**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10K-SB/A**

 

ý            ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                For the fiscalyear ended December 31, 2001

 

o            TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                For the transitionperiod from       to

 

                Commission filenumber: 000-26807

 

**CytoGenix, Inc.**

(Name of Small BusinessIssuer in its charter)

 

| **Nevada**                                                                    |   | **76-0484097**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                                              |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                                               |   |                                  |
|                                                                          |   |                                  |
| **9881  South Wilcrest, Houston, Texas**                                      |   | **77099**                             |
| (Address of principal  executive offices)                                     |   | (Zip Code)                            |
|                                                                          |   |                                  |
| Issuer’s telephone  number, including area code ** (281) 988-6118** |
|                                                                          |   |                                  |
| Securities to be  registered under Section 12(b) of the Act:                  |
|                                                                          |   |                                  |
| Title of each class                                                           |   | Name of each exchange  on which       |
| to be so registered                                                           |   | each class to be  registered          |
| **NA**                                                                        |   | **NA**                                |

 

Securities to beregistered under Section 12(g) of the Act:

 

Common Stock, par value$.001 per share

(Title of class)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. o

 

Issuer’s revenues for the fiscal year ended December31, 2001 were $875.

 

As of December 31, 2001 the aggregate market value ofthe registrant’s common stock (based on the closing sales price for the commonstock as reported on the OTC Bulletin Board on such date) held bynon-affiliates of the registrant was approximately $8,753,680 (Aggregate marketvalue has been estimated solely for the purpose of this report. For the purposeof this report it has been assumed that all officers and directors areaffiliates of the registrant. The statement made herein shall not be construedas an admission for the purpose of determining the affiliate status of anyperson.) As of December 31, 2001 the registrant had 44,890,665 shares of commonstock issued and outstanding.

 

Transitional small Business Disclosure Format (checkone) :  Yes oNo ý

 

Documents incorporated by reference:

None.

 

 

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**CYTOGENIX,INC.**

**FORM10-KSB**

** **

**TABLE OFCONTENTS**

** **
| PART  I                                                                                                                          |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                             |   |
|   ITEM 1. Description of Business                                                                                           |   |
|   ITEM 2. Description of Property                                                                                           |   |
|   ITEM 3. Legal Proceedings                                                                                                 |   |
|   ITEM 4. Submission of Matters to a Vote of  Security Holders                                                              |   |
|                                                                                                                             |   |
| PART  II                                                                                                                         |   |
|                                                                                                                             |   |
|   ITEM 5. Market For Common Equity and  Related Stockholders Matters                                                        |   |
|   ITEM 6. Management’s Discussion and  Analysis or Plan of Operation                                                   |   |
|   ITEM 7. Financial Statements                                                                                              |   |
|   ITEM 8. Changes in and Disagreements with  Accountants                                                                    |   |
|                                                                                                                             |   |
| PART  III                                                                                                                        |   |
|                                                                                                                             |   |
|   ITEM 9. Directors, Executive Officers,  Promoters and Control Persons: Compliance with Section 16(a) of the Exchange  Act |   |
|   ITEM 10. Executive Compensation                                                                                           |   |
|   ITEM 11. Security Ownership of Certain  Beneficial Owners and Management                                                  |   |
|   ITEM 12. Certain Relationships and Related  Transactions                                                                  |   |
|   ITEM 13. Exhibits and Financial Statement  Schedules and Reports on File 8K                                               |   |

 

 

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PART I

 

ITEM 1: DESCRIPTION OF BUSINESS

 

CytoGenix, Inc. (“CytoGenix” or “the Company”) is a biopharmaceuticalcompany whose primary focus is the development and commercialization of it’sproprietary technology applicable to implementing the final stage delivery oftherapeutic single stranded DNA (ssDNA)molecules in cells. The company seeks to generate revenues and improve thehealth and well-being of humans and companion and food animals by utilizing *intracellular*expression of ssDNA for molecular therapies. The Company’s technology prevents genetically diseased cells from manufacturingharmful proteins, thereby preventing disease. The Company seeks to sell and license its technology to biotechnologycompanies owning DNA sequences in the Human Genome and to assist in theirdetermination of the function and purpose of these sequences.

 

 

The Company was formed in 1995 as a biomedical research and developmentcompany.  The original name of theCompany was Cryogenic Solutions, Inc., until the Company changed its name toCytoGenix, Inc. in January 2000. Equity funding has been the only source ofoperational, research and commercialization working capital since the Company’sinception.

 

INTRODUCTION

 

Widely published scientific studies conducted over the last twentyyears by leading universities, including the University of Nebraska, Universityof Texas and University of Pennsylvania, private research laboratories and theNational Institute of Health have established that most diseases are the resultof malfunctioning genes in the human genome, or the activities of rogue genescalled viruses.  This genetic activitycauses the production of harmful proteins that lead to the symptoms anddestructive results of disease. Examples of diseases caused by the productionof such harmful proteins include cancer and certain cardiovascular diseases. Toproduce a protein, a cell first makes a positive copy of the DNA codecontaining the information necessary to produce the protein. This messenger RNA(mRNA) is called the “sense” molecule. This message-carrying molecule thenmoves to another part of the cell where it assembles the biochemical componentsto produce proteins.

 

 

In many instances it ispossible to inhibit the production of these harmful proteins by introducingsmall molecules of specific genetic material into the cells themselves.Fortunately, this genetic activity can be interrupted and controlled at threelevels with the introduction of sequence specific ssDNA into the cells.  ***CytoGenix owns patented intracellular expression system technology(CYGXesTM) to produce any desired sequence-specific, ssDNA molecules (ODN) inindividual cells for the purpose of triplex, antisense, catalytic DNA, andaptamer applications.***

 

1.               *Triplex*:  As mRNA istranscribed and the DNA strands are still separated, a single strand ofcomplementary DNA is inserted into the gap forming a triple helix (triplex)structure, thus preventing the future production of mRNA from that segment.

 

2.               *Antisense:*  Messenger RNAis intercepted en route by a complementary ssDNA sequence that binds to andresults in the destruction of the mRNA by enzymes within the cell, thuspreventing the mRNA from producing the protein in question.

 

3.               **CatalyticDNA:**  Similar to antisense, a ssDNA sequencecontaining sequence regions that bind to the mRNA, but also contains a uniquesequence region that acts to cut and destroy the mRNA, thus preventing it fromproducing the protein in question.

 

4.               *Aptamer:* The ssDNA binds to the protein itself in the cell andcauses the protein to become inactivated.

 

 

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The key to success with these genetic therapies is to insure thatsufficient quantities of the ssDNA molecules ultimately appear in thecells.  CytoGenix has invented whatfunctions as a tiny biological “factory” that, after introduction into thecell, actually produces many copies of the ssDNA molecules in the cell.  The business of CytoGenix is to refine thistechnology and apply it to the delivery of various patented DNA molecules forthe development of effective therapeutic drugs.

 

THE HUMAN GENOME

 

The U.S. Department of Energy defines the human genome as follows: “thecomplete set of instructions for making an organism is called its genome. Itcontains the master blueprint for all cellular structures and activities forthe lifetime of the cell or organism. Found in every nucleus of a person’s manytrillions of cells, the human genome consists of tightly coiled threads ofdeoxyribonucleic acid (DNA) and associated protein molecules, organized intostructures called chromosomes.  For eachorganism, the chromosomes encode all the information necessary for building andmaintaining life, from simple bacteria to remarkably complex human beings.Understanding how DNA performs this function requires some knowledge of itsstructure and organization.”

 

The chromosomes are made up of complementary intertwined strands ofDNA: one is labeled positive and the other negative. The negative strand of theDNA produces single strands of positive nucleotides (messenger RNA), each ofwhich move around in the cell carrying coded instructions for the production ofa specific protein.

 

By studying how genes function in the human genome and understandinghow they go awry, scientists are developing new therapies designed to attackthe underlying causes of disease, not just the symptoms.  Makers of the new gene-based drugsanticipate those drugs will offer advantages over existing treatments, whichmerely attack the symptoms of a disease, by providing therapies that attack theunderlying causes of disease.  TheCompany is aware of only one proven product that constitutes an Antisensetherapy, VitraveneTM, which was approved for marketing in the United States onAugust 26, 1998, for treatment of cytomegalovirus retinitis but was notdeveloped by the Company.  There can beno assurance that any additional Antisense drugs for illnesses other thancytomegalovirus retinitis will be approved for marketing in the United States.

 

 

DEVELOPMENT TO DATE

 

The ssDNA expression vector technology was developed as the directresult of an exclusive license and sponsored research agreement with Dr.Charles Conrad and InGene, Inc.  Dr.Conrad first invented and obtained a patent on the precursor technology ofexpressing single strands of sequence specific DNA in bacteria as a researchlaboratory technique, not contemplating any therapeutic use in livingorganisms. He developed the first version of the vector as a commercialproduct, but later abandoned the enterprise to complete his medical training.Dr. Conrad is not associated with the Company in any way other than bymembership on the Company’s Scientific Advisory Board and through the priorlicensing to the Company of certain rights to technology developed by him.

 

CytoGenix negotiated the license to obtain rights to the technology,revived the patent that had been filed by Dr. Conrad and entered into asponsored research agreement with Dr. Conrad and InGene, Inc., an entity he hadformed to develop the technology.  Theseactivities enabled the Company’s expansion and refinement of the technology forpossible use in human and animal therapies and agriculture. The technology wasproven by Dr. Conrad and his associates in the laboratories in July 1998 andDr. Conrad’s findings have been confirmed and submitted for publication in theANTISENSE AND NUCLEIC ACID DRUG DEVELOPMENT JOURNAL on April 4, 2000.

 

On December 28, 1998 the United States Patent Office (USPTO) notifiedthe Company that it has allowed all the claims contained in the patentapplication for the Company’s single stranded DNA expression vector.  On April 25, 2000 , Dr. Charles Conrad wasissued the patent for its stranded DNA expression vector under United StatesPatent No. 6,054,299 entitled, “Methods and Compositions for ProducingSingle-stranded 

 

 

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cloned DNA in eukaryotic cells”, which the Company has the exclusiveworldwide license to utilize. There are nine additional pending patentapplications describing the Company’s technology. Two other patent applicationsfiled through the Patent Cooperation Treaty (PCT) were published on April 20,2000.  The first patent was No. WO00/22113 entitled, “Enzymatic Synthesis of ssDNA.”  The second patent was No. WO 00/22114 and entitled “Production ofssDNA in vivo.” These patents are important to the Company because they helpform the basis of the technology needed for the production of the Company’sexpression system and other products.

 

The Company entered into an agreement with HEMCO Onshore, L.L.C.(“HEMCO”) on April 6, 2001 in order to obtain $250,000 of working capital. Thenote issued in exchange for the $250,000 has been paid in full by the Company.Pursuant to this agreement, the Company assigned to HEMCO an undivided 10%ownership interest in (i) all of the US and international patents and patentapplications owned by the Company and (ii) any US or international patentobtained, or patent application filed, after April 6, 2001 based on theintellectual property described in clause (i) of this sentence. The Company hasthe right to acquire from HEMCO the foregoing 10% interest for $1,000,000 untilApril 6, 2003.

 

The Company has budgeted for five live animal studies in 2001. TheCompany is currently supporting three (3) Sponsored Research Agreements (SRA):

 

Dr. Cy Stein’s lab at Columbia University is targetinggenes that are involved in cell proliferation or apoptosis in prostate andbladder cancer cells. Dr. Stein’s group is expressing gene specific ODNs andtesting whether down regulation of gene expression leads to chemosensitization.

 

Dr. Franco DeMayo’s lab at Baylor College of Medicineis currently identifying and evaluating transgenic mice expressing ssDNA thatdownregulates a targeted hormonal gene. This is preliminary to testing an antisense approach to reduction ofsolid tumors in mice.

 

Dr. Peter Glazer’s lab at Yale University isexpressing triplex-forming ODNs in cells to induce targeted genomemodification. Dr. Glazer and colleagues have recently published an articleentitled,  “ Intracellular generation ofsingle-stranded DNA for chromosomal triplex formation and inducedrecombination” in Nucleic Acid Research December 15, 2001. This paper details the use of CytoGenix expressionsystems in triplex formation.

 

Several new SponsoredResearch Agreements are contemplated.

 

Dr. Charles Densmore’s lab at Baylor College ofMedicine is conducting pilot experiments inducting aerosolized plasmidconcentrations into lungs.  Dr. Densmorehas already reported success in using this method to achieve transfection ofplasmids into lung cells.  Dr Densmoreis conducting a pilot experiment to test down regulation of the chloramphenicolacetyl transferase (CAT) gene.  Afterevaluation of these results, the Company plans to support additionalinvestigations using Dr. Densmore’s techniques to down regulate proteins inlung tumor cells inducing cytotoxicity.

 

Other research is contemplated to explore variousplasmid delivery systems.

 

The research has produced several additional publicationspresentations.

 

Yin Chen, the Company’s director of Research and Development, presentedthe results of using various forms of the CYGX expression system at the 10thInternational Conference on Gene Therapy in Cancer held from December 13 to 15,2001 in San Diego, CA.  Dr. Chenpresented results from Dr. Cy Stein’s lab at Columbia University School ofMedicine under a sponsored research agreement from CYGX.  Dr. Stein’s lab achieved a 95% knockout ofthe PKC-alpha target protein, considered to be essential to the survival andproliferation of prostate and bladder cancer.  Dr. Chen compared these results with his own results in using theexpression system to achieve suppression of c-raf kinase and with PeterGlazer’s laboratory results using the CYGX expression system to generate triplexforming oligonucleotides and induced genomic recombination.

 

 

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The first phase of a Small Business Technology Transfer Program (STTR)Grant entitled, “ssDNA Expression of Triplex-Forming Oligonucleotides” has beenapproved for funding by the National Institute of Child Health/HumanDevelopment (NICHD) of the National Institutes of Health.

 

There are additional investigators who have requested use of and havereceived kits containing the expression system for sequences of interest andcontrol sequences.  These include:

 

Franklin Bunn, Harvard Medical School, Title:Functional study of a candidate oxygen sensor, b5/b5R;

 

Alan Gewirtz, University of Pennsylvania, Title:Selective killing of cancer cells based on single nucleotide polymorphism andloss of heterozygosity;

 

Scott Ebinghaus, Ph.D., University of Arizona, Title:Triplex DNA based Gene Therapy of Lung Cancer;

 

Ko Mitani, Ph.D., University of California at LosAngeles, Title: Therapeutic gene targeting; and

 

Alejandro Barbieri, Ph.D., Washington University,Title: Early endosome fusion study.

 

Lance Augustin, Ph.D.,University of Minnesota, Research: in vivo chromosomal site-directedmutagenesis

 

Charles Conrad, MD, M.D. Anderson Hospital and TumorInstitute, Title: To be announced

 

CytoGenix has also sold kits to a number of companies and institutionsfor applications related to down regulation of proteins and gene knockouttests.  The Company received $875 insales for the kits in 2001.

 

The Company has not attempted to develop a method of deliveringtreatment either in pill form or as an injection, and there can be no assurancethose alternative delivery methods will ever be available for the Company’sproducts.

 

The specifics of the additional budgeted animal tests are not yetdecided, however animal tests are required to gather data before human testingcan be undertaken by persons wishing deliver their ssDNA molecules using theCompany’s vector delivery system.

 

It has been reported in the scientific literature, such as in theReuters Business Insight 2000 publication, ANTISENSE THERAPY: TECHNICAL ASPECTSAND COMMERCIAL OPPORTUNITIES by Prof. Dr. K.K. Jain M.D., that other Antisensemolecule delivery methods have failed to provide sufficient quantities to betherapeutically effective except in limited applications.  Laboratory cell culture studies havedemonstrated that the Company’s ssDNA expression vector can adequately deliversequence specific Antisense molecules in sufficient quantities in virtually allcell types, thereby overcoming many of the problems previouslyexperienced.  The Company plans toextend expression achieved in cell cultures to cells in live animals as hasbeen discussed above.

 

The Company has submitted for publication a comprehensive manuscriptdescribing these studies showing evidence of expression of various Antisensemolecules in the cell cultures investigated. The authors of this manuscript areCharles Conrad, MD, Yin Chen, Ph.D. and Robert Roxby, Ph.D. Dr. Chen is nowworking full-time in the Company’s on-site laboratory.

 

The Company has spent approximately $1.82 million during the two yearsended December 31, 2001, on its research and development activities.

 

Additional alliances include a Cooperative Research and DevelopmentAgreement (CRADA) with Omnimmune Corporation of Houston, Texas. Omnimmune ownsrights to monoclonal antibody technology 

 

 

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including antibodies against human chorionic gonadotropin (hCG). Thishormone is expressed in the membrane of some cancer cells. The joint researchconducted by CytoGenix and Omnimmune will investigate the utility ofconjugating a CytoGenix plasmid programmed to express specific antisensesequences in the cancer cell with the hCG antibody. The investigation will seekto determine if the antibody targets the identified cancer cells, binds to hCGand if the plasmid is taken into the cell by endocytosis or other absorptivemechanisms. The investigation will further test expression of the sequences ofinterest in the cells.

 

The Company has also entered into a CRADA with Endovasc, Inc. ofMontgomery, Texas. Endovasc specializes in liposomal delivery of variousbiological materials. CYGX will combine its anti-sense DNA expressiontechnology with Endovasc’s customized delivery systems in an attempt to developsafe and effective topical products aimed at blocking viral replication. Theinitial viral targets include herpes simplex and papilloma, both of whichprovide a special threat to women. This fits well within the scope of Endovasc’sresearch program, which was recently expanded by Endovasc’s acquisition ofIntermed 2000, Inc., a life science company devoted to women’s health care.

 

 

The Company has the following 6 full-time employees:

 

**CEO/President- Malcolm Skolnick, PhD, JD**

Malcolm Skolnick has served as President, Chief Execcutive Officer andDirector of the Company since September 1999. He received his Ph.D. in Physicsfrom Cornell University and the JD from the University of Houston Law Center.Prior to joining the Company, Dr. Skolnick held academic positions in theMedical School, the Graduate School of Biomedical Sciences and the School ofPublic Health of the University of Texas Health Science Center at Houston.  He is currently an Adjunct Professor in theSchool of Public Health where he formerly served as Professor of Technology andHealth Law.  Dr. Skolnick is aregistered patent attorney and licensed to practice in Texas. Prior to joiningthe School of Public Health, Dr. Skolnick managed the Health Science Center’sOffice of Technology Management and oversaw the University’s activities inprotecting and licensing its technology. Dr. Skolnick has been active in patentprosecution and licensing for selected clients and has served as an expertwitness in intellectual property, product liability, and accident reconstructionmatters.

 

**Directorof Research and Development — Yin Chen, PhD**

Dr. Chen earned this Ph.D. in Molecular Biology & Biochemistry atthe University of Maine in 1996. Subsequently, he was a post-doctoral fellow atBeth Israel Deaconess Medical Center, a teaching hospital of Harvard MedicalSchool. In 1999, he joined InGene, Inc. of St. Louis as senior researchscientist and then Cytogenix, as chief research scientist in February 2000. Heis one of co-inventors of our company’s proprietary ssDNA expression systems.He was appointed to this position by the Board of Directors on November 7,2001. Dr. Yin Chen has also been promoted to Executive Secretary of theScientific Advisory Committee.

 

**ChiefFinancial Officer - Lawrence Wunderlich**

Mr. Wunderlich has been Chief Financial Officer of the Company sinceAugust 17, 1998. Previously he worked as a financial consultant at theinvestment-banking firm of Josephthal and Company. Prior to his employment withJosephthal, Mr. Wunderlich co-owned The Language Loop a translation andinterpreting service provider to international companies. Mr. Wunderlich isfluent in German and Russian. Mr. Wunderlich attended the University of Viennaand Manhattan College in Riverdale, New York.

 

### EMPLOYEES

 

**CorporateFinance/Business Development - Maury Fogle**

Maury Fogle became the Manager of Corporate Finance/BusinessDevelopment of CytoGenix, Inc. on January 17, 2000. Prior to his employment bythe Company, Mr. Fogle worked with Josephthal & Co. Investment Bankers for4 years. Also, for 3 years, Mr. Fogle worked for Western Geophysical as ageophysicist. Mr. Fogle graduated from the University of Texas at Austin with adegree in Economics/History and with concentrations in Biology and NaturalSciences.

 

 

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**SeniorLaboratory Director-Harilyn McMicken, BS, MT(ASCP****)**

Harilyn W. McMicken graduated from Abilene Christian University andUniversity of Texas at Galveston. She has done post graduate work at theUniversity of Texas School for Biomedical Sciences in Houston, Texas.  CytoGenix, Inc. hired Ms. McMicken as itsSenior Laboratory Director on May 1, 2000. Prior to her employment by the Company, Ms McMicken was Senior ResearchAssistant for 23 years in the Department of Pediatrics at Baylor College ofMedicine.  Her responsibilities andexpertise lie in the areas of molecular biology and general laboratory andpersonnel management.

 

**OfficeManager-Kim Totsky**

Ms. Kim Totsky was hired as Office manager of the Company on November1, 1999. She assists management with day-to-day operations, bookkeeping andscheduling.

 

 

All primary research and development at CytoGenix is conducted in theon-site laboratory located adjacent to the executive offices at the sameaddress.  The Company’s primary researchand development experiments are being conducted in human lung cancer cells(A549 cells) and human liver cells (HepG2 cells) to determine the expressionlevels of single-stranded catalytic DNA and single-stranded Antisense DNAtargeting c-raf kinase mRNA transcripts, bcl-2mRNA transcripts, and mousedouble minute oncogene 2 (MDM2) MRNA transcripts.  Live animal studies are being conducted pursuant to the two sponsoredresearch agreements by Dr. DeMayo and Dr. Glazer described above in the“Developments to Date” section.

 

The Company is relying on Dr. Chen to develop products that the Companywill ultimately be able to market in the United States as well as abroad.

 

The executive officers of the Company are described further in Item 9,“Directors and Executive Officers.”

 

SCIENTIFIC ADVISORY BOARD

 

The Scientific Advisory Board (SAB) for CytoGenix is administered bySAB Executive Secretary, Yin Chen, the Vice President of Research andDevelopment for the Company.  The SABwas formed on August 20, 1998, by the Board of Directors, to advise the Companyon scientific protocol and future experimental and research endeavors. Membersof the SAB who are not employees of the Company are paid $200.00 per hour fortheir services.  There are no existingcontractual relationships between the Company and any non-employee member ofthe SAB other than the license granted by Dr. Conrad to the Company describedunder the caption “Development to Date” above. The Scientific Advisory Board’sresponsibilities are to scrutinize and verify (1) protocols of sponsoredresearch agreements to which the Company became a party, (2) papers submittedby the Company for publication describing achieved research results, (3)abstracts of presentations to be made by the Company at scientific andtechnical meetings, and (4) specifications and claims of patent applicationsproposed by the Company.

 

Dr. Yin Chen also chairs the Scientific Advisory Board for CytoGenix,Inc.  The members include:

 

**CharlesA. Conrad, MD**is BoardCertified in Psychiatry & Neurology and is currently Director of the NeuroCenter at M.D. Anderson Hospital and Tumor Institute in Houston, Texas. He isalso an Associate Professor in the Department of Neuro-Oncology. In addition tohis clinical practice in neuro-oncology, he conducts research in molecularbiology related to genetic factors in tumorogenesis and in anti-sense technology.

 

**Madeleine Duvic, MD**is Professor of Medicine - Chief, Section ofDermatology, and Associate Medical Director of the Melanoma Skin Center at theUT M.D. Anderson Cancer Center Department of Internal Medicine SpecialtiesSection of Dermatology in Houston. Dr. Duvic received her B.A. from RiceUniversity, Magna cum Laude, National Merit Scholar and her M.D. from DukeUniversity Medical School.

 

 

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**Mark R.Emmett, PhD**is Associate Director and Director of Biological Applications of the IonCyclotron Resonance Center for Interdisciplinary Magnetic Resonance, NationalMagnetic Field Laboratory of Florida State University. Dr. Emmett’s researchcenters on molecular biological applications in neurochemistry andneuropharmacology.

 

**PeterGlazer, MD, PhD**holds academic degrees from Harvard (BA), Oxford (MS), and Yale (Ph.D.) and aMedical Degree from Yale University School of Medicine where he is an AssociateProfessor of Therapeutic Radiology and Genetics. His research interests includegene targeting and gene therapy, genetic instability in cancer, mutagenesis,and DNA repair.

 

**StephenM. Hewitt, MD, PhD** is currently conducting medical research as a resident in AnatomicPathology in the Laboratory of Pathology, National Cancer Institute, NationalInstitute of Health.

**Cy A. Stein, MD, PhD** Brown University (BA), Stanford University (PhD inOrganic Chemistry), Albert Einstein College of Medicine (MD), and New YorkHospital-Cornell Medical Center (Internship and Residency in InternalMedicine).  Dr Stein was a Clinical Associateand Senior Staff Fellow at The National Cancer Institute, Bethesda, Maryland.He is currently an Associate Professor of Pharmacology and Clinical Medicine atColumbia University, College of Physicians and Surgeons, in New York.  In addition to his clinical and facultyactivities, he is Co-Editor-in-Chief of *Antisense and Nucleic Acid Drug Development*,sits on 7 Editorial Advisory Boards, including *Nucleic Acids Research*,serves on 8 Scientific Advisory Boards including Genta (Berkeley Heights, NJ),Targent (New York, NY), A3D (Heidelberg, Germany), and is an Ad hoc Reviewerfor over 20 Peer Review Journals.  DrStein is the author of 97 Peer Review Journal Articles, he has written 56 bookchapters, reviews and editorials, and he holds 6 patents issued and has appliedfor 4 additional patents.

 

**AlanGewirtz, Ph.D., M.D.**

Dr. Gewirtz is currently a Member-Institute for Human Gene Therapy, aProfessor of Internal Medicine, and a Professor of Pathology and LaboratoryMedicine at the University of Pennsylvania School of Medicine. He is also aMember of the Graduate Group in Cell and Molecular Biology and the Leader ofthe Stem Cell Biology and Therapeutics Program at the University ofPennsylvania Cancer Center.

A respected leader in antisense research, Dr. Gewirtz earned a BA atColgate University in Marine Biology, received his MA from the State Universityof New York at Buffalo and an MD from the University at Buffalo, School ofMedicine and Biomedical Sciences. He was a Resident in Medicine at Mt. SinaiHospital, N.Y., a Fellow in Hematology/Oncology at Yale University and aResearch Associate in Medicine at Yale University School of Medicine.

 

**YinChen, Ph.D.:**Seethe description above under the caption “Management”

 

 

REGULATORY ISSUES

 

The United States Food and Drug Administration (FDA) approves compoundsthat have been demonstrated as being both safe and effective as individualparts and in combination for medical use in humans. The FDA also recognizesdifferent categories of disease, which deserve different approval standards.The most lenient standard is accorded to those drugs that have been designated“compassionate use” in that any dangers or side effects they may exhibit areless harmful than those inherent in the disease itself when compared with thepotential benefits.

 

Certain diseases have been designated as “orphan” diseases in thatthere are so few cases that the major drug companies cannot justify the expenseof investigational development and submitting to the full approvalprocess.  Many of the orphan diseases,although rare, are nonetheless devastating to the patients and their familiesfrom both a physical and financial point of view.  The FDA therefore, has afforded less rigorous requirements fortheir approval.  The Company will workwithin the existing FDA guidelines described above to achieve approval for theuse of the Company’s technology.

 

 

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Once a therapeutic drug has been demonstrated in the laboratory,typically in cell cultures where Antisense compounds are investigated, the drugmay be studied in animals. Laboratory and animal data may be used to apply fora new drug application (NDA) from the FDA and to support protocols and studydesigns for clinical trials submitted to an Institutional Review Board (IRB).  Data from the clinical trials may besubmitted to the FDA to complete the NDA process.  Once the FDA approves the NDA, the company may market the drug.

 

CytoGenix has produced demonstrations in several cell cultures of theexpression capabilities of its technology. It may require an additional one to three years to complete adequateanimal trials to support initiation of clinical trials for a specific Antisensecompound against a disease.  Theseclinical trials may take from one to three years.  At this time the Company has not yet produced any final productssubject to the approval regulations of the FDA and therefore, cannot anticipateany approval timetable.

 

ITEM 2: DESCRIPTION OF PROPERTY

 

The Company’s corporate executive offices are located at 9881 S.Wilcrest, Houston, TX 77099.  TheCompany has occupied approximately 4200 square feet of executive office andlaboratory space since December 1999. The facility is in good condition and is adequate for the Company’scurrent operations.  Rent on thefacility is $2,046.00 per month.

 

ITEM 3: LEGALPROCEEDINGS

 

# *CARTER LAWSUIT*

 

On May 31, 2001 the Company settled a lawsuit(No. 2000-14858; CYTOGENIX,

INC. VS JIMMY CARTER; In the 125th JudicialDistrict Court of Harris County,

Texas) it had filed against a former consultant.The parties executed a Mutual

Release and Indemnification Agreement as of thatdate. This Agreement closed all

claims and causes of actions in this matter. A$2,750 settlement was paid to the

Company by the consultant for Cytogenix’s courtfees.

 

 

# *ARGYLL PENDINGLITIGATION*

 

Argyll Scientific,L.L.C. (“Argyll”) has asserted, in a letter to the Company dated March 8, 2001,that the Company owes Argyll (i) 44,949 shares of common stock of the Companypursuant to a Stock Rights Agreement, dated as of February 15, 2001, betweenArgyll and the Company and (ii) 16,667 shares of the common stock of theCompany and $25,000 (or shares of common stock of the Company having a fairmarket value equal to that amount) pursuant to a Research and DevelopmentAgreement, dated as of February 15, 2001, between Argyll and the Company. TheCompany strenuously denies any wrongdoing and intends to vigorously defendagainst the claims made by Argyll, which the Company believes are withoutmerit. In addition, the Company has delivered notices of termination of theforegoing Research and Development Agreement to Argyll.

 

*BOYD/BARDWELLLAWSUIT*

 

Charles S. Boyd and Charles M. Bardwell, each of whom is a director ofthe Company (the “Plaintiffs”), filed a petition on March 19, 2002 in the 61stJudicial District of the District Court of Harris County, Texas, which names,among others, the Company as a defendant. The Plaintiffs asserted several claims seeking, among other things, thata shareholders’ meeting be held and that the Company comply with certain boardresolutions purportedly approved by the Company’s board of directors.  On March 27, 2002, the Plaintiffs’ requestfor an order restraining the Company from, among other things, issuing sharesof capital stock, entering into contracts with third parties and destroyingdocuments, was denied.  In addition, thejudge determined that the petition will be dismissed without prejudice uponcompletion of the Company’s 2002 annual meeting of shareholders.

 

 

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PART 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None.

 

PART II

 

ITEM 5: MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDERS MATTERS

 

 

PRINCIPAL MARKET

 

The Company’s securities were quoted on the NASD electronic bulletinboard, from February 5, 1996 to February 27, 2000.  The Company was delisted from the NASD electronic bulletin boardon February 27, 2000 due to the Company having not achieved compliance withNASD marketplace rule 6530. On August 24, 2001 the Company was relisted on theOver The Counter Bulletin Board with the symbol:. The Company’s ticker symbolis “CYGX”. The market makers for the Company’s common stock are:

 

ACAP FINANCIAL INC.

BROKERAGEAMERICA, INC

BISHOP, ROSEN & CO., INC.

FLEET TRADING/A DIVISION OF FLEET SECURITIES

WM. V. FRANKEL & CO., INCORPORATED

GVR COMPANY LLC

HILL THOMPSON MAGID, L.P.

HERZOG, HEINE, GEDULD, LLC

LADENBURG, THALMANN & CO., INC.

M G SECURITIES GROUP, INC.

KNIGHT SECURITIES, L.P.

PARAGON CAPITAL MARKETS, INC.

SCHWAB CAPITAL MARKETS L.P.

WIEN SECURITIES CORP.

 

 

 

BID INFORMATION

 

The high and low bid price for the Company’s common stock for eachquarter within the last two fiscal years, as quoted by the OTC Bulletin Boardwere as follows. The quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission and may not represent actual transactions.

 
|                                  |   | **HIGH** |   | **LOW** |   |
|---------------------------------------|--------|----------|--------|---------|--------|
|                                  |   |     |   |    |   |
| Fiscal Year  Ending December 31, 2001 |   |     |   |    |   |
| Fourth Quarter  Ended 12/31/01        |   | .28      |   | .145    |   |
| Third Quarter  Ended 09/30/01         |   | .51      |   | .10     |   |
| Second Quarter  Ended 06/30/01        |   | .44      |   | .08     |   |
| First Quarter  Ended 03/31/01         |   | .63      |   | .06     |   |
|                                  |   |     |   |    |   |
| Fiscal Year  Ending December 31, 2000 |   |     |   |    |   |
| Fourth Quarter  Ended 12/31/00        |   | 1.00     |   | .031    |   |
| Third Quarter  Ended 09/30/00         |   | 1.125    |   | .25     |   |
| Second Quarter  Ended 06/30/00        |   | 2.625    |   | .531    |   |
| First Quarter  Ended 03/31/00         |   | 2.25     |   | 1.87    |   |

 

 

11

----

 

STOCKHOLDERS

 

There are 590 shareholders of record of the Company as December 31,2001.  The Company has not paid anydividends on its Common Stock. The Board does not intend to declare anydividends in the foreseeable future.

 

On February 15, 2001, the Company entered into a consulting agreementwith Michael D. Skillern, a former officer and director of the Company.  Pursuant to this consulting agreement, Mr.Skillern has acquired 3,700,000 shares of Common Stock (with an aggregate valueof $1,772,300) in exchange for scientific consulting services and $3,700.  In addition the agreement calls forcompensation of $4,000 per month per term of the agreement.  The term of this consulting agreementexpires on December 31, 2002.  Theconsulting agreement also provides that if (i) Malcolm Skolnick, chiefexecutive officer of the Company, is removed from office without his consentand agreement or (ii) the Company defaults on an agreement, the performance ofwhich is secured by the assets of the Company, then Mr. Skillern would begranted in perpetuity a worldwide, non-exclusive, royalty-free license to useany technology owned by, or assigned or licensed to, the Company.  This provision may have the effect ofdelaying, discouraging, inhibiting, preventing or rendering more difficult anattempt to obtain control of the Company by means of a tender offer, businesscombination, proxy contest or otherwise.

 

**CHANGESIN SECURITIES**

 

On October 3, 2001, the Company issued 127,719 sharesof Common Stock. These shares were issued to executive officers (MalcolmSkolnick-32,290, Dell Gibson-19,374, Yin Chen- 14,454  and Lawrence Wunderlich-19,374) and employees (Kim Totsky-10,013,Maury Fogle- 17,760, and Harilyn McMicken- 14,454) of the Company for anaggregate price of $29,685 (based on gross salary for each pay period) inreliance on the exemption from registration provided by Section 4(2) of theSecurities Act of 1933 for transactions not involving a public offering.  Of the $29,685, $128 was received from theemployees in cash and the remainder represents stock compensation.

 

On October 10, 2001 the Company issued 401,143 sharesof Common Stock.  Of these shares,264,445 shares were sold for an aggregate cash price of  $42,600 (or $0.18 per share) in a privateplacement to accredited investors (Marcus E Kuypers- 27,778, John Asard-30,000, Paul J. Goldman- 40,000 and ($.15 per share), Brad Houston- 66,667,Robert Houston- 66,667, and Jackie Houston- 33,333) pursuant to the exemptionfrom registration provided by Section 3(b) of the Securities Act of 1933 andRule 504 thereunder. Also, 25,000 shares were issued to Maury Fogle as bonuscompensation for an aggregate price of $5,375 ( or an average of $0.215 pershare) which shares were issued in reliance on the exemption from registrationprovided by Section 4(2) of the Securities Act of 1933 for transactions notinvolving a public offering. Of the $5,315, $25 was received from the employeein cash and the remainder represents stock compensation Also 111,698 shareswere issued to Mark R. Wisner for services rendered aggregating $9,903 (orapproximately $0.089 per share).

 

On November 7, 2001 the Company issued 575,456 shares of commonstock.  Of these shares, 572,000 shareswere sold for an aggregate cash price of $71,500 (or $0.125 per share) in a private placement to accreditedinvestors (Hydeman Family Partners- 272,000, Bradley A. Houston- 111,000,Robert Q. Houston- 85,000, Paul J. Goldman- 60,000, R. Dino Landino-40,000 andFrank J Lepre- 4,000) pursuant to the exemption from registration provided bySection 3(b) of the Securities Act of 1933 and Rule 504 thereunder. Also 3,456shares were issued to Peter Glazer for services rendered aggregating $750 (or$0.217 per share).

 

On December 4, 2001 the Company issued 390,738 sharesof common stock. Of these shares, 40,238 shares were sold for an aggregate cashprice of  $5,030 (or $0.125 per share)in a private placement to accredited 

 

 

12

----

 

investors (G.M.S. Sichel- 10,238 and Sandra Jedziniak- 30,000) pursuantto the exemption from registration provided by Section 3(b) of the SecuritiesAct of 1933 and Rule 504 thereunder. The additional 350,500 shares were soldfor an aggregate cash price of  $17,525(or $0.05 per share) in a private placement to accredited investors (Paul J.Goldman- 100,000, Bradley A. Houston- 100,000, William B. Waldroff- 88,500,Kimberley Jacobson- 50,000 and Nokmi Kirk- 12,000) pursuant to the exemptionfrom registration provided by Section 3(b) of the Securities Act of 1933 andRule 504 thereunder.

 

On December 5, 2001 the Company issued 800,000 sharesof common stock. These shares were sold for an aggregate cash price of  $100,000 (or $0.125 per share) in a privateplacement to accredited investors (Chou Ming Tu- 300,000 and Chi Chiu Hong-500,000) pursuant to the exemption from registration provided by Section 3(b) ofthe Securities Act of 1933 and Rule 504 thereunder

 

On December 18, 2001 35,830 shares were issued (Michael Walters- 17,915 and Charles S. Boyd- 17,915) for services renderedaggregating  $6,000  ( or $0.167 per share).

 

On December 21, 2001, the Company issued 153,236shares of Common Stock. These shares were issued to executive officers (MalcolmSkolnick-42,857, Dell Gibson-25,714, Yin Chen- 14,454  and Lawrence Wunderlich-25,714) and employees (Kim Totsky-12,283,Maury Fogle- 17,760, and Harilyn McMicken- 14,454) of the Company for an aggregateprice of $40,608 (based on gross salary for each accrued pay period missed in2001 and 2000) in reliance on the exemption from registration provided bySection 4(2) of the Securities Act of 1933 for transactions not involving apublic offering.

 

 

ITEM 6: MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION

 

The Management’s Plan of Operation contains forward-looking statements,which involve risks and uncertainties. The Company’s actual results may differ materially from the resultsdiscussed in the forward-looking statements.

 

The Company has budgeted approximately 3,200,000 for operations infiscal year 2002, of which approximately $1,700,000 has been allocated forgeneral and administrative costs and $1,437,420 has been allocated for researchand development, including three live animal studies that are estimated to cost$50,000 per study based on current estimates. The scientific protocols have been determined by Dr. Yin Chen ofCytoGenix for three of these studies. The Company will rely on equity financingto satisfy its working capital requirements, and has as of December 31, 2001$15,688 of cash on hand for fiscal year 2002. Of the $1,437,420 budgeted for research and development expenses, theCompany anticipates $500,000 will be paid pursuant to the terms of theCompany’s sponsored research agreements with the Columbia University, YaleUniversity, and Baylor College of Medicine, $235,000 will be paid as patentattorneys fees and expenses, $100,000 will be paid as salary to the Company’s employeesand researchers and $46,000 will be paid for supplies.  The remaining $558,000 will be used toexpand the company's research and development activities as it sees fit.  Of the $500,000 for sponsored research,$203,000 will be used to initiate studies and sign on new researchers.  The remaining $297,000 is being used tocontinue existing sponsored research to expand upon those studies andexperiments.

 

There are currently over 800 U.S. patents for Antisense molecules withtherapeutic potential, each of which is a prospective licensee for theCompany.  The Company anticipatesentering into licenses for a $100,000 initiation fee, and either a minimumroyalty fee of $50,000 per year or a royalty fee equal to 15% of the licensee’snet sales, whichever is greater.

 

The Company’s ability to continue operations through December 31, 2002depends on its success in obtaining equity financing in an amount sufficient tosupport its operations through that date. There is substantial doubt that the Company will be able to generatesufficient revenues or be able to raise adequate capital to remain a goingconcern through December 31, 2002. Based on historical yearly financial 

 

 

13

----

 

requirements, operating capital of approximately $3.2 million will beneeded for each of the calendar years 2002 and 2003.

 

The Company entered into a Consulting Agreement dated as of October 27,2001 with Origenesis, LLC and Farm Team Mentors, LLC.  Pursuant to this agreement, the consultants are advising theCompany as to, among other things, corporate finance matters, including theraising of up to $3,000,000 of working capital through the issuance of equitysecurities.  The initial term of thisconsulting agreement is six months, with automatic six-month renewal periodsunless any party provides written notice of termination at least five businessdays prior to the commencement of a new six-month term.  The Company is obligated to pay theconsultants a finders’ fee in an amount equal to (i) 10% of any amount ofworking capital raised less than $1,000,000, plus (ii) 7.5% of any amount ofworking capital raised in excess of $999,999 and less than $2,000,000, plus(iii) 5% of any amount of working capital raised in excess of $1,999,999.   In addition, the Company is obligated topay a monthly fee of $6,000 to the consultants, payable one-half in cash andthe other half in shares of Common Stock with a value equal to 75% of theaverage closing price in the month prior to payment.  Both the finders’ fee and the monthly fee do not become payableuntil $150,000 of working capital has been raised as a result of theconsultants’ efforts.  The Companyraised no working capital as a result of this consulting agreement which wascancelled on February 12, 2002.

 

                The Company hasalso entered into a Consulting Agreement with Eurotrade Financial, Inc. datedMarch 19, 2002.  Pursuant to thisagreement, the consultants are advising the Company as to, among other things,financial public relations and corporate finance matters, including the raisingof up to $5,000,000 of working capital through the issuance of equitysecurities.  The term of this consultingagreement expires on March 19, 2003.  Inconsideration for the financial public relations consulting, the Company hasissued 2,200,000 shares of its Common Stock to six entities selected by theconsultant.  Of those shares, 1,200,000have been released from escrow to those six entities and the remaining1,000,000 shares are to be released at the rate of 100,000 per month on thelast day of each remaining month in 2002. In the event the Company raises working capital pursuant to thisconsulting agreement, the Company is obligated to pay the consultant a finder’sfee equal to 2% of the gross proceeds. In addition, if the Company obtains working capital as a result of anylicensing, joint venture or other mutual exploitation of any asset of theCompany due to the advice received from the consultant, the Company would beobligated to pay the consultant; (i) 5% of the first $1,000,000 of proceeds,plus (ii) 4% of the portion of proceeds in excess of $1,000,000 but less than$1,999,999, plus (iii) 3% of the portion of proceeds in excess of $2,000,000but less than $2,999,999, plus (iv) 2% of the portion of proceeds in excess of$3,000,000 but less than $3,999,999, plus (v) 1% of the portion of proceeds inexcess of $4,000,000.  As of March,2002, the Company has raised no working capital as a result of this consultingagreement.

 

The Company expects its sources of revenue, for the next several years,to consist primarily of payments under future product development jointventures and of licensing agreements as well as possible royalties.  The process of developing the Company’sproducts will require significant additional research and development,preclinical testing and clinical trials, as well as regulatory approvals.  These activities, together with theCompany’s general and administrative expenses, are expected to result in operatinglosses for at least two more years.  TheCompany will not receive product revenue from therapeutic products unless itcompletes clinical trials and successfully commercializes or arranges for thecommercialization of one or more products, the accomplishment of which noassurance can be given.

 

The Company is subject to risks common to biopharmaceutical companies,including risks inherent in its research and development efforts and clinicaltrials, reliance on collaborative partners, enforcement of patent andproprietary rights, the need for future capital, potential competition anduncertainty in obtaining required regulatory approval. In order for a productto be commercialized, it will be necessary for the Company and itscollaborators to conduct pre-clinical tests and clinical trials, demonstrateefficacy and safety of the Company’s product candidates, obtain regulatoryclearances and enter into distribution and marketing arrangements eitherdirectly or through sublicenses.  Fromthe Company’s inception through the date of this document, the major role ofmanagement has been to obtain sufficient funding for required research,monitoring research progress and developing and licensing intellectualproperty.

 

14

----

 

ITEM 7: FINANCIAL STATEMENTS

 

**TABLE OF CONTENTS**

 
|                                               |   |
|----------------------------------------------------|--------|
|                                               |   |
| Independent Auditor’s  Report                 | F-1    |
|                                               |   |
| Balance Sheet                                      | F-4    |
|                                               |   |
| Statement of Operations                            | F-5    |
|                                               |   |
| Statement of Changes in  Stockholders’ Equity | F-6    |
|                                               |   |
| Statement of Cash Flows                            | F-9    |
|                                               |   |
| Notes To The Financial Statements                  | F-10   |

 

 

15

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

 

To the Board of Directors

Cytogenix, Inc.

Houston, Texas

 

 

 

We have audited the accompanying balance sheet of Cytogenix, Inc. (adevelopment stage company) as of December 31, 2001, and the related statementsof operations, stockholders’ equity, and cash flows for the year then ended,and for the period from February 10, 1995 (date of inception and incorporationof the principal developmental activity) through December 31, 2001. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.  The Company’s financialstatements as of and for the year ended December 31, 2000 were audited by otherauditors whose report, dated April 5, 2001, included an explanatory paragraphdescribing conditions that raise substantial doubt about the Company’s abilityto continue as a going concern.  Thefinancial statements as of and for the year ended December 31, 2000 reflecttotal revenues and net loss of $881 and $2,019,605 respectively, of the relatedtotals.  The Company’s financialstatements for the period February 10, 1995 (date of inception and incorporationof the principal developmental activity) through December 31, 1999 were auditedby another auditor whose report, dated March 12, 2001, included an explanatoryparagraph describing conditions that raise substantial doubt about theCompany’s ability to continue as a going concern.  The financial statements for the period February 10, 1995 (dateof inception and incorporation of the principal development activity) throughDecember 31, 1999 reflect total revenues and net loss of $1,633 and $6,229,096respectively, of the related totals. The auditors’ reports have been furnished to us, and our opinion,insofar as it relates to the amounts included for such prior period, is basedsolely on the report of other such auditors.

 

We conducted our audit in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditand the report of other auditors provide a reasonable basis for our opinion.

 

 

F-1

----

 

In our opinion, based on our audit and the reports of other auditors,such financial statements referred to in the first paragraph present fairly, inall material respects, the financial position of the Company, as of December31, 2001, and the results of its operations and its cash flows for the yearthen ended, and for the period from February 10, 1995 (date of inception andincorporation of the principal development activity) to December 31, 2001, inconformity with accounting principles generally accepted in the United Statesof America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company is a developmentstage enterprise, which has suffered recurring losses from operations, has anet working capital deficiency, which raises substantial doubt about itsability to continue as a going concern. Management’s plans regarding thosematters are described in Note 2. The financial statements do not include anyadjustments that might result from the outcome of these uncertainties.

 

 

 

 

/s/ Thomas Leger &Co. L.L.P.

 

 

 

Houston, Texas

April 4, 2002

 

 

F-2

----

[Mann, Frankfort,Stein & Lipp Letterhead]

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

 

To the Board of Directorsand Stockholders of

CytoGenix, Inc.

 

We have audited the statements of operations, changes in stockholders'equity (deficit) and cash flows of CytoGenix, Inc. (a development stagecompany) for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the results of operations and cash flows ofCytoGenix, Inc. for the year ended December 31, 2000, in conformity withaccounting principles generally accepted in the United States.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As shown in the financial statements, the Company has incurred netlosses since its inception, has a capital deficit, and has experienced severeliquidity problems.  Those conditionsraise substantial doubt about the Company's ability to continue as a goingconcern.  Management's plans in regardto those matters also are described in Note 2. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

/s/ Mann, Frankfort, Stein, and Lipp CPAs, L.L.P.

 

Houston, TX

April 5, 2001

 

F-3

----

 

**CYTOGENIX, INC .**

**(A Development Stage Company)**

**BALANCE SHEET**

**DECEMBER 31, 2001**

----

 
| **ASSETS**                                              |   |        |      |
|---------------------------------------------------------|--------|-------------|-----------|
|                                                    |   |        |      |
| **CURRENT ASSETS**                                      |   |        |      |
| Cash                                                    |   | $           | 15,688    |   |
| Deferred consulting fees                                |   | 945,227     |      |
| Prepaid expenses and other current assets               |   | 11,196      |      |
|                                                    |   |        |      |
| Total Current Assets                                    |   | 972,111     |      |
|                                                    |   |        |      |
| **PROPERTY AND EQUIPMENT, net**                         |   | 123,428     |      |
|                                                    |   |        |      |
| **PATENTS,**net of accumulated amortization  of $29,412 |   | 345,588     |      |
|                                                    |   |        |      |
| **TOTAL ASSETS**                                        |   | $           | 1,441,127 |   |
|                                                    |   |        |      |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**         |   |        |      |
|                                                    |   |        |      |
| **CURRENT LIABILITIES**                                 |   |        |      |
| Accounts payable                                        |   | $           | 286,434   |   |
| Accrued payroll and payroll taxes                       |   | 316,577     |      |
| Other accrued liabilities                               |   | 296,803     |      |
|                                                    |   |        |      |
| **TOTAL LIABILITIES**                                   |   | 899,814     |      |
|                                                    |   |        |      |
| **STOCKHOLDERS’ DEFICIT**                          |   |        |      |
| Common stock, $0.001 par value, 150,000,000 shares      |   |        |      |
| authorized, 44,890,665 shares issued                    |   | 44,891      |      |
| Additional paid-in capital                              |   | 12,249,193  |      |
| Treasury stock, 547,250 shares; at cost                 |   | (629,972    | )         |
| Accumulated development stage deficit                   |   | (11,122,799 | )         |
|                                                    |   |        |      |
| **TOTAL STOCKHOLDERS DEFICIT**                          |   | 541,313     |      |
|                                                    |   |        |      |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT**    |   | $           | 1,441,127 |   |

 

The accompanyingfootnotes are an integral part of this financial statement.

 

 

F-4

----

 

**CYTOGENIX, INC.**

**(A Development Stage Company)**

**STATEMENT OF OPERATIONS**

----

 
|                                              |   | **For the Year Ended December 31,** |       | **From February   10, 1995 (Date of   Inception) To   December 31,** |       |
|---------------------------------------------------|--------|-------------------------------------|------------|----------------------------------------------------------------------|------------|
|                                              |   | **2001**                            |       | **2000**                                                             |       | **2001** |   |
|                                              |   |                                |       |                                                                 |       |   |   |
| **REVENUES**                                      |   |                                | ** ** |                                                                 | ** ** |   | ** ** |
|                                              |   |                                | ** ** |                                                                 | ** ** |   | ** ** |
| Research kit sales                                |   | $                                   | 875        |                                                                 | $          | — |   | $ | 875 |   |
| Gain on sale of security                          |   | —                              |       | 881                                                                  |       | 881 |   |
| Dividend income                                   |   | —                              |       | —                                                               |       | 1,633 |   |
|                                              |   |                                |       |                                                                 |       |   |   |
| **Total Revenues**                                |   | 875                                 |       | 881                                                                  |       | 3,389 |   |
|                                              |   |                                |       |                                                                 |       |   |   |
| **OPERATING EXPENSES**                            |   |                                |       |                                                                 |       |   |   |
| Research and development                          |   | 1,262,509                           |       | 560,785                                                              |       | 3,663,701 |   |
| General and administrative                        |   | 1,548,999                           |       | 1,406,064                                                            |       | 7,325,556 |   |
| Depreciation and amortization                     |   | 63,465                              |       | 43,664                                                               |       | 126,931 |   |
| Equity in losses of joint venture                 |   | —                              |       | 9,973                                                                |       | 10,000 |   |
|                                              |   |                                |       |                                                                 |       |   |   |
| **Total Expenses**                                |   | 2,874,973                           |       | 2,020,486                                                            |       | 11,126,188 |   |
|                                              |   |                                |       |                                                                 |       |   |   |
| **NET LOSS**                                      |   | $                                   | (2,874,098 | )                                                                    | $          | (2,019,605 | ) | $ | (11,122,799 | ) |
|                                              |   |                                |       |                                                                 |       |   |   |
| **BASIC AND DILUTED LOSS PER COMMON  SHARE** |   | $                                   | (0.07      | )                                                                    | $          | (0.08 | ) |   |   |
|                                              |   |                                |       |                                                                 |       |   |   |
| **BASIC WEIGHTED AVERAGE SHARES**                 |   | 38,725,175                          |       | 26,531,486                                                           |       |   |   |

 

The accompanyingfootnotes are an integral part of this financial statement.

 

 

F-5

----

 

**CYTOGENIX, INC.**

**(A Development Stage Company)**

**STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

 
|                                                                 |   | **Common Stock** |   | **Treasury Stock** |   | **Additional Paid-In Capital** |   | **Accumulated Development Stage  Deficit** |   | **Total Stockholders' Equity  (Deficit)** |
|----------------------------------------------------------------------|--------|------------------|--------|--------------------|--------|--------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|
| **Shares**                                                           |   | **Amount**       |
| Balance, February 10, 1995                                           |   | —           |   | $                  | — |                           | $      | —                                     |   | $                                         | — |   | $ | — |   | $ | — |   |
| Issuance of common stock                                             |   | 4,584,500        |   | 4,584              |   | —                         |   | 42,799                                     |   | —                                    |   | 47,383 |   |
| Private placements                                                   |   | 110,000          |   | 110                |   | —                         |   | 20,890                                     |   | —                                    |   | 21,000 |   |
| Deficit for period ended December 31, 1995                           |   | —           |   | —             |   | —                         |   | —                                     |   | (42,843                                   | ) | (42,843 | ) |
|                                                                 |   |             |   |               |   |                           |   |                                       |   |                                      |   |   |   |
| Balance, December 31, 1995                                           |   | 4,694,500        |   | 4,694              |   | —                         |   | 63,689                                     |   | (42,843                                   | ) | 25,540 |   |
|                                                                 |   |             |   |               |   |                           |   |                                       |   |                                      |   |   |   |
| Issuance of sharesTo sole stockholder of Physical Therapy Associates |   | 500,000          |   | 500                |   | —                         |   | 374,500                                    |   | —                                    |   | 375,000 |   |
| Deficit for period ended December 31, 1996                           |   | —           |   | —             |   | —                         |   | —                                     |   | (51,952                                   | ) | (51,952 | ) |
|                                                                 |   |             |   |               |   |                           |   |                                       |   |                                      |   |   |   |
| Balance, December 31, 1996                                           |   | 5,194,500        |   | 5,194              |   | —                         |   | 438,189                                    |   | (94,795                                   | ) | 348,588 |   |
|                                                                 |   |             |   |               |   |                           |   |                                       |   |                                      |   |   |   |
| Issuance of shares  For services rendered                            |   | 3,687,425        |   | 3,687              |   | —                         |   | 687,705                                    |   | —                                    |   | 691,392 |   |
| Private placements                                                   |   | 825,974          |   | 826                |   | —                         |   | 128,306                                    |   | —                                    |   | 129,132 |   |
| Deficit for period ended December 31, 1997                           |   | —           |   | —             |   | —                         |   | —                                     |   | (1,240,039                                | ) | (1,240,039 | ) |
|                                                                 |   |             |   |               |   |                           |   |                                       |   |                                      |   |   |   |
| Balance, December 31, 1997                                           |   | 9,707,899        |   | 9,707              |   | —                         |   | 1,254,200                                  |   | (1,334,834                                | ) | (70,927 | ) |
|                                                                      |        |                  |        |                    |        |                                |        |                                            |        |                                           |  |  |  |  |  |  |  |  |

 

The accompanyingfootnotes are an integral part of this financial statement.

 

 

F-6

----

 

 
|                                                                          |       | **Common Stock** |       | **Treasury Stock** |        | **Additional Paid-In Capital** |       | **Accumulated Development Stage  Deficit** |       | **Total Stockholders' Equity  (Deficit)** |
|-------------------------------------------------------------------------------|------------|------------------|------------|--------------------|-------------|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|
| **Shares**                                                                    |       | **Amount**       |
|                                                                          |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| Issuance of shares                                                            |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| Loans from stockholders                                                       |       | 212,780          |       | 213                |        | —                         |       | 135,777                                    |       | —                                    |   | 135,990 |   |
| For services rendered                                                         |       | 3,601,021        |       | 3,601              |        | —                         |       | 2,817,225                                  |       | —                                    |   | 2,820,826 |   |
| Private placements                                                            |       | 2,964,000        |       | 2,964              |        | —                         |       | 590,836                                    |       | —                                    |   | 593,800 |   |
| Payment of services rendered throughother stockholders’  personal shares |       | —           |       | —             |        | —                         |       | 152,500                                    |       | —                                    |   | 152,500 |   |
| Deficit for period ended December 31, 1998                                    |       | —           |       | —             |        | —                         |       | —                                     |       | (3,434,751                                | ) | (3,434,751 | ) |
|                                                                          |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| Balance, December 31, 1998                                                    |       | 16,485,700       |       | 16,485             |        | —                         |       | 4,950,538                                  |       | (4,769,585                                | ) | 197,438 |   |
|                                                                          |       |             | ** ** |               |        |                           |       |                                       | ** ** |                                      | ** ** |   | ** ** |
| Purchase treasury shares                                                      |       | —           |       | —             |        | (60,000                        | )          | —                                     |       | —                                    |   | (60,000 | ) |
| Sale of treasury shares                                                       |       | —           |       | —             |        | 60,000                         |       | —                                     |       | —                                    |   | 60,000 |   |
| Issuance of shares                                                            |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| For services rendered                                                         |       | 544,348          |       | 544                |        | —                         |       | 467,778                                    |       | —                                    |   | 468,322 |   |
| Private placements                                                            |       | 317,220          |       | 317                |        | —                         |       | 129,709                                    |       | —                                    |   | 130,026 |   |
| Stock warrants                                                                |       | —           |       | —             |        | —                         |       | 25,000                                     |       | —                                    |   | 25,000 |   |
| In-kind stock swap                                                            |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| Issuance of restricted shares intotreasury                                    |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
|                                                                          | 20,000,000 |             | 20,000     |               | (10,475,016 | )                              | 10,455,016 |                                       | —     |                                      | — |   |
| Retirement of treasury shares                                                 |       | (8,229,288       | )          | (8,229             | )           | 3,490,669                      |       | (3,482,440                                 | )          | —                                    |   | — |   |
| Sale of treasury stock subject to                                             |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| mandatory repurchase                                                          |       | —           |       | —             |        | 354,803                        |       | (354,803                                   | )          | —                                    |   | — |   |
| Additional penalty on treasury sharessold subject to mandatory  repurchase    |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
|                                                                          | —     |             | —     |               | 125,765     |                           | (125,765   | )                                          | —     |                                      | — |   |
| Deficit for year ended December 31, 1999.                                     |       | —           |       | —             |        | —                         |       | —                                     |       | (1,459,511                                | ) | (1,459,511 | ) |
|                                                                          |       |             |       |               |        |                           |       |                                       |       |                                      |   |   |   |
| Balance, December 31, 1999                                                    |       | 29,117,980       |       | 29,117             |        | (6,503,779                     | )          | 12,065,033                                 |       | (6,229,096                                | ) | (638,725 | ) |
|                                                                               |            |                  |            |                    |             |                                |            |                                            |            |                                           |  |  |  |  |

 

The accompanyingfootnotes are an integral part of this financial statement.

 

 

F-7

----

 
|                                                                                                                              |   | **Common Stock** |       | **Treasury Stock** |       | **Additional Paid-In Capital** |       | **Accumulated Development Stage  Deficit** |       | **Total Stockholders' Equity  (Deficit)** |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|--------------------|------------|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|
| **Shares**                                                                                                                        |   | **Amount**       |
|                                                                                                                              |   |             | ** ** |               | ** ** |                           | ** ** |                                       | ** ** |                                      | ** ** |   |
| Issuance of sharesFor services rendered                                                                                           |   | 546,171          |       | 546                |       | —                         |       | 490,927                                    |       | —                                    |   | 491,473 |   |   |
| Private placements                                                                                                                |   | 1,018,989        |       | 1,019              |       | —                         |       | 384,781                                    |       | —                                    |   | 385,800 |   |   |
| For purchase of patents                                                                                                           |   | 500,000          |       | 500                |       | —                         |       | 374,500                                    |       | —                                    |   | 375,000 |   |   |
| Stock warrants exercised                                                                                                          |   | 250,000          |       | 250                |       | —                         |       | 224,750                                    |       | —                                    |   | 225,000 |   |   |
| Sale of treasury stock subject tomandatory repurchase, net  of reclass ofprior year  treasury stock sales fromliability to equity |   | —           |       | —             |       | 1,765,703                      |       | (1,285,135                                 | )          | —                                    |   | 480,568 |   |   |
| Receipt of shares for collection of notereceivable                                                                                |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
|                                                                                                                              | — |             | —     |               | (25,100    | )                              | —     |                                       | —     |                                      | (25,100 | ) |   |
| Deficit for period ended December 31, 2000                                                                                        |   | —           |       | —             |       | —                         |       | —                                     |       | (2,019,605                                | ) | (2,019,605 | ) |   |
|                                                                                                                              |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| Balance, December 31, 2000                                                                                                        |   | 31,433,140       |       | 31,432             |       | (4,763,176                     | )          | 12,254,856                                 |       | (8,248,701                                | ) | (725,589 | ) |   |
|                                                                                                                              |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| Issuance of shares                                                                                                                |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| For services rendered                                                                                                             |   | 1,780,009        |       | 1,780              |       | —                         |       | 332,962                                    |       | —                                    |   | 334,742 |   |   |
| Private placements                                                                                                                |   | 10,796,853       |       | 10,797             |       | —                         |       | 1,273,161                                  |       | —                                    |   | 1,283,958 |   |   |
| Stock options exercised                                                                                                           |   | 3,700,000        |       | 3,700              |       | —                         |       | 1,768,600                                  |       | —                                    |   | 1,772,300 |   |   |
|                                                                                                                              |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| Retirement of treasury shares                                                                                                     |   | (2,819,337       | )          | (2,819             | )          | 3,383,204                      |       | (3,380,385                                 | )          | —                                    |   | — |   |   |
|                                                                                                                              |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| Reclass of prior year treasury stock salesfrom liability to equity                                                                |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
|                                                                                                                              | — |             | —     |               | 750,000    |                           | —     |                                       | —     |                                      | 750,000 |   |   |
|                                                                                                                              |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| Deficit for year ended December 31, 2001                                                                                     |   | —           |       | —             |       | —                         |       | —                                     |       | (2,874,098                                | ) | (2,874,098 | ) |   |
|                                                                                                                              |   |             |       |               |       |                           |       |                                       |       |                                      |   |   |   |   |
| Balance, December 31, 2001                                                                                                        |   | 44,890,665       |       | $                  | 44,891     |                           | $          | (629,972                                   | )          | $                                         | 12,249,193 |   | $ | (11,122,799 | ) | $ | 541,313 |   |   |
|                                                                                                                                   |        |                  |            |                    |            |                                |            |                                            |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanyingfootnotes are an integral part of this financial statement.

 

 

F-8

----

 

**CYTOGENIX, INC.**

**(A Development Stage Company)**

**STATEMENT OF CASH FLOWS**

----

 
|                                                 |   |                                |       |       |       | **From February   10, 1995 (Date of********Inception) To December 31, 2001** |       |
|------------------------------------------------------|--------|-------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|
|                                                 |   |                                |       |       |       |                                                                              |
|                                                 |   | **For the Year Ended December 31,** |       |       |
|                                                 |   | **2001**                            |       | **2000**   |       |                                                                              |
| **CASH FLOWS FROM OPERATIONS**                       |   |                                | ** ** |       | ** ** |                                                                              | ** ** |
| Net loss                                             |   | $                                   | (2,874,098 | )          | $          | (2,019,605                                                                        | )          | $ | (11,122,799 | ) |
| **Adjustments to reconcile net (Loss) to net cash**  |   |                                |       |       |       |                                                                              |       |
| **used by operating activities:**                    |   |                                |       |       |       |                                                                              |       |
| Depreciation and amortization                        |   | 63,465                              |       | 43,644     |       | 126,931                                                                           |       |
| Common stock issued for services                     |   | 1,158,368                           |       | 426,664    |       | 6,093,052                                                                         |       |
| Equity in losses of joint venture                    |   | —                              |       | 9,973      |       | 10,000                                                                            |       |
| Additional penalty in treasury shares                |   | —                              |       | —     |       | 125,765                                                                           |       |
| **Changes in operating assets and liabilities:**     |   |                                |       |       |       |                                                                              |       |
| Prepaid expenses and other assets                    |   | (10,008                             | )          | (248       | )          | (11,196                                                                           | )          |
| Notes receivables                                    |   | —                              |       | —     |       | (25,100                                                                           | )          |
| Accounts payable and accrued liabilities             |   | 453,264                             |       | 246,012    |       | 964,643                                                                           |       |
| Stockholders’ loans                             |   | —                              |       | —     |       | 135,990                                                                           |       |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **Net cash used by operating activities**            |   | (1,209,009                          | )          | (1,293,560 | )          | (3,702,714                                                                        | )          |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **CASH FLOW FROM INVESTING**                         |   |                                |       |       |       |                                                                              |       |
| Payments for additions to propery and equipment      |   | —                              |       | (156,055   | )          | (217,500                                                                          | )          |
| Investment in joint venture                          |   | —                              |       | —     |       | (10,000                                                                           | )          |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **Net cash provided used in investing activities**   |   | —                              |       | (156,055   | )          | (227,500                                                                          | )          |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **CASH FLOW FROM FINANCING**                         |   |                                |       |       |       |                                                                              |       |
| Proceeds from note payable                           |   | 250,000                             |       | —     |       | 250,000                                                                           |       |
| Payment on note payable                              |   | (250,000                            | )          | —     |       | (250,000                                                                          | )          |
| Treasury shares sold subject to mandatory repurchase |   | —                              |       | 750,000    |       | 1,104,803                                                                         |       |
| Proceeds from issuance of common stock and           |   |                                |       |       |       |                                                                              |       |
| exercise of common stock warrants                    |   | 1,283,958                           |       | 610,800    |       | 2,816,099                                                                         |       |
| Proceeds from issuance of common stock warrants      |   | —                              |       | —     |       | 25,000                                                                            |       |
| Bank overdraft                                       |   | (59,261                             | )          | 59,261     |       | —                                                                            |       |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **Net cash provided used by financing activities**   |   | 1,224,697                           |       | 1,420,061  |       | 3,945,902                                                                         |       |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **Increase (decrease) in cash and cash equivalents** |   | 15,688                              |       | (29,554    | )          | 15,688                                                                            |       |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **Balance at beginning of year**                     |   | —                              |       | 29,554     |       | —                                                                            |       |
|                                                 |   |                                |       |       |       |                                                                              |       |
| **Balance at end of year**                           |   | $                                   | 15,688     |       | $          | —                                                                            |       | $ | 15,688 |   |

 

The accompanyingfootnotes are an integral part of this financial statement.

 

 

F-9

----

 

**CYTOGENIX, INC.**

**(A Development Stage Company)**

**NOTES TO THE FINANCIAL STATEMENTS**

**DECEMBER 31, 2001**

----

** **

**1.**       **ORGANIZATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Natureof Operations and Organization**

 

CytoGenix, Inc. (the “Company”) is a development stagecompany that was incorporated in Nevada on February 10, 1995.  It is a biotechnology company focusing oncontrolled cellular dedifferentatiation and transdifferentiationprocesses.  The Company has acquired theexclusive rights for applications to a specialized expression vector capable ofproducing single stranded DNA (ssDNA) in both eukaryotes and prokaryotes.

 

**CommonStock**

 

On March 2, 2001, the Board ofDirectors approved an increase in the number of authorized shares to150,000,000.

 

**Cashand Cash Equivalents**

 

All short-term highly liquid investments that have anoriginal maturity date of three months or less are considered cash equivalents.

 

**Propertyand Equipment**

 

Property and equipment are stated at cost.  Depreciation is provided for using thestraight-line method over the estimated useful lives of the assets ranging fromfive to seven years.  Routine repairsand maintenance costs are charged to operations as incurred while the cost ofsignificant improvements are capitalized.

 

**Stock-BasedCompensation**

 

In accordance withStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), the Company has elected to continue toaccount for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” and related interpretations.  Accordingly, compensation cost for stock transactions aremeasured as the excess, if any, of the market price of the Company’s commonstock at the date of grant over the stock purchase price.

 

Stock compensationexpense for stock granted to non-employees has been determined in accordancewith SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”),as the fair value of the consideration received or the fair value of the equityinstruments issued, whichever is more reliably measured.

 

 

F-10

----

 

**NetLoss Per Share**

 

Basic loss pershare is calculated based on the net loss applicable to common stockholdersdivided by the weighted average number of common shares outstanding for theperiod, excluding any dilutive effects of options, warrants and convertiblesecurities.  Diluted earnings per share,if separately presented, would assume the conversion of all dilutivesecurities, such as options, warrants and convertible securities.  Due to the Company’s history of losses, allsuch securities, if any, have been anti-dilutive.

 

**IncomeTaxes**

 

The liabilitymethod is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determinedbased on differences between financial reporting and tax bases of assets andliabilities and are measured using the enacted tax rates and laws that will bein effect when the differences are expected to reverse.  A valuation allowance is established fordeferred tax assets if it is not more likely than not that such assets will berecoverable in the future.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Patents**

 

Patent applicationcosts attributable to internally developed patents are expensed as incurred,while the costs of acquired patents are capitalized.  The costs of acquired patents are amortized over their remaininglegal lives of seventeen years. Amortization expense was $22,060 and $7,352 for the years ended December31, 2001 and 2000, respectively.

 

**Revenue and Recognition**

 

Currently, theCompany’s only source of income has been from dividends, gains on sale ofsecurities and the sale of research kits. This income is recognized in the period in which dividends are receivedor securities and kits sold.

 

 

F-11

----

 

**2.**       **GOING CONCERN**

 

Since inception,the Company has been considered a development stage company and has not generatedany operating revenue.  To fund itsdevelopment stage activities to date, the Company has relied on the sale of itscommon stock.  There is substantialdoubt that the Company will generate sufficient revenues during 2002 to meetits operating cash requirements. Accordingly, the Company’s ability to continue operations through 2002depends on its success in obtaining equity or debt financing in an amountsufficient to support its operations. This raises substantial doubt about its ability to continue as a goingconcern.  The financial statements donot include any adjustments that might result from this uncertainty.

 

**3.**       **SALE OF STOCK**

 

In January 1999, rules of governing Regulation D, 504 PrivatePlacements were amended by the U.S. Securities Exchange Commission wherebyissuers were compelled to offer one year restricted stock to investors.  Prior to this amendment, issuers werepermitted to offer freely transferable shares to investors, typically at a slightdiscount to market in order to secure equity financing.

 

In order to continue to fund future operations of the Company, theCompany’s management decided on May 13, 1999 to offer all current stockholdersthe opportunity to exchange their freely transferable shares for one yearrestricted shares at a ratio of two shares of restricted stock for one share offreely transferable stock.  It was theCompany’s belief at that time the unrestricted shares could be sold by theCompany to individual investors without registration as a means to fund theCompany.

 

The Company initially proposed to issue a total of20,000,000 restricted shares in exchange for 10,000,000 free tradingshares.  The free trading shares wouldthen be sold by the Company in the market and in private transactions.  Between May 16, 1999 and August 21, 1999, atotal of 5,885,356 free trading shares were exchanged for 11,770,712 restrictedshares.  The Company then, in a seriesof brokerage and private transactions, sold a total of 1,813,272 and 725,577shares in the market in 2000 and 1999, respectively.  In addition to the stock sold from the Company’s treasury fromthe in-kind stock swap, the Company also sold 72,727 shares in 1999 frompreviously existing treasury stock. From shares received from the stock swap, the Company received $750,000and $354,803 in 2000 and 1999, respectively, from treasury shares sold.

 

 

F-12

----

 

Accordingly, it is possible that the sale of the2,611,576 shares in treasury described above may have violated securitiesregistration provisions of the federal and state securities laws which couldsubject the Company to fines, penalties or other regulatory enforcementaction.  Additionally, although it ispossible that Stockholders who purchased the shares and federal securities lawsto require the Company within one year from date of issuance of such shares torepurchase their shares, for the amount originally paid, plus interest, nostockholder has made such a claim and the one-year statute expired in February2001.  Accordingly, the $750,000 oftreasury shares sold subject to mandatory repurchase was reclassified from aliability to equity during the year ended December 31, 2001.

 

**4.**        **STOCK BASED COMPENSATION**

 

During September 1999, the Company established an Employee StockPurchase Plan (the “Purchase Plan”), under which employees may purchase commonshares at par value quarterly up to 25% of their gross salary computed at theclosing price on the last day of each pay period.  The purchase plan was made retroactive to January 1, 1999 and iscompensatory since only a maximum discount of 15% is allowed for the purchaseplan to be non-compensatory.

 

The Company issued 5,480,009 shares and 546,171 shares during 2001 and2000, respectively, of its common stock in return for services.  Pursuant to the Purchase Plan, the Companyissued 628,139 and 105,111 common shares during 2001 and 2000, respectively, tothe employees of the Company.  Inaddition 811,545 and 202,667 shares were issued during 2001 and 2000 respectivelyas merit and retention bonuses to the employees.  Compensation cost charged to operations for those individuals was$256,255 and $252,758 for the years ended December 31, 2001 and 2000,respectively.  The Company also issued4,040,325 and 238,393 shares during 2001 and 2000, respectively, for consultingand other services provided by non-employees for an aggregate fair value of$1,816,855 and $255,993, respectively. The shares issued and fair value provided by non-employees includes theshares exercised related to a consulting agreement with a shareholder (Note 5).

 

**5.**       **CONSULTING AGREEMENT AND STOCK OPTIONS**

 

The Company has a consulting agreement with a shareholder thatcommenced February 15, 2001 and continues until December 31, 2002.  The services to be rendered are varied andprimarily are to help the Company in its development stage.  The services include but are not limited todevelopment of single-stranded DNA expression technology, and/or technologicalapproaches that could complement or compete with the Company’s technology.

 

 

F-13

----

 

The agreement calls for compensation of $4,000 per month during theterm of the agreement, which is expensed on a monthly basis as incurred.  The shareholder was authorized a grant of3,700,000 stock options with an exercise price of $0.001 per share.  The options vest immediately and wereexercised on June 27, 2001.  Inaccordance with SFAS 123 and EITF 96-18, the expense related to these optionsis measured and recorded over the service period that generally coincides withvesting.  The Company expensed $827,073associated with these options and has recorded $945,227 as deferred consultingfees.  Using the Black-Scholesoption-pricing model, the Company determined that the per share fair value ofnon-employee options granted during the year ended December 31, 2001 was $0.479on the date of grant.  The followingassumptions were included in this method: no expected dividend yield; volatility rate of 172%, risk free interestrate of 4.61% and an expected life of 2 years. Upon request of the shareholder, the Company will register for resalewith all appropriate regulatory authorities up to 1,000,000 shares owned by theshareholder or his assigns.  In theevent that the Company’s president is removed from office without his consentand agreement or if the Company defaults on any agreement which holds theassets of the Company as collateral then for good and valuable considerationthe shareholder is granted a worldwide, non-exclusive, royalty-free license touse any technology owned by, assigned or licensed to the Company.  The shareholder’s license granted shall beeffective as of the date February 15, 2001, shall continue in perpetuity, andshall bear no license fee or other charges.

 

**6.       PROPERTY AND EQUIPMENT**

 

Property and equipmentconsisted of the following at December 31, 2001:

 
| Lab equipment                        |   | $       | 174,578 |   |
|--------------------------------------|--------|---------|---------|--------|
| Furniture and office  equipment      |   | 42,992  |    |
|                                 |   | 217,570 |    |
| Less:  accumulated depreciation |   | (94,142 | )       |
|                                 |   |    |    |
| Net property and  equipment          |   | $       | 123,428 |   |

 

Depreciation expense was $41,405 and $36,312 for theyears ended December 31, 2001 and 2000 respectively.

 

 

F-14

----

 

**7.       SPONSORED RESEARCH AGREEMENTS**

 

The Company has enteredinto one year Sponsored Research Agreements (SRAs) with various universities inwhich the Company sponsors research related to the Company’s proprietarytechnology.  The SRAs have establishedbudgets and the Company shall have the option of extending the SRAs undermutually agreeable support terms.  Costsrelated to the SRAs are expensed as incurred and were $292,363 in 2001 and areincluded in research and development expense. The liability related to the SRAs in total was $269,107 at December 31,2001.  The potential commitment based onbudgeted costs of the SRAs that have not been incurred was $57,714 at December31, 2001.  There were two SRAs that wereterminated during 2001.

 

**8.       EQUITY INVESTMENT**

 

On November 3, 1999, CytoGenix, Inc. formed a jointventure with Professional Compounding Centers of America, Inc. (PCCA).  Each own a 50% interest in Pharmagenix, LLC(Pharmagenix).  This joint venture willapply part of the nucleic acid technology (synthesized DNA and RNA sequences)to the developing non-prescription products for distribution through the 2,500member compounding pharmacies that are affiliated with PCCA.  The Company’s initial contribution was$10,000.  During the year ended December31, 2000, the investment was written down to zero due to the recording of itsequity in losses of the joint venture.

 

**9.      FACILITIES LEASE**

 

The Company has executed noncancelable-operating leases for a vehicleand office and laboratory space that expire in 2004 and 2002,respectively.  Rent expense under theoperating lease agreement aggregated $31,764 and $28,675 for the years endedDecember 31, 2001 and 2000, respectively. However, the 2001 rent expense is offset by rent reimbursement of$19,272 received by a tenant that subleased space from the Company during theyear.  Future minimum annual rentalpayments under the current leases are as follows:

 
|                          |   | **Operating** |   |
|-------------------------------|--------|---------------|--------|
|                          |   | **Leases**    |   |
|                          |   |          |   |
| 2002                          |   | $27,648       |   |
| 2003                          |   | 5,142         |   |
| 2004                          |   | 2,571         |   |
|                          |   |          |   |
| Total minimum lease  payments |   | $35,361       |   |

 

 

F-15

----

 

**10.      INCOME TAXES**

 

As of December 31, 2001 the Company has net operating tax loss carryforwards of approximately $4,260,727. The carry forwards begin to expire in the year 2018.

 

Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.  For financial reporting purposes, avaluation allowance has been provided to offset the deferred tax asset relatedto these carry forwards, as it is more likely than not that these assets willnot be realized.

 

Significant components of the Company’s deferred tax assets andliabilities at December 31, 2001 are as follows:

 
| Deferred tax assets:                             |   |      |      |
|--------------------------------------------------|--------|-----------|-----------|
| Net operating loss  carryfowards                 |   | $         | 1,491,255 |   |
| Less:  valuation allowance                  |   | 1,468,318 |      |
|                                             |   |      |      |
| Net deferred tax assets                          |   | 22,937    |      |
|                                             |   |      |      |
| Deferred tax liabilities:                        |   |      |      |
| Book depreciation in  excess of tax depreciation |   | (22,937   | )         |
|                                             |   |      |      |
| Net deferred tax                                 |   | $         | —    |   |

 

**11.          WARRANTSSOLD**

 

During 1999, the Company sold 250,000 warrants for $25,000 to purchasecommon stock with the right to exercise at any time after July 5, 1999 atexercise price of $.90 per share.  Thesewarrants were exercised during 2000.

 

**12.     LITIGATION**

 

The Company has been subject to routine litigation matters in theordinary course of business.  Managementbelieves the outcome of such matters will not have a material effect of itsfinancial position or results of operations.

 

 

F-16

----

 

**13.      NON-CASH INVESTING AND FINANCINGACTIVITIES**

 

For the year ended December 31, 2000, there was $25,100 for receipt oftreasury stock for payment of a note receivable.  For the year ended December  31,2000, there were issuances of common stock for payment of liabilitiesand acquisition of patents of $64,829 and $375,000 respectively.

 

For the year ended December 31, 2001, there was issuances of commonstock for deferred consulting fees and payment of liabilities of $945,227 and$58,881, respectively.

 

**14.      NOTE PAYABLE**

 

During 2001, the Company obtained debt financing from an unrelatedparty for $250,000.  The note agreementbears no interest unless the loan defaults, as defined and is secured bycertain patents and patents pending. The note matured July 2001 and contains various covenants includingmaintenance and protection of the collateral. There is a commitment fee on the note equal to 10% interest in allpatents and patents pending of the Company. The Company may repurchase, at its option, the 10% interest from thelender for $1,000,000 within two years from the date of the noteagreement.  The note was fully repaidduring 2001.

 

**15.      SUBSEQUENT EVENT.**

** **

In March 2002, the Company issued 7,391,833 shares of common stock in aprivate placement which resulted in cash proceeds of approximately $887,020.

 

 

F-17

----

 

 

ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Changes in Accountants

 

On January 24, 2002, Mann Frankfort Stein & Lipp CPA's, LLP ofHouston, Texas (MFSL) advised CytoGenix, Inc. (the "Company") that itis resigning and would no longer serve as the Company's independent accountant.  MSFL has issued no reports on the financialstatements of the Company for any period subsequent to December 31, 2000.

 

(ii) The report of MFSL on the Company's financial statements for thefiscal year ended December 31, 2000 contains a modification for a going concernuncertainty.  MFSL issued no reports onthe financial statements of the Company for any period prior to December 31,2000.

 

(iii) The decision to change independent auditors was approved by theBoard of Directors.

 

(iv) The Company has not had any disagreements with MFSL on any matterof accounting principles or practices, financial statement disclosure, orauditing scope or procedures, which disagreements, if not resolved to thesatisfaction of MFSL, would have caused them to make reference thereto in theirreport on the financial statements of the Company.

 

(v) The Company has requested MFSL furnish it with a letter addressedto the Securities and Exchange Commission stating whether it agrees with theabove statements.

 

On February 13, 2002, CytoGenix, Inc. (the "Company") engagedThomas Leger & Co., L.L.P. of Houston, Texas ("TL & Co.") asits principal independent accountants to audit the Company's financialstatements.  The Company's Board ofDirectors approved the engagement of TL & Co. February 12, 2002.

 

PART III

 

 

ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth certain information with respect to eachof the Directors, executive Officers, key employees and control persons of theCompany.

 
| **NAME** |   | **AGE** |   | **TITLE** | ** ** |
|----------|--------|---------|--------|-----------|------------|

 
| Malcolm H. Skolnick | 67 | Chief Executive Officer, President, Director

Term of Office:   1999 to 2002 |
|---------------------|----|-----------------------------------------------------------------------------------|
| Lawrence Wunderlich | 43 | Chief Financial Officer, Director

Term of Office:   1999 to 2002            |
| Michael Walters     | 66 | Director

Term of Office:   1998 to 2001                                     |
| Yin Chen            | 39 | VP of Research & Development                                                  |
| Charles S. Boyd     | 70 | Director

Term of Office: (Oct. 30, 2001—present)                            |
| Charles M. Bardwell | 61 | Director

Term of Office: (Dec. 10, 2001—present)                            |

 

 

16

----

 

None of the members of management are related. The Company has executedan employment agreement with each of the officers of the Company. Employmentcompensation can be made in the form of cash or restricted common stock at theprevailing ask price of the stock.  Theexecutive officers are given the option of accruing cash payments until suchtime as the Company can afford to make such payments, in the sole discretion ofthe Board of Directors.  The payment ofstock is based on the closing asked price of the Company’s common stock on the1st and 15th of each month for the preceding pay period.

 

Dr. Skolnick has been the Chief Executive Officer and President of theCompany since September 1, 1999.  Priorto that time and for the last 30 years Dr. Skolnick was a Professor in the Universityof Texas Health Sciences Center at Houston. Dr. Skolnick received a Ph.D. in physics from Cornell University and aJ.D. from the University of Houston. He is licensed to practice law in Texasand is a registered patent attorney. He has practiced intellectual propertylaw, been active in technology transfer and licensing activities and serves onthe Boards of Biodyne, Inc., Public Health Services, Inc., QBIT, Inc. andseveral non-profit foundations.

 

Mr. Wunderlich worked as a financial consultant at the investmentbanking firm of Josephthal and Company from October 1996 until August1998.  At that time, Mr. Wunderlichbecame the Company’s Chief Financial Officer. Prior to his employment withJosephthal, Mr. Wunderlich co-owned The Language Loop, a translation servicefrom 1991 to 1996 and held the position of President.  Mr. Wunderlich attended the University of Vienna and ManhattanCollege in Riverdale, New York.

 

Mr. Walters has been a Director since February 1995, is a LicensedPhysical Therapist and has been in private practice for over 36 years.

 

Dr. Chen earned this Ph.D. in Molecular Biology & Biochemistry atthe University of Maine in 1996. Subsequently, he was a post-doctoral fellow atBeth Israel Deaconess Medical Center, a teaching hospital of Harvard MedicalSchool. In 1999, he joined InGene, Inc. of St. Louis as senior researchscientist and then Cytogenix, as chief research scientist in February 2000. Heis one of co-inventors of our company’s proprietary ssDNA expression systems.He was appointed to this position by the Board of Directors on November 7, 2001to replace Dr. Jonathan Elliston. Dr. Yin Chen has also been promoted toExecutive Secretary of the Scientific Advisory Committee.

 

 

17

----

 

Charles S. Boyd is a retired business owner and manager. Mr. Boydgraduated from the University of Texas at Austin with a Bachelors of Artsdegree in Biology with a minor in Chemistry. In 1969 he acquired the patent fora positive displacement dry spirometry device and formed Cardio PulmonaryInstruments, Inc. His management of the company allowed him to double the salesvolume each year from 1971 to 1974 then sell the company to G.D. Searle in1975.

 

Charles M. Bardwell in as attorney licensed in the state of Texas andhas been engaged in private practice of law as a sole practitioner for the last25 years.

 

Based upon a review of filings with the Securities and ExchangeCommission and written representations that no other reports were required, theCompany believes that all of the Company’s directors and executive officerscomplied during 2001 with the reporting requirements of Section 16(a) of theSecurities Exchange Act of 1934, except (i) Charles M. Bardwell did not timelyfile a Form 3 upon his becoming a director, (ii) Charles M. Boyd has not yetfiled a Form 3 as was required upon his becoming a director and (iii) DellGibson, the Company’s former Chief Operating Officer, did not timely file Forms4 on at least three occasions.

 

 

ITEM 10: EXECUTIVE COMPENSATION

 

The Company has entered into an employment agreement with Dr.Skolnick.  In addition to salary, Dr.Skolnick has the option each quarter to purchase common stock at a price pershare equal to $0.001 in an amount equivalent to 25% of his gross salarycomputed at the closing price on the last day of each pay period.

 

The following table sets forth certain information concerningcompensation of the person who served as the Company’s Chief Executive Officerduring the last fiscal year of the Company. No other executive officers of theCompany were paid aggregate cash compensation exceeding $100,000 during thelast fiscal year.

 

SUMMARY COMPENSATIONTABLE
| **NAME AND PRINCIPAL POSITION** |   | **YEAR** |   | **SALARY ($)** |   | **BONUS ($)** |   | **LONG-TERM COMPENSATION AWARD(S) RESTRICTED STOCK AWARD(S)  ($)** |   |
|---------------------------------|--------|----------|--------|----------------|--------|---------------|--------|--------------------------------------------------------------------|--------|
| Malcolm Skolnick (CEO           |   | 2001     |   | 120,000        |   | —        |   | $                                                                  | 72,200 |   |
| beginning Sept. 9, 1999)(1)     |   | 2000     |   | 120,000        |   | —        |   | 30,000                                                             |   |
|                            |   | 1999     |   | 40,000         |   | 4,000         |   | 10,000                                                             |   |
|                                 |        |          |        |                |        |               |        |                                                                    |        |  |

 

----

(1)          Dr. Skolnick was issued shares of restricted CommonStock as compensation as follows:

 
| **DATE** |   | **$VALUE** |   | **CLOSE** |   | **NUMBER OF  SHARES** |   |   |   |
|----------|--------|------------|--------|-----------|--------|-----------------------|--------|--------|--------|
| 12/31/01 |   | $          | 1,250  |      | $      | 0.20                  |   | 6,410  |   |   |   |
| 12/14/01 |   | $          | 1,250  |      | $      | 0.21                  |   | 5,952  |   |   |   |
| 11/30/01 |   | $          | 1,250  |      | $      | 0.17                  |   | 7,576  |   |   |   |
| 11/14/01 |   | $          | 1,250  |      | $      | 0.19                  |   | 6,579  |   |   |   |
| 10/31/01 |   | $          | 1,250  |      | $      | 0.20                  |   | 6,250  |   |   |   |
| 10/12/01 |   | $          | 1,250  |      | $      | 0.23                  |   | 5,435  |   |   |   |
|          |        |            |        |           |        |                       |        |        |        |  |  |  |  |  |  |  |

 

 

18

----

 
| 09/28/01   |   | $      | 1,250  |   | $      | 0.22   |   | 5,682  |   |                                                                          |   |
|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------------------------------------------------------------------------|--------|
| 09/10/01   |   | $      | 1,250  |   | $      | 0.28   |   | 4,464  |   |                                                                          |   |
| 08/31/01   |   | $      | 1,250  |   | $      | 0.35   |   | 3,571  |   |                                                                          |   |
| 08/14/01   |   | $      | 1,250  |   | $      | 0.26   |   | 4,808  |   |                                                                          |   |
| 07/31/01   |   | $      | 1,250  |   | $      | 0.16   |   | 7,813  |   |                                                                          |   |
| 07/13/01   |   | $      | 1,250  |   | $      | 0.21   |   | 5,952  |   |                                                                          |   |
| 06/29/01   |   | $      | 1,250  |   | $      | 0.13   |   | 10,000 |   |                                                                          |   |
| 06/15/01   |   | $      | 1,250  |   | $      | 0.24   |   | 5,208  |   |                                                                          |   |
| 05/31/01   |   | $      | 1,250  |   | $      | 0.25   |   | 5,000  |   |                                                                          |   |
| 05/15/01   |   | $      | 1,250  |   | $      | 0.30   |   | 4,167  |   |                                                                          |   |
| 04/30/01   |   | $      | 1,250  |   | $      | 0.25   |   | 5,000  |   |                                                                          |   |
| 04/12/01   |   | $      | 1,250  |   | $      | 0.25   |   | 5,000  |   |                                                                          |   |
| 03/30/01   |   | $      | 1,250  |   | $      | 0.50   |   | 2,500  |   |                                                                          |   |
| 03/15/01   |   | $      | 1,250  |   | $      | 0.19   |   | 6,579  |   |                                                                          |   |
| 02/28/01   |   | $      | 1,250  |   | $      | 0.25   |   | 5,000  |   |                                                                          |   |
| 02/15/01   |   | $      | 1,250  |   | $      | 0.49   |   | 2,551  |   |                                                                          |   |
| 01/31/01   |   | $      | 1,250  |   | $      | 0.31   |   | 4,032  |   |                                                                          |   |
| 01/13/01   |   | $      | 1,250  |   | $      | 0.06   |   | 20,833 |   |                                                                          |   |
|       |   |   |   |   |   |   |   |   |   |
| 01/19/01   |   | $      | 12,500 |   | $      | 0.25   |   | 50,000 |   |                                                                          |   |
| 12/21/01   |   | $      | 22,500 |   | $      | 0.35   |   | 64,386 |   | (“Bonus valued at August  28, 2001 share price of 150% salary.")    |   |
| 01/13/01   |   | $      | 7,500  |   | $      | 0.086  |   | 86,667 |   | (Bonus based on average  closing price for 12/15/00, 12/29/00   and 01/15/01) |   |
|       |   |   |   |   |   |   |   |   |   |
| 12/29/00   |   | $      | 1,250  |   | $      | 0.13   |   | 10,000 |   |                                                                          |   |
| 12/15/00   |   | $      | 1,250  |   | $      | 0.10   |   | 12,500 |   |                                                                          |   |
| 11/30/00   |   | $      | 1,250  |   | $      | 0.25   |   | 5,000  |   |                                                                          |   |
| 11/15/00   |   | $      | 1,250  |   | $      | 0.31   |   | 4,006  |   |                                                                          |   |
| 10/31/00   |   | $      | 1,250  |   | $      | 0.38   |   | 3,333  |   |                                                                          |   |
| 10/13/00   |   | $      | 1,250  |   | $      | 0.60   |   | 2,083  |   |                                                                          |   |
| 09/29/00   |   | $      | 1,250  |   | $      | 0.75   |   | 1,667  |   |                                                                          |   |
| 09/15/00   |   | $      | 1,250  |   | $      | 0.63   |   | 2,000  |   |                                                                          |   |
| 08/31/00   |   | $      | 1,250  |   | $      | 0.75   |   | 1,667  |   |                                                                          |   |
| 08/15/00   |   | $      | 1,250  |   | $      | 0.69   |   | 1,820  |   |                                                                          |   |
| 07/31/00   |   | $      | 1,250  |   | $      | 0.50   |   | 2,500  |   |                                                                          |   |
| 07/14/00   |   | $      | 1,250  |   | $      | 0.69   |   | 1,820  |   |                                                                          |   |
| 06/30/00   |   | $      | 1,250  |   | $      | 0.75   |   | 1,667  |   |                                                                          |   |
| 06/15/00   |   | $      | 1,250  |   | $      | 1.01   |   | 1,238  |   |                                                                          |   |
| 06/01/00   |   | $      | 1,250  |   | $      | 0.75   |   | 1,667  |   |                                                                          |   |
| 05/15/00   |   | $      | 1,250  |   | $      | 1.25   |   | 1,000  |   |                                                                          |   |
| 05/01/00   |   | $      | 1,250  |   | $      | 1.56   |   | 800    |   |                                                                          |   |
| 04/14/00   |   | $      | 1,250  |   | $      | 1.38   |   | 909    |   |                                                                          |   |
| 03/31/00   |   | $      | 1,250  |   | $      | 2.13   |   | 588    |   |                                                                          |   |
| 03/15/00   |   | $      | 1,250  |   | $      | 2.13   |   | 588    |   |                                                                          |   |
| 03/01/00   |   | $      | 1,250  |   | $      | 2.25   |   | 556    |   |                                                                          |   |
| 02/15/00   |   | $      | 1,250  |   | $      | 1.68   |   | 744    |   |                                                                          |   |
| 02/01/00   |   | $      | 1,250  |   | $      | 1.81   |   | 691    |   |                                                                          |   |
| 01/15/00   |   | $      | 1,250  |   | $      | 1.01   |   | 1,238  |   |                                                                          |   |
|       |   |   |   |   |   |   |   |   |   |
| 12/31/1999 |   | $      | 1,250  |   | $      | 0.81   |   | 1,543  |   |                                                                          |   |
| 12/15/1999 |   | $      | 1,250  |   | $      | 0.66   |   | 1,894  |   |                                                                          |   |
| 12/01/1999 |   | $      | 1,250  |   | $      | 0.65   |   | 1,923  |   |                                                                          |   |
| 11/15/1999 |   | $      | 1,250  |   | $      | 0.46   |   | 2,717  |   |                                                                          |   |
| 11/01/1999 |   | $      | 1,250  |   | $      | 0.53   |   | 2,358  |   |                                                                          |   |
| 10/15/1999 |   | $      | 1,250  |   | $      | 0.54   |   | 2,315  |   |                                                                          |   |
| 10/01/1999 |   | $      | 1,250  |   | $      | 0.48   |   | 2,604  |   |                                                                          |   |
| 09/15/1999 |   | $      | 1,250  |   | $      | 0.65   |   | 1,923  |   |                                                                          |   |
| 09/01/1999 |   | $      | 1,250  |   | $      | 0.80   |   | 1,563  |   |                                                                          |   |

 

 

19

----

 

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

 

Principal Shareholders

 

The following table sets forth the name and address, as of December 31,2001, and the approximate number of shares of Common Stock of the Company ownedof record or beneficially by each person who owned of record, or was known bythe Company to own beneficially, more than 5% of the Company’s Common Stock,and the name and ownership rights of each executive officer and director, andall officers and directors as a group.

 
| **NAME AND ADDRESS OF BENEFICIAL OWNER**                                                          |   | **NUMBER OF   SHARES** |   | **PERCENT OF SHARES** |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------|--------|----------------------------|--------|
| Nelson Bunker  Hunt  Hunt Exploration Mining Co.   1601 Elm St., Suite 1500   Dallas, Texas 75201 |   | 2,391,976              |   | 5.3                        | %      |
|                                                                                              |   |                   |   |                       |   |
| Malcolm H.  Skolnick, Ph.D., J.D.   9881 So. Wilcrest   Houston, Texas 77099                      |   | 1,550,880              |   | 3.5                        | %      |
|                                                                                              |   |                   |   |                       |   |
| Michael Walters,  L.P.T.   1220 Blalock, #220   Houston, Texas 77055                              |   | 672,461                |   | 1.5                        | %      |
|                                                                                              |   |                   |   |                       |   |
| Lawrence  Wunderlich   9881 So. Wilcrest   Houston, Texas 77099                                   |   | 509,602                |   | 1.1                        | %      |
|                                                                                              |   |                   |   |                       |   |
| Yin Chen   9881 So. Wilcrest   Houston, Texas 77099                                          |   | 165,524                |   | *                          |   |
|                                                                                              |   |                   |   |                       |   |
| Charles S.  Boyd   10805 Smithdale   Houston, TX 77041                                  |   | 90,682                 |   | *                          |   |
|                                                                                              |   |                   |   |                       |   |
| Charles M.  Bardwell   9881 S. Wilcrest  Houston, TX 77099                                        |   | 997,220                |   | 2.2                        | %      |
|                                                                                              |   |                   |   |                       |   |
| All Executive  Officers and Directors as a group (six persons)                                    |   | 3,986,369              |   | 8.9                        | %      |

----

* Less than 1%

 

 

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On January 18, 2000, the Company entered into an agreement with QuantumBit Induction, Inc.,(“QBIT”), a company in which each of Lawrence Wunderlich,Malcolm Skolnick and Dell T. Gibson own 1,000,000 

 

 

20

----

 

of the outstanding shares of capital stock.  Pursuant to that agreement, QBIT was issued 3,000,000 shares ofCommon Stock, valued at $9,000,000. The above agreement was rescinded and QBITreturned the 3 million shares to the Company in August 2001. A new consultingagreement was entered into with Mike Skillern.

 

 Management is unaware of anyother interests of its officers and directors that may create a potentialconflict of interest with the Company.

 

ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K

                (a)           Exhibits.

 
| **Exhibit** |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|-------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Number**  |   |   |   | **Description**                                                                                                                                                                                                                                                                                                   |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 3.1*        |   | — |   | Articles of Incorporation of Cryogenic Solutions,  Inc. (incorporated by reference to exhibit 3.1 to the registrant’s  registration statement on Form 10-SB, as amended (File No. 000-26807), filed  with the Securities & Exchange Commission initially on July 23, 1999 (the  “Form 10-SB”)) |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 3.2*        |   | — |   | Certificate of Amendment dated November 1, 1995 of  Articles of Incorporation of Cryogenic Solutions, Inc. (incorporated by  reference to exhibit 3.2 of the Form 10-SB).                                                                                                                                         |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 3.3*        |   | — |   | Certificate  of Amendment dated January 13, 2000 of Articles of Incorporation of CytoGenix,  Inc. (incorporated by reference to exhibit 3.3 of the Form 10-SB)                                                                                                                                                    |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 3.4*        |   | — |   | Bylaws of Cryogenic Solutions, Inc. (incorporated by  reference to exhibit 3.4 of the Form 10-SB)                                                                                                                                                                                                                 |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.1*       |   | — |   | Employment Agreement dated September 1, 1999 between  Cryogenic Solutions, Inc. and Malcolm H. Skolnick (incorporated by reference  to exhibit 10.2 of the Form 10-SB).                                                                                                                                           |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.2*       |   | — |   | License Agreement dated February 3, 2000, between

CytoGenix, Inc. and PharmaGenix, LLC. (incorporated  by reference to exhibit 10.3 of the Form 10-SB)                                                                                                                                                           |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.3*       |   | — |   | Technology Transfer Agreement dated June 26, 1998  between Cryogenic Solutions, Inc. and InGene, Inc. (incorporated by reference  to exhibit 10.4 of the Form 10-SB)                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.4*       |   | — |   | Employment Agreement dated February 1, 2000 between  CytoGenix, Inc. and Lawrence Wunderlich (incorporated by reference to exhibit  10.5 of the Form 10-SB).                                                                                                                                                      |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.5*       |   | — |   | Sponsored Research Agreement between CytoGenix, Inc.  and Baylor College of Medicine as of March 1, 2000 (incorporated by reference  to exhibit 10.7 of the Form 10-SB).                                                                                                                                          |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.6**      |   | — |   | Loan Agreement dated April 6, 2001, between  CytoGenix, Inc. and HEMPCO.                                                                                                                                                                                                                                          |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                              |   |
| 10.7**      |   | — |   | Consulting Agreement dated February 15, 2001 between  Cryogenic Solutions, Inc. and Mike Skillern.                                                                                                                                                                                                                |   |

 

 

21

----

 
|   |   |   |   |                                                                                                                                                                                                                   |   |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |   |   |                                                                                                                                                                                                                   |   |
| 10.8** |   | — |   | Consulting Agreement dated October 27, 2001 between  CytoGenix, Inc. and Origenesis, LLC.                                                                                                                              |   |
|   |   |   |   |                                                                                                                                                                                                                   |   |
|   |   |   |   |                                                                                                                                                                                                                   |   |
| 10.9** |   | — |   | Consulting Agreement between CytoGenix, Inc. and  EuroTrade Financial, Inc. as of March 19, 2002                                                                                                                       |   |
|   |   |   |   |                                                                                                                                                                                                                   |   |
|   |   |   |   |                                                                                                                                                                                                                   |   |
| 16.1*  |   | — |   | Letter  re: change in certifying accountant (incorporated by reference to exhibit 16  to the registrant’s Current Report on Form 8-K/A filed with the Securities  & Exchange Commission on February 21,2002). |   |

______________________

                *Incorporated byreference as indicated.

 

                **Previously Filed

 

                (b)           Reports on Form 8-K.

 

                None.

 

 

22

----

 

SIGNATURES

 

In accordance withSection 13 or 15(d) Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|                 |   |   |   |   |   |   | CYTOGENIX, INC.                       |
|----------------------|--------|--------|--------|--------|--------|--------|---------------------------------------|
|                 |   |   |   |   |   |   |                                  |
|                 |   |   |   |   |   | By:    | /s/ Malcolm Skolnick                  |
|                 |   |   |   |   |   |   | Malcolm Skolnick, Ph.D.               |
|                 |   |   |   |   |   |   | President and Chief Executive Officer |
| Date: April 18, 2002 |   |   |   |   |   |   |                                  |

 

 

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