alternative accounting
treatments for significant transactions that are documented and
approved by management; there are no formal or informal
procedures for journal entry review, and no formal or informal
procedures to ensure the completeness and accuracy of financial
statement disclosures.
This material weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2006 financial statements, and
this report does not affect our report dated March 12, 2007 on those financial
statements.
In our opinion, management's assessment that CytoGenix, Inc. did not maintain
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, because
of the effect of the material weakness described above on the achievement of the
objectives of the control criteria, CytoGenix, Inc. has not maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ LBB & Associates Ltd., LLP
- ------------------------------
LBB & Associates Ltd., LLP
Houston, TX
March 12, 2007
38
MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Board of Directors and Shareholders of Cytogenix, Inc.
The Management of CytoGenix, Inc. (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. The Company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U. S. generally accepted accounting principles. The
Company's internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company, (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statement in accordance
with U. S. generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention of timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent
limitations, Therefore, even those systems determined to be effective may not
prevent or detect misstatements.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006, utilizing the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control-Integrated Framework. Management's
assessment included evaluating the design of the Company's internal control over
financial reporting and testing the operational effectiveness of the Company's
internal control over financial reporting.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The Company identified the following control deficiencies which,
together, constitute a material weakness in the Company's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2006:
o The Company has inadequate segregation of duties within various
accounting processes and lacks sufficient monitoring controls
over these processes to mitigate the risk. The accounting
processes lacking sufficient monitoring controls include the
signing of checks, bank statement reconciliation, and review of
data used to prepare the financial statements.
o The Company lacks procedures to properly account for non-routine
or complex accounting issues.
39
o The Company lacks controls to ensure that agreements are provided
to, and reviewed by, accounting and financial reporting personnel
on a timely basis.
o The Company lacks a well-defined process for financial reporting,
including review and approvals. There is no standard and
consistent financial reporting package; there is not a process in
place for evaluating alternative accounting treatments for
significant transactions that are documented and approved by
management; there are no formal or informal procedures for
journal entry review, and no formal or informal procedures to
ensure the completeness and accuracy of financial statement
disclosures.
Because of the aforementioned control deficiencies, which together constitute a
material weakness, the Company's management has concluded that the Company's
internal control over financial reporting was ineffective as of December 31,
2006.
The Company is in the process of remediating its control deficiencies. However,
the material weakness in internal control over financial reporting that has been
identified will not be remediated until numerous internal controls are
implemented and operate for a period of time, are tested, and the Company is
able to conclude that such internal controls are operating effectively.
Effective with the first quarter in 2007, the Company has (i) implemented
increased segregation of duties between the check issuance, the check signature,
and the bank statement reconciliation functions, (ii) implemented the
requirement for greater documentation for all expenditures, including approvals
by division manager and CEO under certain circumstances, and (iii) hired an
outside financial reporting consultant to review the financial data used to
prepare the financial statements. The Company cannot provide assurance that
these procedures will be successful in identifying material errors that may
exist in the financial statements. The Company cannot make assurances that it
will not identify additional material weaknesses in its internal control over
financial reporting in the future.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2006 has been audited by LBB &
Associates Ltd., LLP, the Company's independent registered public accounting
firm, as stated in their report included in this Annual Report on Form 10-K.
CytoGenix, Inc.
/s/ MALCOLM SKOLNICK
- ---------------------
Malcolm Skolnick
PRESIDENT & CEO/(PRINCIPAL EXECUTIVE OFFICER)
/s/ PAM SCHERTZ
- ----------------
Pam Schertz
CHIEF FINANCIAL OFFICER
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CytoGenix, Inc.
We have audited the accompanying balance sheets of CytoGenix, Inc. as of
December 31, 2006 and 2005, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2006. 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, 2006, 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, 2006 and 2005, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2006 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 absence of
significant revenues, recurring losses from operations, and its need for
additional financing in order to fund its projected loss in 2007 raise
substantial doubt about its ability to continue as a going concern. The 2006
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of CytoGenix,
Inc.'s internal control over financial reporting as of December 31, 2006, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 12, 2007 expressed an unqualified opinion on management's
assessment of internal control over financial reporting and an adverse opinion
on the effectiveness of internal control over financial reporting.
/s/ LBB & Associates Ltd., LLP
- ------------------------------
LBB & Associates Ltd., LLP
Houston, TX
March 12, 2007
41
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
BALANCE SHEETS
December 31, 2006 December 31, 2005
--------------------- ---------------------
ASSETS
Current Assets:
Cash $ 2,854,197 $ 1,307,965
Accounts receivable, net 2,577 -
Inventory 421,957 -
Prepaid expenses 14,297 21,392
--------------------- ---------------------
Total Current Assets 3,293,028 1,329,357
Property and equipment, net 261,793 56,287
Deposits 481,971 6,399
Long-term investments - restricted 172,892 117,905
--------------------- ---------------------
Total Assets $ 4,209,684 $ 1,509,948
===================== =====================
LIABILITIES AND STOCKHOLERS' EQUITY
Current Liabilities:
Long-term debt, current portion $ 25,153 $ -
Accounts payable 309,874 258,495
Accrued expenses 927,889 843,932
--------------------- ---------------------
Total Current Liabilities 1,262,916 1,102,427
Long-term debt, less current portion 45,015 -
--------------------- ---------------------
Total Liabilities 1,307,931 1,102,427
--------------------- ---------------------
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,
140,663,961 and 124,460,970 share issued and outstanding as of
December 31, 2006 and 2005, respectively 140,664 124,461
Additonal paid-in capital 30,544,649 23,971,086
Treasury stock (629,972) (629,972)
Deficit accumulated during the development stage (27,153,588) (23,058,054)
--------------------- ---------------------
Total Stockholders' Equity 2,901,753 407,521
--------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 4,209,684 $ 1,509,948
===================== =====================
The accompanying notes are an integral part of these financial statements
42
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF OPERATIONS
February 10, 1995
Year Ended December 31, Inception Through
2006 2005 2004 December 31, 2006
---------------- ----------------- ---------------- --------------------
REVENUES $ 76,993 $ - $ - $ 159,568
COSTS OF REVENUES 45,547 - - 310,440
---------------- ----------------- ---------------- --------------------
GROSS MARGIN 31,446 - - (150,872)
COSTS AND EXPENSES:
Research and development 2,199,148 1,724,317 831,472 10,005,336
General and administrative 1,534,830 1,495,454 1,434,893 14,455,743
Consulting expense 345,637 290,000 60,926 1,864,118
Depreciation and amortization 48,754 25,391 38,125 318,347
Impairment expense - - - 345,588
Equity in losses in joint venture - - - 10,000
---------------- ----------------- ---------------- --------------------
LOSS FROM OPERATIONS (4,096,923) (3,535,162) (2,365,416) (27,150,004)
OTHER INCOME(EXPENSE):
Interest income 4,987 2,405 40 7,673
Interest expense (3,011) - - (3,011)
Loss on disposal of property of equipment (587) (368) - (10,760)
Other income - - - 2,514
---------------- ----------------- ---------------- --------------------
NET LOSS $ (4,095,534) $ (3,533,125) $ (2,365,376) $ (27,153,588)
================ ================= ================ ====================
Net loss per share:
Basic and diluted net loss per share $ (0.03) $ (0.03) $ (0.02)
================ ================= ================
Weighted average shares outstanding:
Basic and diluted 127,366,388 114,181,072 101,817,083
================ ================= ================
The accompanying notes are an integral part of these financial statements
43
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 2006
Additional Total
Common Stock Paid -in Treasury Retained Stockholders'
Shares Amounts Capital Stock Deficit Equity (Deficit)
---------------------------------------------------------------------------------------------------
Shares issued for cash 64,638,231 $ 64,638 $ 5,621,470 $ - $ - $ 5,686,108
Shares issued for services 22,701,324 22,701 6,956,535 - - 6,979,236
Shares issued for exercised warrants 1,599,999 1,600 222,400 - - 224,000
Stock option expense - - 1,797,300 - - 1,797,300
Contributions to capital - - 152,500 - - 152,500
Purchase of treasury stock - - - (60,000) - (60,000)
Sales of treasury stock - - (1,639,938) 2,180,506 - 540,568
Shares issued for debt 334,064 334 231,470 - - 231,804
Issuance of stock into treasury 20,000,000 20,000 10,455,016 (10,475,016) - -
Retirement of treasury stock (11,048,625) (11,048) (6,862,825) 6,873,873 - -
Penalty on sale of treasury stock - - (125,765) 125,765 - -
Shares issued for patent 500,000 500 374,500 - - 375,000
Shares received for note receivable - - - (25,100) - (25,100)
Share rights issued as revenue
incentive - - 264,893 - - 264,893
Reclassify prior year treasury sales
to additional paid in capital in
2000 - - - 750,000 - 750,000
Net loss - - - - (17,159,553) (17,159,553)
---------------------------------------------------------------------------------------------------
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 482,032 482 162,760 - - 163,242
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)
---------------------------------------------------------------------------------------------------
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 647,701 648 541,478 - - 542,126
Shares issued for services 679,963 680 327,820 - - 328,500
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
Shares issued for cash, net
fundraising 15,882,991 15,883 6,298,683 - - 6,314,566
Shares issued for services 320,000 320 274,880 - - 275,200
Net loss - - - - (4,095,534) (4,095,534)
---------------------------------------------------------------------------------------------------
BALANCE, December 31, 2006 140,663,961 $ 140,664 $ 30,544,649 $ (629,972) $ (27,153,588) $ 2,901,753
===================================================================================================
44
CYTOGENIX, INC.
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF CASH FLOWS
February 10, 1995
Year Ended December 31, Inception Through
2006 2005 2004 December 31, 2006
------------- ------------- ------------- ------------------
OPERATING ACTIVITIES:
Net loss $ (4,095,534) $ (3,533,125) $ (2,365,376) $ (27,153,588)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deprecation and amortization 48,754 25,391 38,128 314,971
Impairment expense - - - 345,588
Loss on disposal of property and equipment 587 368 - 10,760
Gain on long-term investments - restricted (4,987) (2,405) - (7,392)
Stock issued for services 275,200 328,500 163,242 7,746,178
Stock option expense - - - 2,062,193
Equity in losses of joint venture - - - 10,000
Changes in assets and liabilities:
Accounts receivable (2,577) - - (2,577)
Inventory (421,957) - - (421,957)
Prepaid expenses 7,095 (21,392) 20,374 (14,297)
Deposits - - - (6,399)
Accounts payable 51,379 20,662 (50,533) 309,874
Accrued expenses 83,956 584,138 524,372 1,733,107
------------- ------------- ------------- ------------------
Net cash used in operation activities (4,058,084) (2,597,863) (1,669,793) (15,073,539)
------------- ------------- ------------- ------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (254,846) (16,987) (12,964) (558,111)
Deposit on Building Contract (475,572) (475,572)
Issue note receivable - - - (25,100)
Purchase of long-term investments - restricted (50,000) (115,500) - (165,500)
Investment in joint venture - - - (10,000)
------------- ------------- ------------- ------------------
Net cash used in investing activities (780,418) (132,487) (12,964) (1,234,283)
------------- ------------- ------------- ------------------
FINANCING ACTIVITIES:
Proceeds from notes payable 80,000 - - 330,000
Payment on notes payable (9,832) - - (259,832)
Treasury share sold - - - 1,290,568
Purchase of treasury shares - - - (60,000)
Buyback of stock warrants - - (571) (571)
Proceeds from stock subscriptions - - - -
Sale of common stock 6,314,566 3,585,080 1,551,601 17,137,355
Sale of common stock for exercised warrants - - 348,000 571,999
Contributions to capital - - - 152,500
------------- ------------- ------------- ------------------
Net cash provided by financing activities 6,384,734 3,585,080 1,899,030 19,162,019
------------- ------------- ------------- ------------------
NET CHANGE IN CASH 1,546,232 854,730 216,273 2,854,197
CASH, beginning of period 1,307,965 453,235 236,962 -
------------- ------------- ------------- ------------------
CASH, end of period $ 2,854,197 $ 1,307,965 $ 453,235 $ 2,854,197
============= ============= ============= ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,272 $ - $ - $ 1,272
============= ============= ============= ==================
Income taxes paid $ - $ - $ - $ -
============= ============= ============= ==================
NONCASH TRANSACTIONS:
Common stock issued for debt $ - $ 542,126 $ 31,289 $ 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
45
CYTOGENIX, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006
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 application to a specialized expression vector capable of producing
single stranded DNA (ssDNA) in both eukaryotes and prokaryotes.
Basis of Presentation
These financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, temporary cash investments
having original maturity dates of three months or less. For reporting purposes,
such cash equivalents are stated at cost plus accrued interest which
approximates fair value.
Accounts Receivable
The Company's accounts receivable primarily consist of trade receivables.
Management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The company includes any accounts
receivable balances that are determined to be uncollectible in its allowance for
doubtful accounts. As of December 31, 2006 and 2005 the allowance for doubtful
accounts is zero.
Inventory
Inventory includes raw materials (liquid buffers and enzyme mix) that are used
to produce enzymatically synthesized DNA (synDNA(TM)). Inventory is stated at
the lower of cost or market, cost being determined using the first-in, first out
("FIFO") method. Reserves are established for excess or obsolete inventories.
Inventory is included in the cost of revenue when sold.
46
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment is recorded at cost and depreciation is computed using
the straight-line method over the useful lives of the assets. Major renewals and
improvements are capitalized; minor replacements, maintenance and repairs are
charged to current operations.
Impairment of Long-lived Assets
CytoGenix performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment of or Disposal of Long-Lived Assets, sets forth guidance as to when
to recognize an impairment of long-lived assets and how to measure such
impairment. The standards require certain assets be reviewed for impairment
whenever events or circumstances indicate the carrying amount may not be
recoverable.
Revenue Recognition
CytoGenix's revenues are primarily derived from selling synDNA(TM). CytoGenix
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collectibility is
probable.
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.
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.
47
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised),
"Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach.
Prior to the adoption of SFAS 123(R) we accounted for stock option grant in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and accordingly, recognized compensation expense for stock option grants using
the intrinsic value method.
Under the modified prospective approach, SFAS 123(R) applies to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the first quarter of fiscal 2006 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation cost for
all share-based payments granted subsequent to January 1, 2006 based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). For all quarters after the first quarter of fiscal 2006, compensation
costs recognized will include compensation costs for all share-based payments
granted based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R).
Segment Reporting
The Company operates in one industry segment -- biotechnology research and
development. The Company operates in one geographic area, being the United
States of America.
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is its Chief Executive Officer. The Company's Chief Executive
Officer reviews financial information presented on a consolidated basis for
purposes of allocating resources and evaluating financial performance. The
Company has one business activity and there are no segment managers who are held
accountable for operations, operating results and plans for products or
components below the consolidated unit level. Accordingly, the Company reports
as a single operating segment.
48
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact SFAS No. 157 will have on the Company's financial
position, results of operations, and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
statement No. 115." This Statement permits all entities to choose, at specified
election dates, to measure eligible items at fair value (the "fair value
option"). A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another
performance indicator if the business entity does not report earnings) at each
subsequent reporting date. Upfront costs and fees related to items for which the
fair value option is elected shall be recognized in earnings as incurred and not
deferred. If an entity elects the fair value option for a held-to-maturity or
available-for-sale security in conjunction with the adoption of this Statement,
that security shall be reported as a trading security under Statement 115, but
the accounting for a transfer to the trading category under paragraph 15(b) of
Statement 115 does not apply. Electing the fair value option for an existing
held-to-maturity security will not call into question the intent of an entity to
hold other debt securities to maturity in the future. This statement is
effective as of the first fiscal year that begins after November 15, 2007. The
Company is currently analyzing the effects of SFAS 159 but does not expect its
implementation will have a significant impact on the Company's financial
condition or results of operations.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for
Uncertainly in Income Taxes - An Interpretation of FASB Statement No. 109. FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement, and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006, and the provisions of FIN 48 will be applied to all positions
upon the adoption of the Interpretation. The cumulative effect of this applying
the provisions of this Interpretation will be reported as an adjustment to the
opening balance of retained earnings for that fiscal year. Management is
currently evaluating the impact of FIN 48 on the financial statements but does
not believe that its adoption will have a material effect on the Company's
financial position, results of operations, or cash flows.
49
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006, and will be adopted by the Company in the first quarter of 2007. The
Company does not expect the adoption of this interpretation to have an impact on
its financial position or results of operations.
NOTE 2 - GOING CONCERN
CytoGenix has had negligible revenues since inception and only approximately
$77,000 in the last two years. The Company has incurred losses totaling
$27,153,588 from inception through December 31, 2006. 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.
50
NOTE 3 - LONG TERM INVESTMENT - RESTRICTED
The Company established a CD for $50,000 with Frost National bank which matures
July 18, 2007. This CD earned interest at 4.650% and in 2006 interest earned is
$1,057. The CD was required by Frost National Bank to partially secure the
equipment loan discussed in Note 7.
The Company has a restricted long-term CD investment for the Waldroff litigation
matter discussed in Note 12 to the financial statements. Pending appeal of this
case CytoGenix has established a long-term CD in the amount of $115,500 to
comply with the court order. This CD earns interest at a rate of 3.4% annually.
This CD must be maintained until a mandate is issued by the 1st Court of
Appeals. Only upon issuance of the mandate can we petition for the refund of the
CD.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property consisted of the following as of December 31:
2006 2005
---- ----
Lab equipment 5-7 years $ 299,005 $ 104,635
Office Furniture & Fixtures 3-7 years 62,592 57,759
Office Equipment 3-7 years 63,246 57,518
Leasehold Improvements Lease Term 16,804 3,164
Less: accumulated depreciation (179,854) (166,789)
--------- ---------
Net book value $ 261,793 $ 56,287
========= =========
Depreciation expense totaled $48,754, $25,391, and $38,125 for 2006, 2005, and
2004 respectively.
NOTE 5 - DEPOSITS
The Company deposits at December 31, 2006 include the first installment for the
construction of the new production and office facility in Houston, Texas in the
amount of $475,572. The remaining balance in the deposit account is a rent
deposit on the current facilities for $6,399.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist mainly of unpaid salaries and unpaid payroll taxes on
cash compensation and stock based compensation. Total accrued payroll taxes for
previously issued stock compensation as of December 31, 2006 and 2005 was
$207,154 and $207,154, respectively. Accrued bonus compensation per employment
agreements was as of December 31, 2006 and 2005 was $361,946 and $396,946
respectively.
51
NOTE 7 - DEBT
CytoGenix entered into an $80,000, 36 month promissory note with a bank on July
18, 2006 to finance the cost of equipment. The note requires monthly payments of
$2,569 including interest at 9.51%. Interest paid for the year ended December
31, 2006 was $3,012.
Annual maturities of debt during each of the years ended December 31, are as
follows:
2007 $ 25,153
2008 30,105
2009 14,910
2010 -
2011 -
-------------
Total $ 70,168
==============
NOTE 8 - COMMON STOCK ISSUANCES
CytoGenix has issued common stock since inception 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
2003 4,295,315 733,351
---------- ------------
Sub-total 22,701,324 6,979,236
2004 482,032 163,242
2005 679,963 328,500
2006 320,000 275,200
52
NOTE 8 - COMMON STOCK ISSUANCES (CONTINUED)
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
2003 31,662,784 1,321,349
----------- -----------
Sub-total 64,638,231 5,686,108
2004 8,715,191 1,551,601
2005 13,928,967 3,585,080
2006 15,882,991 6,314,566
In 2006, restricted common stock sold for cash was consistently sold through
private placement offering at a discount. The difference between the selling
price and the fair market value on the date sold was approximately $3,686,112
for the year.
STOCK ISSUED FOR DEBT:
In 2006, there were no shares issued for debt. In 2005, 647,701 shares were
issued for debt totaling $542,126.
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. In 2004, 39,267
shares were issued for debt totaling $31,289.
NOTE 9 - STOCK OPTIONS AND WARRANTS
In 2004, CytoGenix issued 1,242,856 warrants as part of a private placement
memorandum. The warrants are exercisable at $0.28 per share, vest immediately
and expire one year from the grant date. Of these warrants 642,857 were not
exercised and expired in 2005. There were no warrants outstanding at December
31, 2006 or 2005.
On June 24, 2003, the Company adopted the 2003 Stock Option Plan (the "2003
Plan") to provide for the granting of incentive stock options to executive
officers and employees of the Company, as determined by a committee of the
Company's board of directors. Non-qualified options may also be granted under
the 2003 Plan to non-employee directors and consultants of the Company.
53
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONTINUED)
A total of 18,000,000 share of common stock have been reserved for the issuance
under the 2003 Plan. All stock options granted under the 2003 Plan vest, subject
to a Condition Precedent, 33.3% over each of the first and second anniversaries
of the grant date and expire no later than ten years from the date of the plan
on June 24, 2013. Awards granted under the Option Plan are to be determined from
time to time by a compensation committee. If an option expires or is terminated,
surrendered or cancelled without having been fully exercised, the unused share
covered by any such Option shall again be available for grant under the Option
Plan. As of December 31, 2006 6,325,000 common stock shares are available to be
awarded under this plan. No option issued under the 2003 Plan is exercisable,
even if vested, unless and until such time that the underlying shares to be
issued are publicly registered with the Securities and Exchange Committee, such
registration constituting the Condition Precedent. The Company is under no
obligation to register the underlying shares, nor is there any recourse by the
option holder in the event their options expire or otherwise terminate prior to
the Condition Precedent being met.
On June 14, 2005 the Company adopted the 2005 Stock Option Plan (the "2005
Plan") to provide for the granting of incentive stock options to executive
officers and employees of the Company, as determined by a committee of the
Company's board of directors. Non-qualified options may also be granted under
the 2005 Plan to non-employee directors and consultants of the Company
A total of 18,000,000 share of common stock have been reserved for the issuance
under the 2005 Plan. All stock options granted under the 2003 Plan vest, subject
to a Condition Precedent, 33.3% over each of the first and second anniversaries
of the grant date and expire no later than ten years from the date of the plan
on June 14, 2015. Awards granted under the Option Plan are to be determined from
time to time by a compensation committee. If an option expires or is terminated,
surrendered or cancelled without having been fully exercised, the unused share
covered by any such Option shall again be available for grant under the Option
Plan. As of December 31, 2006 7,496,000 common stock shares are available to be
awarded under this plan. No option issued under the 2005 Plan is exercisable,
even if vested, unless and until such time that the underlying shares to be
issued are publicly registered with the Securities and Exchange Committee, such
registration constituting a Condition Precedent. The Company is under no
obligation to register the underlying shares, nor is there any recourse by the
option holder in the event their options expire or otherwise terminate prior to
the Condition Precedent being met.
The shares of common stock granted in the options under the stock option plans
discussed above have not been registered as of December 31, 2006. Management
presently has no plans to register such shares.
54
NOTE 10 - INCOME TAXES
For the period from inception through December 31, 2006, 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 $1,400,000, $1,205,000, and $800,000 during
the years ended December 31, 2006, 2005 and 2004, respectively. The cumulative
net operating loss carry-forward is approximately $19,926,500 at December 31,
2006, and will expire in the years 2013 through 2022.
Deferred income taxes consist of the following at December 31,
2006 2005
---- ----
Long-term:
Deferred tax assets $ 6,775,000 $ 5,375,000
Valuation allowance (6,775,000) (5,375,000)
------------- -------------
$ - $ -
============= =============
NOTE 11 - CONCENTRATIONS
The Company had gross sales of $76,993, $0 and $0 for the years ended 2006, 2005
and 2004, respectively. The Company has three customers that represent 100% of
the gross sales for the year ended December 31, 2006. The Company has one
supplier that provides all the materials necessary to generate the sales for the
year ended December 31, 2006.
The Company has cash balances in a single financial institution which, from time
to time, exceed the federally insured limit of $100,000. As of December 31,
2006, the Company's cash balance exceeded the federally insured limit by
$2,767,887. No loss has been incurred related to this concentration of cash.
NOTE 12 - COMMITMENTS AND CONTIGENCIES
Lease
- -----
CytoGenix leases office facilities under an operating lease that expires on
December 31, 2009. Rent expense was $69,749, $66,455 and $68,407 for 2006, 2005
and 2004, respectively. Annual future rent payments are as follows:
Year Amount
------------- -----------------
2007 $ 74,806
2008 76,792
2009 76,792
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, 2006 and
2005 deferred rent was $25,981 and $32,656, respectively and is included in
accrued expenses.
55
NOTE 12 - COMMITMENTS AND CONTIGENCIES (CONTINUED)
Land & Building
- ---------------
The Company signed an earnest money contract with GSL Constructors, Ltd. for
design/build project located in the Westchase District of Houston for
$3,796,577. Upon execution of the earnest money contract a deposit of $474,572
was paid by the Company. The second payment of $474,572 will be due when the
facility is completed to Dried-In Conditions. The balance will be due at
closing. The contract is for 2.274 acres of land together with a facility. The
Company has engaged the services of Luwa SA to design and construct the cGMP
portion of the new 20,000 sq ft facility. Groundbreaking for this project is
anticipated to occur in 2007 subject to financing.
Research
- --------
CytoGenix has entered into Sponsored Research Agreements (SRA) with several
Universities. The Universities do research for CytoGenix related to CytoGenix's
proprietary technology. As work progresses, the Universities invoice CytoGenix
for reimbursement of expenses related to the research. The SRA's have
established budgets. As of December 31, 2006 unbilled amounts under the SRA's
totaled approximately $120,987.
As of December 31, 2006 the Company renewed an SRA with the Montefiore Medical
Center. A Company director is affiliated with Montefiore Medical Center.
Employment
- ----------
Per the employment agreement of the CEO, there is a severance pay obligation for
early termination for any reason other than cause, permanent disability, or if
the employee voluntarily resigns following a constructive termination,
(collectively a "Termination Event") then the Company shall pay the employee
base compensation for a period of twelve (12) months following termination. In
addition, the Company shall also reimburse the Employee for the payment of the
Employee' COBRA or equivalent other replacement medical and dental insurance
premiums for the period of twelve (12) months. The cash obligation under this
arrangement if the CEO were to be terminated on January 1, 2007 could result in
a cash outflow of approximately $515,000.
Board of Directors
- ------------------
There are currently four outside Directors who received $25,000 each in
compensation for the year ending December 31, 2006. The compensation for 2007
will increase to $40,000 each per year.
56
NOTE 12 - COMMITMENTS AND CONTIGENCIES (CONTINUED)
Inventory
- ---------
The Company has entered an agreement with GE Healthcare Bio-Sciences Corp.
whereas GEHC will provide the Company with DNA production reagents for use in
the manufacture of vaccines and therapeutic compounds. The Company committed
under this agreement to spend $350,000 for the year ended December 31, 2006. The
Company met the commitment for 2006 and is in the process of negotiating with GE
for the options for 2007 and beyond. As of the date of this filing no agreement
has been finalized.
Litigation
- ----------
Phanuel Pursuits, LLC
Phanuel Pursuits, LLC suit was filed in October 2004 claiming that CytoGenix
(licensor) had breached a license agreement with Phanuel Pursuits (licensee) for
use of the CytoGenix ssDNA expression technology in Indian and Chinese
therapeutics. The licenses were dependent upon foreign regulatory approval. The
case was dismissed prior to trial for lack of evidence and no appeal was filed.
Action on this matter was therefore finalized in March of 2006.
William B Waldroff and Applied Veterinary Genomics, Inc.
Waldroff and Applied Veterinary Genomics, Inc. ("AVGI") - Litigation initiated
in March 2004 over the validity of license agreements between CytoGenix
(licensor) and William Waldroff (licensee) for use of CytoGenix ssDNA expression
technology in shrimp and horse therapeutic applications. AVGI, as sublicensee,
was a third party in this action. A jury trial held in February 2005 resulted in
entry of a judgment against CytoGenix requiring performance on the contracts and
payment of attorney fees. CytoGenix subsequently appealed this decision and in
December 2006 the 1st Court of Appeals reversed the trial court's judgment,
finding no need for CytoGenix to perform on the contracts and no need for either
party to pay the opposing party's attorney fees. Waldroff and Applied Veterinary
Genomics filed a motion for a rehearing; CytoGenix filed a timely response to
that motion and the parties await decision by the Court. On March 3, 2007, the
Court of Appeals denied Waldroff/AVGI's Motion for Rehearing. Pending resolution
of the Court's decision and possible further appeals, CytoGenix has established
a long-term CD in the amount of $115,500 to comply with the trial court
judgment. This CD earns interest at a rate of 3.4% annually. Accrued Interest
for the year ended December 31, 2006 and 2005 was $3,929 and $2,405
respectively.
Defamatory Actions
- ------------------
The Company is actively pursuing legal action against various parties involved
in the posting of defamatory comments about the Company and several of its
officers on public investor chat-room websites. A settlement with one of the
parties resulted in an apology posted on Investor's Hub (www.investorshub.com),
57
NOTE 13 - SUBSEQUENT EVENTS
In November of 2006, the former Chief Financial Officer (CFO), Lawrence
Wunderlich, and the former Chief Operations Officer, Frank Vazquez, resigned
from the Company. The Company and former officers are currently pursuing
arbitration to resolve claims by Messrs Vazquez and Wunderlich and counterclaims
by the Company. In conjunction with the former officers' resignations, the
former CFO filed a SOX Whistleblower Complaint with the Department of Labor in
January of 2007. The action is against the Company and the Chief Executive
Officer, Malcolm Skolnick.
The SEC has requested information from the Company addressing the allegations
and the Company has responded to the request. The Company's Board of Directors
instituted a special committee of independent directors who have appointed an
independent, outside counsel to conduct an independent investigation. As of
March 20, 2007 this investigation is in progress. Management intends to
vigorously defend the actions brought by the former CEO and CFO.
NOTE 14 - UNAUDITED QUARTERLY FINANCIAL DATA
First Quarter Second Quarter Third Quarter Fourth Quarter
------------ -------------- ------------- --------------
Year Ended December 31, 2006
Net Sales $ - $ 37,180 $ 8,115 $ 31,698
Gross Profit - 25,524 (11,327) 17,249
Net Loss (1,035,494) (916,763) (1,219,699) (923,578)
Basic Loss Per Share (0.01) (0.01) (0.01) (0.01)
Year Ended December 31, 2005
Net Sales $ - $ - $ - $ -
Gross Profit - - - -
Net Loss (686,845) (591,514) (1,065,266) (1,189,500)
Basic Loss Per Share (0.01) (0.00) (0.01) (0.01)
Year Ended December 31, 2004
Net Sales $ - $ - $ - $ -
Gross Profit - - - -
Net Loss (382,440) (461,935) (485,044) (1,035,957)
Basic Loss Per Share (0.00) (0.00) (0.00) (0.01)
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURES CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, we have formalized our disclosure controls and
procedures. Our principal executive officer and principal financial officer have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of
December 31, 2006. Based on such evaluations, such officers have concluded that,
as of December 31, 2006, our disclosure controls and procedures were effective
in timely alerting them to material information relating to us(and our
consolidated subsidiaries) required to be included in our periodic SEC filings.
These has been no change in our internal control over financial reporting during
the quarter ended December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
See Management's Report on Internal Control over Financial Reporting in Item 8,
which is incorporated herein by reference.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE COMPANY AND OTHER KEY EMPLOYEES
Set forth below are the names, ages as of March 16, 2007 and titles of the
persons currently serving as Director, Executive Officers and Significant
Employees of the Company:
NAME AGE TITLE
- --------------------------------------------------------------------------------
Malcolm H Skolnick 71 Chief Executive Officer, President and
Director
Term of Office 2006-2009
59
Pam Schertz 50 Chief Financial Officer
Cindee Ewell 52 Vice President of Legal Affairs
Yin Chen 44 Vice President of Research & Development
Kurt Berens 44 Vice President of Product Development
Xin-Xing Tan 37 Senior Research Scientist
Frederic Kendirgi 36 Senior Research Scientist
Scott E. Parazynski, M.D. 47 Director
Term of Office: 2006-2009
Cy A. Stein, M.D., Ph.D. 52 Director
Term of Office: 2003-2006
John J. Rossi, Ph.D. 60 Director
Term of Office: 2004-2007
Raymond L. Ocampo, Jr. 53 Director
Term of Office: 2004-2007
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 M.S. and Ph.D. degrees in physics from
Cornell University and a J.D. from the University of Houston. Dr. Skolnick has
conducted basic science and clinical research and is a patented inventor. 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 Southwest Health Technology
Foundation, Citizens League for Environmental Action Now (CLEAN), and Frank
Evans Center for Conflict Resolution and Responsible Community Designs (a
private company).
MS. PAM SCHERTZ was appointed Interim CFO on December 1, 2006 and holds the
position of Corporate Treasurer. Ms. Schertz previously served as Controller for
the company beginning in October 2003. Prior to working for CytoGenix, Ms.
Schertz has over 15 years of experience in accounting in various industries,
including a casket manufacturer, an independent power company, and an
architecture firm. Management positions have included serving as Controller at a
high-end clothier and at a civil engineering firm. Ms. Schertz received her BBA
in Accounting from the University of Houston as is a licensed CPA in the State
of Texas.
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 Kansis City, MO as senior research scientist
60
and then CytoGenix, as chief research scientist in February 2000. He is one of
co-inventors of the Company's proprietary ssDNA expression systems. He was
appointed as Chief Scientific Officer and Vice President of Research and
Development on November 7, 2001 and is Executive Secretary of the Scientific
Advisory Committee.
DR. CINDEE EWELL brings a combination of scientific, legal, and intellectual
property experience that is critical to securing and maintaining the legal
protection of the technology as well as our Company agreement with outside third
parties. Dr. Ewell holds a Bachelor of Science degree from Cornell University, a
Doctor of Philosophy degree from the University of Texas Health Science Center
at Houston, a Juris Doctorate from South Texas College of Law, and has over
seven years of post-doctoral experience working in the Department of Cell
Biology at Baylor College of Medicine. Dr. Ewell initially worked in the
biotechnology industry as a microbiologist and then moved on into academics
where she worked more as a cellular molecular biologist. Her legal expertise
includes approximately three years law firm experience where she worked with
large pharmaceutical and chemical clients in the areas of patent prosecution and
freedom to operate.
MR. KURT BERENS has ten years research and development experience in ethical
drugs and medical devices. Mr. Berens has been a collaborator on projects in
academia and was most recently the Manager of the Cellular and Biomedical
Section at NASA-Johnson Space Center. He was a Senior Project Manager for Texas
Biotechnology for six years, Mr. Berens was part of a development team that was
successful in obtaining FDA approval for Argatroban(R). Trained as a
pharmaceutical scientist, Mr. Berens has worked successfully in both the
academic and commercial drug development fields. Mr. Berens received his
Bachelor's degree at the University of Minnesota followed by doctoral studies in
pharmaceutics at the University of Houston.
DR. XIN XING TAN joined the Company on October 1, 2002 as a Senior Research
Scientist. His responsibilities and expertise lie in the areas of DNA/RNA
manipulation, cDNA library screening, gene expression regulation and Photosystem
II protein complexes. Dr Tan graduated from Wuhan University in Wuhan, P.R.
China. He attained his doctorate in biochemistry at the Chinese Academy of
Sciences. Following graduation he maintained a position of NIH Postdoctoral
Fellow at Rice University before joining CytoGenix, Inc.
DR. FREDERIC KENDIRGI is a Senior Research Scientist bringing broad experience
in eukaryotic gene expression as well as developing assays for protein
detection/function and expression vectors in eukaryotic systems. He earned his
M.Sc. in Virology and Immunology in 1995 from the University of Quebec
(INRS-Institut Armand-Frappier) Laval, Canada and his Ph.D. in biochemistry and
Molecular Biology from the University of Calgary, Calgary Alberta, Canada in
2000. Subsequently, he joined the laboratory of Dr. S.R. Wente as post-doctoral
scientist at Washington University in St. Louis and Vanderbilt University,
Nashville. Dr. Kendirgi has authored, co-authored or presented 10 scientific
abstracts at national and international meeting and 5 scientific papers. He
joined CytoGenix research and development team in October 2004.
61
SCOTT E. PARAZYNSKI, M.D. Dr. Parazynski is a graduate of Stanford University
and Stanford Medical School and pursued clinical training at the Brigham and
Women's Hospital (Boston, MA) and emergency medicine residency training in
Denver, CO. He has published articles in the field of space physiology and has
expertise in human adaptation to stressful environments. Dr. Parazynski is a
member of the Aerospace Medical Association, the American Society for
Gravitational and Space Biology and has received numerous special honors,
including the National Institutes of Health Predoctoral Training Award in Cancer
Biology, NASA Graduate Student Researcher's Award and Research Honors Award from
Stanford Medical School. Dr. Parazynski has been an astronaut since 1992 and has
logged over 262 hours in space. He first flew in 1994 on the Atmospheric
Laboratory for Applications and Science (ATLAS-3) mission, which was part of an
on-going program to determine the Earth's energy balance and atmospheric change
over an 11-year solar cycle. During this mission, he and his crewmates also
evaluated the Interlimb Resistance Device, a free-floating exercise he developed
to prevent musculoskeletal atrophy in microgravity.
CY A. STEIN, M.D., PH.D. Dr. Stein is currently Professor of Medicine Urology
and Pharmacology in the Oncology Department of Albert Einstein College of
Medicine, New York. In addition to his clinical and faculty activities, he is
co-editor-in-chief of Antisense and Nucleic Acid Drug Development, sits on seven
editorial advisory boards, including Nucleic Acids Research, serves on eight
scientific advisory boards, including Genta (Berkeley Heights, NJ), Targent (New
York, NY), A3D (Heidelberg, Germany), and is an ad hoc reviewer for over 20 peer
reviewed journals. He has authored 97 peer reviewed journal articles. He has
written 56 book chapters, reviews and editorials, and he holds six patents
issued and four patents pending. He attended Brown University (BA), Stanford
University (PhD in Organic Chemistry), Albert Einstein College of Medicine (MD),
and New York Hospital-Cornell Medical Center (Internship and Residency in
Internal Medicine). Dr Stein was a Clinical Associate and Senior Staff Fellow at
The National Cancer Institute, Bethesda, Maryland.
JOHN J. ROSSI, PH.D., Associate Director for Laboratory Research, City of Hope
Comprehensive Cancer Center. Dr. Rossi began his employment with City of Hope
(COH) in 1980 as an assistant research scientist in the Department of Molecular
Genetics. He was promoted to chairman of the Division of Biology in 1992. In
1993, COH bestowed its highest honor upon him by naming him to its Gallery of
Medical and Scientific Achievement for his pioneering work at the molecular
level in the battle against AIDS and other major diseases. In 1998, Dr. Rossi
was appointed as the Dean of the City of Hope Graduate School of Biological
Sciences. Dr. Rossi is an expert in ribozymes (molecular scissors). One of his
most notable projects is in the area of ribozyme research in AIDS. He led the
research team that first suggested applying ribozymes to treat HIV. His research
in molecular genetics and microbiology has resulted in eight patents being
granted and has served as the basis for more than 120 scientific papers. Dr.
Rossi received his bachelor's degree from the University of New Hampshire and
earned his doctorate at the University of Connecticut. Prior to his working at
COH, Dr. Rossi completed four years of post Ph.D. training at Brown University
in Providence, Rhode Island.
RAYMOND L. OCAMPO JR. is a lawyer and businessman. He currently serves on the
boards of PMI Group, Inc. (PMI) and Pinpoint Solutions Corporation. Mr. Campo
62
retired in November 1996 as Senior Vice President, General Counsel & Secretary
at Oracle Corporation, the world's second largest software company, after
serving as its chief legal counsel for more than a decade. Before joining Oracle
Corporation in 1986, Mr. Ocampo was engaged in the private practice of law in
San Francisco (1976-86) and was an adjunct professor at Hastings College of the
Law (1977-83). He received his undergraduate degree form U.C.L.A. in 973 and his
law degree from Boalt Hall School of Law at U.C. Berkely in 1976. Mr. Ocampo
authored Surfing the Law and Technology Tsunami (American Bar Association 2001),
a collection of keynote addresses about the intersection of law and technology,
and co-authored Negotiating and Drafting Software Consulting Agreements (Glasser
LegalWorks 1996). Mr. Ocampo was the 2001-02 Chair of the American Bar
Association's Section of Science & Technology law. He previously served as the
chair of the Section's E-Commerce Division (1998-99) and Internet & Cyberspace
Committee (1996-99) and served as co-chair of the Multimedia & Interactive
Technologies Committee (1995-96). He also served as chair of the Computer
Litigation Committee (1992-94) of the ABA's Section of Litigation.
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 and current management has decided that in lieu of
current events and the anticipated growth of the company a Code of Ethics will
be adopted in 2007.
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.
The Company entered into a consultant agreement with one of the Company's
Directors, Cy A. Stein, Ph.D. This agreement is for services by Dr. Stein to
evaluate and consult in the development of existing and new research platforms
and business directives for the Company. The agreement began on October 3, 2006
and extends for no longer than six (6) months for a fee of $3,000 per month plus
travel expenses. The Company has paid to Dr. Stein the amount of $11,540 for the
year ended December 31, 2006.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
63
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 ("SEC") initially on July 23, 1999 the ("Form 10-SB")).
3.2 --Certificate of Amendment dated November 1, 1995 of Articles of
Incorporation of Cryogenic Solutions, Inc. (incorporated by re-
ference to exhibit 3.2 of the Form 10-SB).
3.3 --Certificate of Amendment dated January 13, 2000 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
exhibit 3.3 of the Form 10-SB).
3.4 --Certificate of Amendment dated March 7, 2001 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
Annex II of the definitive proxy statement on Schedule 14A
filed with the SEC on December 23, 2003).
3.5 --Certificate of Amendment dated April 6, 2004 of Articles of
Incorporation of CytoGenix, Inc. (incorporated by reference to
Exhibit 3.5 to the registrant's Form 10-KSB for the year ended
December 31, 2003 filed with the SEC on April 14, 2004).
3.6 --Bylaws of Cryogenic Solutions, Inc (incorporated by reference to
exhibit 3.4 of the Form 10-SB).
3.7 --Amendments to Bylaws of CytoGenix, Inc. (incorporated by
reference to Annex I of the definitive proxy statement on
Schedule 14A filed with the SEC on December 23, 2003).
10.1+ --Employment Agreement dated January 1, 2005 between
CytoGenix, Inc. and Malcolm H. Skolnick (incorporated
by reference to exhibit 10.1 of the Form 10-K/A for
64
Year ended December 31, 2005 filed with the SEC Inc. on
April 21, 2006).
10.2 --License Agreement dated February 3, 2000, between CytoGenix,
Inc. and PharmaGenix, LLC. (incorporated by reference to
exhibit 10.3 of the Form 10-SB).
10.3 --Technology Transfer Agreement dated June 26, 1998 between
Cryogenic Solutions, Inc. and InGene, Inc. (incorporated by
reference to exhibit 10.4 of the Form 10-SB)
10.4 --Sponsored Research Agreement between CytoGenix, Inc. and
Baylor College of Medicine as of March 1, 2000 (incorporated
by reference to exhibit 10.7 of the Form 10-SB).
10.5+ --Stock Option Plan (incorporated by reference to Annex III of
the definitive proxy statement on schedule 14A filed with the
SEC on December 23, 2003).
10.6+ --Stock Option Plan (incorporated by reference to Annex I of the
definitive proxy statement on schedule 14A filed with the
SEC on June 17, 2005).
10.7 --Supply Agreement dated March 22, 2006, between CytoGenix,
Inc. and GE Healthcare Bio-Science Corporation (incorporated
by reference to Exhibit 10 to the registrant's current report on
Form 8-K filed with the SEC on March 28, 2006).
10.8 --Ernest Money Contract of Design/Build Project dated October
30, 2006 between CytoGenix, Inc. and GSL Contractors, Ltd.
(incorporated by reference to Exhibit 10.1 to the registrant's
current report on Form 8-K filed with the SEC on November 3,
2006).
31.1 --Certifications of Principal Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, the "Act".
31.2 --Certifications of Principal Financial Officer pursuant to Rule
13a-14(a) of the Act".
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.
- -------------------------
+ Management contract or compensatory plan or arrangement.
65
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: March 30, 2007
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: March 30, 2007 By: /s/ Malcolm Skolnick
--------------------------------------------
MALCOLM SKOLNICK, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR)
Date: March 30, 2007 By: /s/ Raymond L Ocampo, Jr.
--------------------------------------------
RAYMOND L. OCAMPO, JR.
DIRECTOR
Date: March 30, 2007 By: /s/ Scott E. Parazynski
--------------------------------------------
Scott E. Parazynski
DIRECTOR
Date: March 30, 2007 By: /s/ Cy A. Stein
--------------------------------------------
CY A. STEIN
DIRECTOR
Date: March 30, 2007 By: /s/ John J. Rossi
--------------------------------------------
JOHN J. ROSSI
DIRECTOR
Date: March 30, 2007 By: /s/ Pam Schertz
--------------------------------------------
PAM SCHERTZ
CHIEF FINANCIAL OFFICER
66