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 September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the
transition period from ___________ to ____________.
Commission file number: 0-26807
CYTOGENIX, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0484097
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3100 Wilcrest, Suite 140, Houston, Texas 77042
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (713) 789-0070
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | | Accelerated filer | | Non-accelerated filer |X|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the issuer's common stock, par value $.001 per share, as of September 30, 2006 was 129,327,220.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. - Financial Statements
Balance Sheets as of September 30, 2006 (Unaudited) and
December 31, 2005 3
Statements of Operations for the three and nine months
ended September 30, 2006 and 2005 (Unaudited) 4
Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 13
ITEM 4. Controls and Procedures 13
PART II OTHER INFORMATION 13
ITEM 1. Legal Proceedings 13
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
ITEM 6. Exhibits 15
SIGNATURES 16
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CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
September 30, December 31,
2006 2005
(Unaudited)
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ASSETS
Current Assets:
Cash $ 389,810 $ 1,307,965
Accounts receivable, net 7,615 --
Inventory 450,757 --
Prepaid expenses 24,007 21,392
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Total Current Assets 872,189 1,329,357
Property and equipment, net of $199,361 and $166,789 accumulated
depreciation at September 30, 2006 and December 31, 2005, respectively 255,054 56,287
Deposits 6,399 6,399
Long-term investments - restricted 171,329 117,905
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Total Assets $ 1,304,971 $ 1,509,948
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LIABILITIES AND STOCKHOLERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 427,377 $ 258,495
Accrued expenses 969,125 843,932
Stock subscription deposits 155,000 --
Current portion of long-term debt 24,558 --
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Total Current Liabilities 1,576,060 1,102,427
Long-term debt, less current portion 51,576 --
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Total Liabilities 1,627,636 1,102,427
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
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,
129,327,220 and 124,460,970 share issued and outstanding as of
September 30, 2006 and December 31, 2005, respectively 129,327 124,461
Additonal paid-in capital 26,407,990 23,971,086
Treasury stock (629,972) (629,972)
Deficit accumulated during the development stage (26,230,010) (23,058,054)
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Total Stockholders' Equity (Deficit) (322,665) 407,521
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Total Liabilities and Stockholders' Equity (Deficit) $ 1,304,971 $ 1,509,948
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The accompanying notes are an integral part of these financial statements
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CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDING SEPTEMBER 30, 2006 AND 2005 AND PERIOD
FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 2006
(UNAUDITED)
Inception
Three Months Ended Nine Months Ended Through
September 30, September 30, September 30,
2006 2005 2006 2005 2006
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REVENUES $ 8,115 $ -- $ 45,295 $ -- $ 127,870
COSTS OF REVENUES 19,442 -- 31,098 -- 295,991
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GROSS MARGIN (11,327) -- 14,197 -- (168,121)
COSTS AND EXPENSES:
Research and development 554,974 402,208 1,696,051 1,075,869 9,502,239
General and administrative 355,729 367,963 1,166,715 957,438 14,087,628
Consulting expense 282,557 290,000 292,667 290,000 1,811,148
Depreciation and amortization 15,017 6,088 32,572 21,363 302,165
Impairment expense -- -- -- -- 345,588
Equity in losses in joint venture -- -- -- -- 10,000
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LOSS FROM OPERATIONS (1,219,604) (1,066,259) (3,173,808) (2,344,670) (26,226,889)
OTHER INCOME:
Gain on sale of security -- -- -- -- 881
Interest income 1,477 993 3,424 1,413 6,110
Interest expense (1,572) -- (1,572) -- (1,572)
Loss on disposal of property of equipment -- -- -- (368) (10,173)
Dividend income -- -- -- -- 1,633
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NET LOSS $ (1,219,699) $ (1,065,266) $ (3,171,956) $ (2,343,625) $ (26,230,010)
============= ============= ============= ============= =============
Net loss per share:
Basic and diluted net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============= ============= ============= =============
Weighted average shares outstanding:
Basic and diluted 128,257,802 116,034,303 126,082,958 112,843,190
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The accompanying notes are an integral part of these financial statements
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CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDING SEPTEMBER 30, 2006 AND 2005 AND PERIOD
FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 2006
(UNAUDITED)
Inception
Through
September 30,
2006 2005 2006
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OPERATING ACTIVITIES:
Net Loss $ (3,171,956) $ (2,343,625) $(26,230,010)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deprecation and amortization 32,572 21,363 298,791
Impairment expense -- -- 345,588
Loss on disposal of property & equipment -- 368 10,173
Interest on long-term investments - restricted (3,424) (1,413) (5,829)
Stock issued for services 275,200 301,000 7,746,178
Stock option expense -- -- 2,062,193
Equity in losses of joint venture -- -- 10,000
Changes in assets and liabilities:
Accounts receivable (7,615) -- (7,615)
Inventory (450,757) -- (450,757)
Prepaid expenses (2,615) (8,046) (24,007)
Deposits -- -- (6,399)
Accounts payable 168,882 22,765 427,376
Accrued expenses 125,193 96,209 1,774,344
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Net cash used in operating activities (3,034,520) (1,911,379) (14,049,974)
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INVESTING ACTIVITIES:
Purchase of property and equipment (231,339) (16,987) (534,605)
Issue note receivable -- -- (25,100)
Purchase of long-term investments - restricted (50,000) (115,500) (165,500)
Investment in joint venture -- -- (10,000)
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Net cash used in investing activities (281,339) (132,487) (735,205)
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FINANCING ACTIVITIES:
Proceeds from notes payable 80,000 -- 330,000
Payment on notes payable (3,866) -- (253,866)
Proceeds from sale of treasury shares -- -- 1,290,568
Purchase of treasury shares -- -- (60,000)
Payment on buyback of stock warrants -- -- (571)
Proceeds for stock pending issuance 155,000 -- 155,000
Proceeds from sale of common stock 2,166,570 2,276,080 12,764,359
Proceeds from sale of common stock for exercised warrants -- -- 796,999
Contributions to capital -- -- 152,500
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Net cash provided by financing activities 2,397,704 2,276,080 15,174,989
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NET CHANGE IN CASH (918,155) 232,214 389,810
CASH, beginning of period 1,307,965 453,235 --
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CASH, end of period $ 389,810 $ 685,449 $ 389,810
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,272 $ -- $ 1,272
============ ============ ============
Income taxes paid $ -- $ -- $ --
============ ============ ============
NONCASH TRANSACTIONS:
Common stock issued for debt $ -- $ 542,126 $ 805,219
Received treasury stock for note receivable -- -- 25,100
Common stock issued for patent -- -- 375,000
The accompanying notes are an integral part of these financial statements
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CYTOGENIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDTIED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of CytoGenix, Inc. ("CytoGenix") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in CytoGenix's latest annual report filed with the SEC on Form 10K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal year ending December 31, 2005, as reported in the 10K, have been omitted.
NOTE 2 - RECLASSIFICATIONS
Certain amounts in the 2005 financial statements have been reclassified to conform with the September 30, 2006 financial statement presentation.
NOTE 3 - COMMON STOCK
In the nine months ended September 30, 2006, CytoGenix issued a total of 916,400 shares of common stock to financial consultants in consideration for their services in a $.25 per share private placement completed in the fourth quarter of 2005. The shares were recorded in the first quarter 2006, as a cost of capital in conjunction with fourth quarter 2005 fundraising.
In the nine months ended September 30, 2006, CytoGenix issued a total of 3,333,185 shares of common stock in a private placement to accredited investors at a cash price of $.65 per share.
In the nine months ended September 30, 2006, CytoGenix issued a total of 296,665 shares of common stock to financial consultants in consideration for their services in a $0.65 per share private placement. The shares were recorded in the third quarter 2006, as a cost of capital in conjunction with second and third quarter 2006 fundraising.
In the nine months ended September 30, 2006 CytoGenix issued a total of 320,000 shares of common stock for services valued at $275,200.
NOTE 4 - 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.
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NOTE 5 - NOTES PAYABLE
On July 18, 2006, in conjunction with the purchase of equipment, the Company entered into an $80,000, 36-month promissory note payable agreement with a bank. The note requires monthly payments of $2,569, including interest at 9.51%, and is collateralized by the underlying equipment and a $50,000 certificate of deposit (CD). The CD bears interest at 4.65% and is included with long-term investments - restricted in the accompanying financial statements.
Interest expense paid during the nine months ended September 30, 2006 in conjunction with this note amounted to $1,272.
NOTE 6 - REVENUE RECOGNITION
The Company earns revenue from the sale of synthetic DNA. In general, revenue is recognized when all of the following criteria are met: evidence of an arrangement exits, shipment has occurred, the price is determined, and collection is reasonably assured.
NOTE 7 - 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 2005 to the last 20 trading days of 2006. This bonus is payable when the stock appreciation is at least 15%. The Company has accrued $34,112 in the first nine months of 2006 based on the Company's common stock price as of September 30, 2006.
CytoGenix filed a Declaratory Judgment action in March 2004, to obtain a finding of nonliability with respect to two license agreements entered into with William B. Waldroff (licensee) in 1998 covering use of the Company's single-stranded DNA expression technology in shrimp and horses. Waldroff sublicensed this technology to Applied Veterinary Genomics, Inc. (AVGI; sublicensee) who is a party in interest in the action. The licensee and sublicensee counterclaimed against CytoGenix for damages, attorneys fees, unrelated torts, and a permanent injunction to honor the purported licenses. A jury trial held in February of 2005 resulted in entry of a preliminarily injunction against CytoGenix, ordering specific performance according to the licenses, and an award for the licensee and sublicensee's attorneys fees in an amount of $115,500. The jury awarded no damages to CytoGenix. CytoGenix appealed the Judgment in the 1st Court of Civil Appeals. Briefs have been filed and oral argument was held before a panel of three Judges on October 24, 2006. The Company currently awaits final opinion from the Appellate Court.
Pending resolution of the 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. Accrued interest for the nine months ended September 30, 2006 and for the period ended December 31, 2005 was $2,942 and $2,405 respectively.
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NOTE 8 - CONCENTRATIONS
The Company had gross sales of $45,295 and $0 for the nine months ended September 30, 2006 and 2005, respectively. The Company has three customers that represent 100% of the gross sales
for the nine months ending, September 30, 2006. The Company has one supplier that provides all the materials necessary to generate the sales for the nine months ended September 30, 2006.
NOTE 9 - SUBSEQUENT EVENTS
On October 30, 2006 the Company signed an earnest money contract for a $3,796,577 design/build project with GSL Constructors, Ltd. The contract is for 2.274 acres of land together with a facility. Earnest money of $1,000 and the initial down payment of $474,572 were issued to Chicago Title Company (escrow agent) upon execution of the agreement. This facility will house the Company headquarters, research and development, and manufacturing facilities.
On November 17, 2006, the Company's Chief Financial Officer and the Company's Executive Vice President and Chief Operating Officer, both of whom were also directors of the Company, resigned from all officer and director positions at the Company.
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.
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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.
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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.
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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
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of September 30, 2006 the Company has a restricted long-term CD (Certificate of Deposit) investment for the Waldroff litigation matter discussed below. Pending resolution of an appeal of this case the Company has established a long-term CD in the amount of $115,500. This CD earns interest at a rate of 3.4% annually.
ITEM 4. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2006.
CHANGES IN INTERNAL CONTROLS
There has been no change in our internal control over financial reporting during the nine months ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WILLIAM B. WALDROFF AND APPLIED VETERINARY GENOMICS, INC. V. CYTOGENIX, INC.
CytoGenix filed a Declaratory Judgment action in March, 2004, to obtain a finding of nonliability with respect to two license agreements entered into with William B. Waldroff (licensee) in 1998 covering use of the Company's single-stranded DNA expression technology in shrimp and horses. Waldroff sublicensed this technology to Applied Veterinary Genomics, Inc. (AVGI; sublicensee) who is a party in interest in the action. The licensee and sublicensee counterclaimed against CytoGenix for damages, attorneys fees, unrelated torts, and a permanent injunction to honor the purported licenses. A jury trial held in February of 2005 resulted in entry of a preliminarily injunction against CytoGenix, ordering specific performance according to the licenses, and an award for the licensee and sublicensee's attorneys fees in an amount of $115,500. The jury awarded no damages against CytoGenix. CytoGenix appealed the Judgment in the 1st Court of Civil Appeals. Briefs have been filed and oral argument was held before a panel of three Judges on October 24, 2006. The Company currently awaits final opinion from the Appellate Court. 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.
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CytoGenix has also filed for an Injunction in a Defamation action against Investorshub.com (IHUB) and one of its members known only by a pseudonym. Suit was filed in the Federal District Court on September 26, 2006 and a subpoena served on IHUB to reveal the identification of the member by November 1, 2006. The suit seeks damages as well as a permanent injunction against the member to prohibit further discourse involving CytoGenix matters and/or personnel.
INTELLECTUAL PROPERTY MATTERS:
CytoGenix has received Notices of Allowance from foreign patent offices for applications covering the Company's proprietary in vivo single-stranded DNA expression technology. Final formalities are in progress for grants forthcoming in: India, China and the European Community, including Austria, Belgium, France, Germany, the Netherlands, Switzerland, and the United Kingdom.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the nine months ended September 30, 2006, CytoGenix issued a total of 916,400 shares of common stock for fundraising efforts in the last quarter of 2005 to financial consultants at a value of $.25 per share.
In the nine months ended September 30, 2006, CytoGenix issued a total of 3,333,185 shares of common stock in a private placement to accredited investors at a cash price of $.65 per share.
In the nine months ended September 30, 2006, CytoGenix issued a total of 296,665 shares of common stock to financial consultants in consideration for their services in a $0.65 per share private placement. The shares were recorded in the third quarter 2006, as a cost of capital in conjunction with second and third quarter 2006 fundraising.
In the nine months ended September 30, 2006 CytoGenix issued a total of 320,000 shares of common stock for services valued at $275,200.
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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) ylaws of Cryogenic Solutions,
Inc. 3.6* B 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: November 14, 2006 By: /s/ Malcolm Skolnick
---------------------
MALCOLM SKOLNICK
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
- 16 -
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Malcolm Skolnick, President and Chief Executive Officer certify that:
1.
I have reviewed this quarterly report on Form 10-Q of CytoGenix, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 20, 2006
/s/ Malcolm Skolnick
Malcolm Skolnick
President & CEO
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Pam Schertz, Controller certify that:
1.
I have reviewed this quarterly report on Form 10-Q of CytoGenix, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 20, 2006
/s/ Pam Schertz
Pam Schertz
Controller
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CytoGenix, Inc. (the “Company”) on Form 1O-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Malcolm H. Skolnick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Malcolm H. Skolnick
Malcolm H. Skolnick
Chief Executive Officer
November 20, 2006
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CytoGenix, Inc. (the “Company”) on Form 1O-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof’ (the “Report”), I, Pam Schertz, Controller of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Pam Schertz
Pam Schertz
Controller
November 20, 2006
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