Form 10-Q for CYTOGENIX INC
20-Nov-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
IN ACCORDANCE WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT CERTAIN STATEMENTS IN THIS FORM 10-Q WHICH ARE FORWARD-LOOKING AND WHICH PROVIDE OTHER THAN HISTORICAL INFORMATION, INVOLVE RISKS AND UNCERTAINTIES THAT MAY IMPACT THE COMPANY'S RESULTS OF OPERATIONS. THESE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS CONCERNING THE COMPANY'S GENERAL BUSINESS STRATEGIES, FINANCING
DECISIONS, AND EXPECTATIONS FOR FUNDING CAPITAL EXPENDITURES AND OPERATIONS IN THE FUTURE. WHEN USED HEREIN, THE WORDS "BELIEVE," "PLAN," "CONTINUE," "HOPE," "ESTIMATE," "PROJECT," "INTEND," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, NO STATEMENTS CONTAINED IN THIS FORM 10-Q SHOULD BE RELIED UPON AS PREDICTIONS OF FUTURE EVENTS. SUCH STATEMENTS ARE NECESSARILY DEPENDENT ON ASSUMPTIONS, DATA OR METHODS THAT MAY BE INCORRECT OR IMPRECISE AND MAY BE INCAPABLE OF BEING REALIZED. THE RISKS AND UNCERTAINTIES INHERENT IN THESE FORWARD-LOOKING STATEMENTS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY THESE STATEMENTS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE INFORMATION CONTAINED IN THIS FORM 10-Q IS BELIEVED BY THE COMPANY TO BE ACCURATE AS OF THE DATE HEREOF. CHANGES MAY OCCUR AFTER THAT DATE, AND THE COMPANY WILL NOT UPDATE THAT INFORMATION EXCEPT AS REQUIRED BY LAW IN THE NORMAL COURSE OF ITS PUBLIC DISCLOSURE PRACTICES.
- 8 -
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 September 30, 2006 Compared to Three Months Ended September 30, 2005
For the three months ended September 30, 2006, we reported a net loss of $1,219,699, or less than one cent per share, and revenue of $8,115 as compared with a net loss of $1,065,266, or less than one cent per share, and no revenue for the three months ended September 30, 2005.
Revenues. Revenue increased to $8,115 for the third quarter of 2006 as compared to no revenues during the same period in 2005. The increase is a result of our commencement of sale of synthetic DNA.
Research and Development Expenses. Research and development expenses increased to $554,974 for the third quarter of 2006 as compared to $402,208 during the same period in 2005. Approximately $30,000 of the increase is a result of the payroll and employment costs and the remaining difference of $123,000 results from the increased activity cost of antibacterial and DNA vaccine research.
General and Administrative Expenses. General and administrative expenses decreased to $355,729 for the third quarter of 2006 compared to $367,963 for the same period in 2005 primarily due to a refund received from an advertising firm.
Consulting Expenses. Consulting expenses decreased to $282,567 for the third quarter of 2006 compared to $290,000 for the same period in 2005. This decrease was due to the common stock price decline resulting in a decrease in compensation at the contract renewal date for an investor relations consultant.
- 9 -
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased to $15,017 for the third quarter of 2006 compared to $6,088 for the same period in 2005 primarily due to the upgrade of hardware and security software for the Company's network server and additional R&D equipment purchased for DNA production.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
For the nine months ended September 30, 2006, we reported a net loss of $3,171,956, or approximately $.025 per share, and revenue of $45,295 as compared with a net loss of $2,343,625, or approximately $.020 per share, and no revenue for the nine months ended September 30, 2005.
Revenues. Revenue increased to $45,295 for the nine months ended September 30, 2006 as compared to no revenue during the same period in 2005. The increase is a result of our commencement of sales of synthetic DNA.
Research and Development Expenses. Research and development expenses increased to $1,696,051 for the nine months ended September 30, 2006 as compared to $1,075,869 during the same period in 2005. Approximately $288,000 of the increase is a result of the payroll and employment costs and the remaining difference of $332,000 results from the increased activity cost of antibacterial and DNA vaccine research.
General and Administrative Expenses. General and administrative expenses increased to $1,166,715 for the nine month ended September 30, 2006 compared to $957,438 for the same period in 2005 primarily due to an increase in payroll, and related employment costs.
Consulting Expenses. Consulting expenses decreased from $292,667 for the nine month ended September 30, 2006 compared to $290,000 for the same period in 2005 due to the common stock price decline and the resulting decrease in compensation at the contract renewal date for an investor relations consultant.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased to $32,572 for the nine months ended September 30, 2006 compared to $21,363 for the same period in 2005 primarily due to the upgrade of hardware and security software for the Company's network server and additional R&D equipment purchased for DNA production.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted approximately $4,300,000 for operations in fiscal year 2006, of which approximately $1,300,000 has been allocated for general and administrative costs, $2,000,000 for research and development, and $1,000,000 for plant facilities. We will rely on equity financing to satisfy our working capital requirements, and have, as of September 30, 2006, $389,810 of cash on hand for fiscal year 2006. Of the $2,000,000 budgeted for research and development expenses, the Company anticipates $1,800,000 will be utilized for pre-clinical development.
- 10 -
The Company's ability to continue operations through December 31, 2006 depends on its success in obtaining equity financing in an amount sufficient to support its operations through that date. There is substantial doubt that the Company will be able to generate sufficient revenues or be able to raise adequate capital to remain a going concern through December 31, 2006. Based on historical yearly financial requirements, operating capital of approximately $4.4 million/year will be needed for each of the calendar years 2006 and 2007.
The Company expects its sources of revenue for the next several years to consist primarily of 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 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 gene down regulation technologies. These originated with single stranded DNA (ssDNA) expression vectors for expression of specifically designed strings of single stranded DNA (oligos) inside a cell which are 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 ssDNA sequences that bind to target mRNA's and prevent the production of the encoded protein. Here, the antisense sequence binds to the mRNA and prevents it from being "read" by a ribosome. In other antisense applications, the ssDNA sequence contains a DNA enzyme sequence which degrades the target mRNA so further translation does not occur. 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 received notice of allowance.
The ssDNA gene down regulation activity has expanded. The Company uses target identification analysis to confirm target gene function. Those genes found to be highly disease-related become targets for potential drug or molecular therapies. These target validation and gene function capabilities provide a foundation for the Company's activities in developing novel anti-bacterial compounds and sequences. These have been tested against bacteria including Escherichia coli (E.coli) and Staphylococcus aureus.
The Company's early research and development on ssDNA expression vectors utilized 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
-11 -
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 equally as, or more effective than conventional plasmids. These tests have included targets such as HIV, Hepatitis B virus, Smallpox, and seasonal flu. The Company has entered a Cooperative Research and Development Agreement with the United States Department of Agriculture (USDA) to develop a DNA vaccine against Brucellosis and is pursuing other CREDA'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.
News 
Market Data 
Discover 
