UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ___________ to ____________.
Commission file number: 0-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0484097
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3100 Wilcrest, Suite140, Houston, Texas 77042
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (713) 789-0070
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |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 number of shares outstanding of the issuer's common stock, par
value $.001 per share, as of March 31, 2007 was 140,663,961.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. - Financial Statements
Balance Sheets as of March 31, 2007 (Unaudited) and
December 31, 2006 3
Statements of Operations for the three months ended March 31,
2007 and 2006, and period from February 10, 1995 (Inception)
through March 31, 2007(Unaudited) 4
Statements of Cash Flows for the three months ended March 31,
2007 and 2006, and period from February 10, 1995 (Inception)
through March 31, 2007 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk 11
ITEM 4. Controls and Procedures 11
PART II OTHER INFORMATION 12
ITEM 1. Legal Proceedings 12
ITEM 2. Unregistered Sales of Equity Securities and
Use of Proceeds 13
ITEM 6. Exhibits 14
SIGNATURES 15
2
CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
March 31, December 31,
2007 2006
(Unaudited)
----------------- -----------------
ASSETS
Current Assets:
Cash $ 1,928,259 $ 2,854,197
Accounts receivable, net - 2,577
Inventory 385,709 421,957
Prepaid expenses 14,685 14,297
----------------- -----------------
Total Current Assets 2,328,653 3,293,028
Property and equipment, net 279,687 261,793
Deposits 481,971 481,971
Long-term investments - restricted 174,445 172,892
----------------- -----------------
Total Assets $ 3,264,756 $ 4,209,684
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Long-term debt, current portion $ 25,745 $ 25,153
Accounts payable 312,395 309,874
Accrued expenses 1,084,526 927,889
----------------- -----------------
Total Current Liabilities 1,422,666 1,262,916
Long-term debt, less current portion 38,339 45,015
----------------- -----------------
Total Liabilities 1,461,005 1,307,931
----------------- -----------------
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 140,663,961 share issued and outstanding as of
March 31, 2007 and December 31, 2006, respectively 140,664 140,664
Additonal paid-in capital 30,544,649 30,544,649
Treasury stock, at cost (629,972) (629,972)
Deficit accumulated during the development stage (28,251,590) (27,153,588)
----------------- -----------------
Total Stockholders' Equity 1,803,751 2,901,753
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 3,264,756 $ 4,209,684
================= =================
The accompanying notes are an integral part of these financial statements.
3
CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDING MARCH 31, 2007 AND 2006 AND PERIOD
FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH MARCH 31, 2007
(UNAUDITED)
Inception
Through
2007 2006 March 31, 2007
----------------- ---------------- ------------------
REVENUES $ - $ - $ 159,568
COSTS OF REVENUES - - 310,440
----------------- ---------------- ------------------
GROSS MARGIN - - (150,872)
COSTS AND EXPENSES:
Research and development 516,984 498,509 10,522,320
General and administrative 557,476 522,358 15,013,218
Consulting expense 8,031 9,075 1,872,149
Depreciation and amortization 15,442 6,518 333,790
Impairment expense - - 345,588
Equity in losses in joint venture - - 10,000
----------------- ---------------- ------------------
LOSS FROM OPERATIONS (1,097,933) (1,036,460) (28,247,937)
OTHER INCOME:
Interest income 1,553 966 9,226
Interest expense (1,622) - (4,633)
Loss on disposal of property of equipment - - (10,760)
Dividend income - - 2,514
----------------- ---------------- ------------------
NET LOSS $ (1,098,002) $ (1,035,494) $ (28,251,590)
================= ================ ==================
Net loss per share:
Basic and diluted net loss per share $ (0.01) $ (0.01)
================= ================
Weighted average shares outstanding:
Basic and diluted 140,663,961 124,613,703
================= ================
The accompanying notes are an integral part of these financial statements.
4
CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDING MARCH 31, 2007 AND 2006 AND PERIOD
FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH MARCH 31, 2007
(UNAUDITED)
Inception
Through
March 31,
2007 2006 2007
-------------- -------------- ---------------
OPERATING ACTIVITIES:
Net Loss $ (1,098,002) $ (1,035,494) $ (28,251,590)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deprecation and amortization 15,442 6,518 330,413
Impairment expense - - 345,588
Loss on disposal of property & equipment - - 10,760
Accrued interest income on long-term investment-restricted (1,553) (967) (8,945)
Stock issued for services - - 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 - -
Inventory 36,248 (176,571) (385,709)
Prepaid expenses (388) (22,426) (14,685)
Deposits - - (6,399)
Accounts payable 2,521 90,005 312,395
Accrued expenses 156,637 99,859 1,889,744
-------------- -------------- ---------------
Net cash used in operation activities (886,518) (1,039,076) (15,960,057)
-------------- -------------- ---------------
INVESTING ACTIVITIES:
Purchase of property and equipment (33,336) (93,254) (591,447)
Deposit on building contract - - (475,572)
Issue note receivable - - (25,100)
Investment in long-term CD - - (165,500)
Investment in joint venture - - (10,000)
-------------- -------------- ---------------
Net cash used in investing activities (33,336) (93,254) (1,267,619)
-------------- -------------- ---------------
FINANCING ACTIVITIES:
Proceeds from notes payable - - 330,000
Payment on notes payable (6,084) - (265,916)
Treasury share sold - - 1,290,568
Purchase of treasury shares - - (60,000)
Buyback of stock warrants - - (571)
Proceeds from stock subscriptions - 365,000 -
Sale of common stock, net fundraising - - 17,137,355
Sale of common stock for exercised warrants - - 571,999
Contributions to capital - - 152,500
-------------- -------------- ---------------
Net cash used in financing activities (6,084) 365,000 19,155,935
-------------- -------------- ---------------
NET CHANGE IN CASH (925,938) (767,330) 1,928,259
CASH, beginning of period 2,854,197 1,307,965 -
-------------- -------------- ---------------
CASH, end of period $ 1,928,259 $ 540,635 $ 1,928,259
============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,622 $ - $ 2,894
============== ============== ===============
Income taxes paid $ - $ - $ -
============== ============== ===============
NONCASH TRANSACTIONS:
Common stock issued for debt $ - $ - $ 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.
5
CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDTIED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of CytoGenix, Inc.
("CytoGenix") have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission ("SEC"), and should be read in conjunction
with the audited financial statements and notes thereto contained in CytoGenix's
latest annual report filed with the SEC on Form 10K. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosure contained in the audited
financial statements for fiscal year ending December 31, 2006, as reported in
the Form 10K, have been omitted.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
CytoGenix is obligated, per employment agreements, to deliver cash bonuses after
year end based on the increase in average share price of the Company's common
stock from the last 20 trading days of 2007 to the last 20 trading days of 2006.
This bonus is payable when the stock appreciation is at least 15%. The Company
has accrued no bonus amount in the first three months of 2007 based on the
Company's common stock price as of March 31, 2007.
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. Appellants have
now filed a petition for review before the Supreme Court of Texas. The parties
await the high Court's decision to grant or deny the petition.
Pending resolution of the Court's decision and possible ongoing/ 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.
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'
6
resignations, the former CFO filed a Sarbanes Oxley 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 Securities and Exchange
Commission (SEC) 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 has hired independent, outside counsel to conduct an independent
investigation. As of May 15, 2007 this investigation is in progress. Management
intends to vigorously defend the actions brought by the former COO and CFO.
NOTE 3 - SUBSEQUENT EVENTS
Employee Stock-Based Compensation
The Board resolved during a regularly scheduled meeting on April 17, 2007 to
register the underlying shares of the 2003 Stock Option Plan. At such time when
the shares are registered the stock options will be fully vested and
exercisable. Employee stock-based compensation expenses relating to the 2003
stock option plan will be recorded as follows during the quarter ending June 30,
2007.
Research and development $2,462,347
General and administrative 1,133,596
-----------
Stock-based compensation $3,595,943
==========
We used the Black-Scholes option-pricing model ("Black-Scholes model") to value
our stock options with the following assumptions:
Volatility 116% to 250%
Risk-Fee Interest Rate 4.50%
Dividend Yield 0.00%
Expected Term (years) 10.00
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
IN ACCORDANCE WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT CERTAIN
STATEMENTS IN THIS FORM 10-Q WHICH ARE FORWARD-LOOKING AND WHICH PROVIDE OTHER
THAN HISTORICAL INFORMATION, INVOLVE RISKS AND UNCERTAINTIES THAT MAY IMPACT THE
COMPANY'S RESULTS OF OPERATIONS. THESE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG
OTHERS, STATEMENTS CONCERNING THE COMPANY'S GENERAL BUSINESS STRATEGIES,
7
FINANCING DECISIONS, AND EXPECTATIONS FOR FUNDING CAPITAL EXPENDITURES AND
OPERATIONS IN THE FUTURE. WHEN USED HEREIN, THE WORDS "BELIEVE," "PLAN,"
"CONTINUE," "HOPE," "ESTIMATE," "PROJECT," "INTEND," "EXPECT," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, NO STATEMENTS CONTAINED IN THIS
FORM 10-Q SHOULD BE RELIED UPON AS PREDICTIONS OF FUTURE EVENTS. SUCH STATEMENTS
ARE NECESSARILY DEPENDENT ON ASSUMPTIONS, DATA OR METHODS THAT MAY BE INCORRECT
OR IMPRECISE AND MAY BE INCAPABLE OF BEING REALIZED. THE RISKS AND UNCERTAINTIES
INHERENT IN THESE FORWARD-LOOKING STATEMENTS COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY THESE STATEMENTS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE INFORMATION CONTAINED IN THIS FORM 10-Q IS BELIEVED BY THE COMPANY
TO BE ACCURATE AS OF THE DATE HEREOF. CHANGES MAY OCCUR AFTER THAT DATE, AND THE
COMPANY WILL NOT UPDATE THAT INFORMATION EXCEPT AS REQUIRED BY LAW IN THE NORMAL
COURSE OF ITS PUBLIC DISCLOSURE PRACTICES.
IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE EXPECTATIONS REFLECTED IN ANY FORWARD-LOOKING STATEMENT
HEREIN INCLUDE AMONG OTHER THINGS: (1) THE ABILITY OF THE COMPANY TO QUICKLY
PENETRATE THE MARKET WITH ITS CURRENT THERAPEUTIC PRODUCTS AGAINST LARGER,
WELL-FINANCED COMPETITORS WITHIN THE MARKETPLACE; (2) THE ABILITY OF THE COMPANY
TO GENERATE REVENUES IS SUBSTANTIALLY DEPENDENT UPON CONTINUED RESEARCH AND
DEVELOPMENT FOR, AND FDA APPROVAL OF, THERAPEUTIC PRODUCTS; (3) THE ABILITY OF
THE COMPANY TO ATTRACT AND RETAIN KEY OFFICERS, KNOWLEDGEABLE SALES AND
MARKETING PERSONNEL AND HIGHLY TRAINED TECHNICAL PERSONNEL; (4) THE ABILITY OF
THE COMPANY TO OBTAIN ADDITIONAL FINANCING FROM PUBLIC AND PRIVATE EQUITY
MARKETS TO FUND OPERATIONS AND FUTURE GROWTH; AND (5) THE ABILITY OF THE COMPANY
TO GENERATE REVENUES TO COVER OPERATING LOSSES AND POSITION THE COMPANY TO
ACHIEVE POSITIVE CASH FLOW.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006.
For the three months ended March 31, 2007, we reported a net loss of
$1,098,002, or less than one cent per share, and no revenue as compared with a
net loss of $1,035,494, or less than one cent per share, and no revenue for the
three months ended March 31, 2006.
8
Research and Development Expenses. Research and development expenses
increased to $516,984 for the first quarter of 2007 as compared to $498,509
during the same period in 2006 due to an increase of approximately $172,500 in
DNA production research expenses through Sponsored Research Agreements and
additional internal DNA product research expenses incorporating the GE
Healthcare kits. This increase in research activity was offset by the decrease
of approximately $154,000 in salary, bonus, and related payroll expenses not
paid in 2007 to a former executive officer due to his resignation in the last
quarter of 2006.
General and Administrative Expenses. General and administrative
expenses increased to $557,476 for the first quarter of 2007 compared to
$522,358 for the same period in 2006 primarily due to the increase in legal fees
and investigation fees amounting to approximately $221,000 relating to a
Sarbanes-Oxley whistleblower complaint and an arbitration complaint filed by a
former executive officer. These fees were offset by (i) a decrease of
approximately $147,000 in salary, bonus, and related payroll expenses not paid
to a former executive officer due to his resignation in the last quarter of
2006, and (ii) public relations fees incurred in 2006 but not in 2007 of
approximately $38,000.
Consulting Expenses. Consulting expenses decreased to $8,031 for the
first quarter of 2007 compared to $9,075 for the same period in 2006. This
decrease was due to a decrease in fees for a consultant used to format our
yearly SEC filings.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $15,442 for the first quarter of 2007 compared to $6,518
for the same period in 2006 primarily due to the additional R&D equipment
purchased for DNA production.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted approximately $5,700,000 for operations in
fiscal year 2007, of which approximately $2,100,000 has been allocated for
general and administrative costs and $3,600,000 for research and development. We
will rely on equity financing to satisfy our working capital requirements, and
have as of March 31, 2007 $1,928,259 of cash on hand for fiscal year 2007. Of
the $3,600,000 budgeted for research and development expenses, the Company
anticipates $2,000,000 will be utilized for pre-clinical development.
The Company's ability to continue operations through December 31, 2007
depends on its success in obtaining equity financing in an amount sufficient to
support its operations through that date. There is substantial doubt that the
Company will be able to generate sufficient revenues or be able to raise
adequate capital to remain a going concern through December 31, 2007. Based on
historical yearly financial requirements, operating capital of approximately
$5.7 million will be needed for each of the calendar years 2007 and 2008.
The Company expects its sources of revenue for the next several years
to consist primarily of income generated by the sale of enzymatically
synthesized DNA (synDNA(TM)) to companies involved in the development of
DNA-based therapeutics and vaccines, and payments earned under future product
development joint ventures, licensing agreements, and royalties. The process of
developing the Company's future products will require hiring of additional
9
personnel, significant additional
research and development, preclinical testing and clinical trials, as well as
regulatory approvals. These activities, together with the Company's general and
administrative expenses, are expected to result in operating losses for at least
two more years. The Company will not receive product revenue from therapeutic
and vaccine products unless it completes clinical trials and successfully
commercializes or arranges for the commercialization of one or more products,
the accomplishment of which no assurance can be given.
CytoGenix has developed a broad platform of down regulation and gene
silencing technologies. Down regulation of genes or gene silencing comprises a
set of techniques which can prevent a gene from expressing the protein for which
it is encoded or interact with a target protein to change or inhibit its
function. These techniques are based on the use of single stranded DNA (ssDNA)
expression vectors for production of specifically designed strings of single
stranded DNA (oligos) inside a cell which can be useful in triplex, antisense,
DNA enzyme and aptameric applications. Triplex applications are those where a
designed sequence of ssDNA binds to a specific location in the duplex DNA of the
genome which can inhibit a promoter or expression of a target gene and prevent
gene expression. In some antisense applications, the expression vector makes a
specific ssDNA sequences that binds to a complementary target mRNA's and
prevents the production of the encoded protein. When this antisense sequence
binds to the targeted mRNA it prevents mRNA from being "read" by a ribosome.
This antisense approach can be modified so that internally produced ssDNA
sequence contains an additional DNA enzyme sequence in the central region of the
ssDNA sequence which can degrade the target mRNA after the sequence binds to the
targeted mRNA and prevents further translation. Aptamers are ssDNA sequences
that directly bind to the target proteins to inhibit their function. The Company
has coordinated and performed experiments utilizing all these applications. The
results appear in scientific publications in peer reviewed journals and have
been incorporated into numerous patent applications, some of which have granted
or allowed.
The Company's early research and development on ssDNA expression
vectors was dependent upon the use of DNA plasmids produced using bacterial
fermentation techniques. At the time the Company's experiments began, clinical
grade plasmids could be obtained for approximately $25,000 per gram. When the
Company introduced its first product, Simplivir(TM), an anti-herpes compound, to
the FDA, the price for clinical grade plasmids had risen to approximately
$250,000 per gram. The Company looked for alternatives and developed a process
for producing enzymatically synthesized DNA (synDNA(TM)) without using bacterial
fermentation. The bacteria-free process for making therapeutic quality DNA is
proprietary to the Company. Through its use, we have met our own product needs
and have directed our excess capacity to producing DNA for other third party
users in the market. The combination of competitive pricing, rapid manufacture,
and regulatory advantages associated with endotoxin-free and bacteria-free
production make our products very competitive. The Company is currently
generating revenues from synDNA(TM) sales.
We have been able to expand our product line to include DNA vaccines.
Tests comparing the efficacy of various DNA vaccines made with synDNA(TM) to
conventional, bacteria-grown plasmids have demonstrated synDNA(TM) products are
equivalent to or more effective than these conventional plasmids. These tests
have included targets such as HIV, Hepatitis B virus, Smallpox, and seasonal and
avian flu. The Company has entered a Cooperative Research and Development
Agreements with the United States Department of Agriculture (USDA) to develop a
DNA vaccine against Brucellosis and with the United States Army Medical Research
Institute for Infectious Diseases (USAMRIID) to develop DNA vaccines against
10
ebola and equine encephalitis. The Company is pursuing other CRADA's/contracts
with the federal government especially in the bio-terror and pandemic threat
areas.
The Company is subject to risks common to biopharmaceutical companies,
including risks inherent in its research and development efforts and clinical
trials, reliance on collaborative partners, enforcement of patent and
proprietary rights, the need for future capital, potential competition and
uncertainty in obtaining required regulatory approval. In order for a product to
be commercialized, it will be necessary for the Company and its collaborators to
conduct pre-clinical tests and clinical trials, demonstrate efficacy and safety
of the Company's product candidates, obtain regulatory clearances and enter into
distribution and marketing arrangements either directly or through sublicenses.
From the Company's inception through the date of this document, the major role
of management has been to obtain sufficient funding for required research,
monitoring research progress and developing and licensing intellectual property.
The Company expects to incur losses for the foreseeable future due to
the ongoing activities of the Company to develop new products through research
and development and to develop joint ventures and licensing agreements with
third parties. The Company expects its existing operations to continue to result
in negative cash flow and working capital deficiencies that will require the
Company to continue to obtain additional capital. There can be no assurance that
the necessary financing will be available to the Company or, if available, that
the same will be on terms satisfactory or favorable to it. It is possible that
additional equity financing will be highly dilutive to existing shareholders.
The Company is currently operating at a loss and expects to continue to
depend on cash generated from the sale of securities to fund its operating
deficit. There can be no assurance that the Company will be able to generate
sufficient revenues to meet its operating cash and growth needs or that any
equity or debt funding will be available or at terms acceptable to the Company
in the future to enable it to continue operating in its current form.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has no significant exposure to market risks with any of its
financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
11
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended, or the Exchange Act, as of the end of the period covered by
this report. Based on this evaluation our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures have not changed since the December 31, 2006 evaluation and audit of
such controls.
At December 31, 2006 the Company indicated their control deficiencies,
which together constituted a material weakness over the Company's internal
control over financial reporting are still in existence. The Company was in the
process of remediating the control deficiencies and will continue to do so going
forward.
CHANGES IN INTERNAL CONTROLS
The Company is remediating its control deficiencies. Remediation of the
identified material weakness in internal controls over financial reporting will
be addressed and modified as needed until all necessary internal controls are
implemented and operate for a period of time, are tested, and the Company and
its auditors are able to conclude that such internal controls are operating
effectively. 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,
(iii) is developing controls to insure proper accounting for non-routine or
complex accounting issues, and to insure that agreements are provided to and
reviewed by appropriate accounting and financial personnel on a timely basis,
and (iv) hired an outside financial reporting consultant. The function of the
outside accounting consultant is to: (i) review alternative accounting
treatments for significant transactions and to make sure that they are
documented and approved by management, (ii) develop a financial reporting
process, and (iii) 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 controls over financial reporting
in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BREACH OF CONTRACT ACTION
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
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
12
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 now filed a petition
for review by the Supreme Court of Texas. The parties await the high Court's
decision to grant or deny the petition.
Pending resolution of an appeal 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.
DEFAMATORY ACTIONS
The Company is actively pursuing legal action against various parties involved
in the posting of defamatory comments about the Company and /or its employees.
It has recently settled a suit filed for injunctive relief and damages again a
poster on the Cytogenix Investor Hub (IHUB) chatroom. The suit was filed in the
Federal District Court on September 26, 2006. A subpoena was subsequently served
on IHUB to reveal the identification of the responsible poster who was later
included in the suit. The parties agreed to settle the matter and further legal
action has been dismissed.
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 Sarbanes Oxley 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 Securities and Exchange
Commission (SEC) 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 has hired independent, outside counsel to conduct an independent
investigation. As of May 15, 2007 this investigation is in progress. Management
intends to vigorously defend the actions brought by the former COO and CFO.
INTELLECTUAL PROPERTY MATTERS:
In the quarter ending March 31, 2007, CytoGenix expanded its enforceable patent
rights in the foreign markets through registration of patent rights in nine
countries claiming rights to a European patent which was granted during the last
quarter of 2006. These registrations cover similar in vivo ssDNA expression
technology as covered by a patent in China (also granted in the last quarter of
2006) and allowed patents in Korea and India.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the three months ended March 31, 2007, CytoGenix did not issue any shares of
common or preferred stock.
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ITEM 6. EXHIBITS.
Exhibit Number Description
3.1* Articles of Incorporation of Cryogenic Solutions,
Inc.
3.2* Certificate of Amendment dated November 1, 1995 of
Articles of Incorporation of Cryogenic Solutions,
Inc.
3.3* Certificate of Amendment dated January 13, 2000 of
Articles of Incorporation of CytoGenix, Inc.
3.4 Certificate of Amendment dated April 6, 2004 of
Articles of Incorporation of CytoGenix, Inc.
(incorporated by reference to Exhibit 3.5 to the
Company's annual report of Form 10-KSB for the
year ended December 31, 2004)
3.5 Certificate of Amendment dated March 7, 2001 of
Articles of Incorporation of CytoGenix, Inc.
(incorporated by reference to Annex II of the
definitive proxy statement on Schedule 14A filed
with the Securities and Exchange Commission on
December 23, 2003) Bylaws of Cryogenic Solutions,
Inc. 3.6* mendments to Bylaws of CytoGenix, Inc.
(incorporated by reference to 3.7 Annex I of the
definitive proxy statement on Schedule 14A filed
with Ahe Securities and Exchange Commission on
December 23, 2003) t
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of Chief Executive
Officer
32.2 Section 1350 Certification of Chief Financial
Officer
* Incorporated by reference to the corresponding Exhibit in the Form 10-SB of
the Company filed on January 31, 2001.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYTOGENIX, INC.
Date: May 15, 2007 By: /s/ Malcolm Skolnick
---------------------
MALCOLM SKOLNICK
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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