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The increase was primarily attributable to increased royalties ($166,000) which are directly dependent on sales of covered products by licensees, over which the Company exercises no control. The Company also saw a modest increase in product sales ($8,000) as it intensified its sales efforts in the first quarter of 2008. The Company plans to devote further resources to its efforts in the sales and marketing areas in the coming quarters.
Gross Profit
Gross profit rose $192,000 (89%) to $409,000 comparing the three months ended March 31, 2008, to the same period last year. For the same periods, gross margins rose to 65% from 48%.
The increase in gross profit was primarily due to higher revenue discussed above and improved margins. The improved margins were driven by reduced contingent legal fees pursuant to the Company’s agreement with its patent counsel reached on August 2, 2007.
Operating Expenses
Operating expenses rose $256,000 (23%) to $1,376,000 comparing the three months ended March 31, 2008, to the same period last year. A discussion of the various components of Operating expenses follows below.
Salaries and Wages
Salaries and wages rose $174,000 (48%) to $535,000 comparing the three months ended March 31, 2008, to the same period last year.
The increase was primarily due to increased equity-based compensation ($114,000) resulting from reduced 2007 expense from cancelled options for terminated employees ($67,000) and the 2008 grant of 30,000 stock options to the Company’s CEO ($43,000). Increased bonus expense ($29,000) and salaries ($27,000) also contributed to the rise.
Consulting Expenses
Consulting expenses fell $27,000 (43%) to $37,000 comparing the three months ended March 31, 2008, to the same period last year. The decrease was primarily due to reduced fees associated with the Company’s efforts to secure FDA clearance for its AutoloGelTM System; said clearance being obtained in September 2007.
Professional Fees
Professional fees rose $22,000 (6%) to $357,000 comparing the three months ended March 31, 2008, to the same period last year. Increased legal fees ($78,000) associated with the Company’s efforts to secure CMS coverage for AutoloGelTM and ongoing patent maintenance activities, mostly offset by reduced audit fees ($57,000), resulted in this nominal change. Professional fees consist primarily of legal and accounting services.
General and Administrative Expenses
General and administrative expenses rose $88,000 (24%) to $447,000 comparing the three months ended March 31, 2008, to the same period last year. The increase was primarily due to higher personnel placement fees ($28,000), investor services fees ($28,000), and marketing services ($17,000).
Other Income/Expenses
Other income fell $15,000 (18%) to $68,000 comparing the three months ended March 31, 2008, to the same period last year. The decrease was primarily due to lower interest income earned on cash invested in money market accounts and notes receivable balances.
Liquidity and Capital Resources
The Company’s operating revenues do not cover the costs of its operations. The cash position of the Company at March 31, 2008 was approximately $4,319,000. The Company believes that it will have adequate cash on hand to fund operations for the next twelve months, based on the current level of licensing revenues and
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operating expenditures. However, additional cash may be required if operating revenues do not materialize or the cost of operations increases. The Company has certain warrants that are callable, subject to certain requirements including a minimum per share price ranging from $4 to $6, at an aggregate exercise price of approximately $1.8 million.
The Company has no material commitments for capital expenditures except for a commitment to purchase a minimum number of centrifuges in the first nine months of 2008 totaling approximately $50,000. However, the Company does plan to conduct a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost approximately $500,000 over the next three years.
Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. All working capital required to implement the Company’s business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company. There can be no assurance that the Company will be able to raise additional capital if and when needed, and, even if needed capital is raised, there can be no assurance that the Company will achieve its strategic goals. To continue its operations and complete the implementation of its current business plan, the Company will likely require additional long-term financing. There are no assurances that such financing will be available, or if available, it will be on terms acceptable to the Company. Any financing may result in significant dilution.
Prospects for the Future
Cytomedix’s near-term success is primarily dependent on the success of the AutoloGelTM System, and the Company believes that AutoloGelTM has a reasonable chance for success in the marketplace. First and foremost, the Company believes that, based on the results of the Company’s clinical trial and other historical data as well as the results of a pharmaco-economic study, the AutoloGelTM System provides substantial clinical benefit for diabetic foot ulcers and is more cost effective than most other wound treatments. Additionally, based on other data and experience, the Company believes that AutoloGelTM offers similar clinical and cost advantages when used to treat other chronic and open cutaneous wounds. The Company owns the patents on the process for utilizing platelet gel for treating damaged tissue and wound healing, which is the basis of its license agreements, through 2009 and for the specific formulation of AutoloGelTM, which it believes provides several competitive advantages, and which patents expire in 2019.
The Company’s recent obtainment of FDA clearance for its AutoloGelTM System has increased the prospects for success. A key restriction on the Company’s ability to market AutoloGelTM for its intended use has been removed and the Company has launched its product in the first quarter of 2008.
However, the recent CMS decision to continue its non-coverage of autologous blood-derived products when used on chronic wounds is a setback to the Company’s overall strategy. While this decision will not have an impact on the Company’s current sales and marketing strategy which targets the non-reimbursement sensitive market, it does limit, for an indefinite amount of time, the Company’s ability to access the broader market for its products. The Company will be targeting segments of the direct reimbursed market by seeking coverage from commercial insurers as discussed previously in this report.
The results of the Company’s on-going sales efforts through 2008 will reflect on the potential for AutoloGelTM’s success in the chronic wound marketplace.
The Company also believes that some of its other patents concern technologies that could be further developed and translated into viable commercial opportunities. Further research and development regarding these technologies is required in order to better determine viability, and the Company is evaluating the best route to that end, whether through use of its own resources, partnering with others, or other alternatives.
Recent Accounting Pronouncements
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”) for financial assets & financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The Company does not believe that the partial adoption of SFAS 157 has had or will have a material impact on the Company’s financial statements. In February 2008, the FASB issued a FASB Staff Position (“FSP”), FSP SFAS 157-2 “Effective Date of FASB Statement No. 157”, to defer the effective date of SFAS 157, for nonfinancial assets and
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nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. The Company does not expect the adoption of FSP SFAS 157-2 to have a significant impact on the financial statements.
On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company does not believe that the adoption of SFAS 159 has had or will have a material impact on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 160, Interests in Consolidated Financial Statements — an amendment of ARB No. 51(“SFAS 160”), which impacts the accounting for minority interest in the consolidated financial statements of filers. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial position. However, the adoption of SFAS 160 is not expected to have a material impact on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”), which impacts the accounting for business combinations. The statement requires changes in the measurement of assets and liabilities required in favor of a fair value method consistent with the guidance provided in SFAS 157 (see above). Additionally, the statement requires a change in accounting for certain acquisition related expenses and business adjustments which no longer are considered part of the purchase price. Adoption of this standard is required for fiscal years beginning after December 15, 2008. Early adoption of this standard is not permitted. The statement requires prospective application for all acquisitions after the date of adoption. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial position. However, the adoption of SFAS 141R is not expected to have a material impact on the Company’s financial statements.
In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment to FASB Statement No. 133 (“SFAS 161”). SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company does not expect the adoption of this statement to have a material effect on its financial statements.
Forward-looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When the words “believes,” “plans,” “anticipates,” “will likely result,” “will continue,” “projects,” “expects,” and similar expressions are used in this Form 10-Q, they are intended to identify “forward-looking statements,” and such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. The Company’s forward-looking statements generally relate to regulatory efforts, reimbursement efforts, licensing
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activities, intellectual property rights, product development, sales initiatives, and market acceptance of its products. Furthermore, the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of management and the Board.
These forward-looking statements speak only as of the date this report is filed. The Company undertakes no obligation to update the forward-looking statements contained in this report to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may occur as part of its ongoing periodic reports filed with the SEC.
Given these uncertainties, the reader is cautioned not to place undue reliance on such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not enter into financial instruments for speculation or trading purposes. In accordance with the Company’s investment policy, cash is to be invested in bank and institutional money market funds, or in T-Bills or short-term T-Notes. At March 31, 2008, the Company’s cash balance of approximately $4.3 million was maintained primarily in an institutional money market account, sensitive to changes in the general level of interest rates. Based on the Company’s cash balances at March 31, 2008, a 100 basis point increase or decrease in interest rates would have an approximately $43,000 impact on the Company’s annual interest income and net loss. Actual changes in rates may differ from the hypothetical assumption used in computing this exposure.
The Company does not presently have any derivative financial instruments.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure.
As of the end of the period covered in this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out with the participation of management, including the chief executive officer (“CEO”) and chief financial officer (“CFO”). This evaluation included the items described in management’s report on internal control over financial reporting included in Item 9A of the 2007 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 25, 2008. Based on and as of the date of such evaluation and as a result of the material weaknesses described below, the Company’s CEO and CFO concluded that the disclosure controls and procedures were not effective.
In light of the material weaknesses described below, additional analysis and other post-closing procedures were performed to ensure the Company’s financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.
As determined in connection with the 2007 Annual Report on Form 10-K, the Company did not maintain effective controls over the completeness and accuracy over certain financial statement note disclosures related to SFAS 109, Accounting for Income Taxes. Specifically, controls over the processes and procedures related to the determination and review of the financial statement note disclosures in this area were not adequate to ensure that the financial statement notes were prepared in accordance with generally accepted accounting principles. This control deficiency, which continues to exist as of March 31, 2008, could result in a misstatement of the note disclosures that would result in a material misstatement to the Company’s interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.
Also as determined in connection with the 2007 Annual Report on Form 10-K, the Company did not maintain effective controls over the completeness and accuracy over the calculation of stock-based compensation
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expense and the related financial statement note disclosures. Specifically, controls over the processes and procedures related to the determination of the compensation amounts and the determination and review of the financial statement note disclosures were not adequate to ensure that the compensation amount and the related financial statement notes were prepared in accordance with generally accepted accounting principles. This control deficiency, which continues to exist as of March 31, 2008, resulted in the restatement of the Company’s quarterly and annual reports for 2006 on Forms 10-Q/A and 10-K/A and the Company’s first two quarterly reports for 2007 on Forms 10-Q/A to correct the Company’s stock-based compensation expense. Additionally, this material weakness could result in a misstatement of the stock-based compensation expense and the related note disclosures that would result in a material misstatement to the Company’s interim or annual financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.
Changes in Internal Control over Financial Reporting
The Company commenced remedial actions in 2007 to correct and strengthen the internal controls in those areas where material weaknesses were identified. These remedial actions are described in detail in the Company’s Annual Report for the period ended December 31, 2007 and included (i) formation of a Disclosure Committee to improve the execution of the Company’s controls over financial disclosure, (ii) identification and implementation of a software solution to reduce the risk of error in accounting for stock-based compensation and (iii) monitoring the effectiveness of the Disclosure Committee’s performance and the software solution for stock-based compensation to ensure that they have yielded the desired effect of mitigating the identified material weaknesses in the future. The remedial efforts are on-going and are expected to conclude in 2008.
During the three months ended March 31, 2008, there were no changes identified that would have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting. During this period, the Company continued to monitor the effects of the remedial actions taken in 2007.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At present, the Company is not engaged in or the subject of any material pending legal proceedings.
Item 1A. Risk Factors
There were no material changes from the risk factors as previously disclosed on the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007, except as noted below:
The Contemplated Additional Study May Not Yield Sufficient or Favorable Data for CMS to Reconsider Its Prior Non-Coverage Determination
In March 2008, CMS reaffirmed its 2003 non-coverage decision for PRP gel, which would include AutoloGelTM. The Company met with CMS in April 2008 to discuss the optimal path for securing future coverage for AutoloGelTM. Following this discussion, the Company intends to conduct a study to gather additional data to meet CMS requirements for a favorable decision.
There is no assurance that the additional study contemplated by the Company will yield sufficient data to convince CMS to reconsider its prior non-coverage decision or arrive at a positive coverage decision. Further, as the scope of the study is not yet determined, the Company cannot yet accurately estimate the associated costs, but it is probable that additional financing will be required to conduct this study. There is no assurance that the Company will be able to secure such financing on terms acceptable to the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company issued 708 shares of Common stock during the three months ended March 31, 2008. The following table lists the sources of and the proceeds from those issuances:
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Source | | # of Shares | | Total Exercise Price |
Conversion of series A convertible preferred shares | | | 708 | | | | — | |
Totals | | | 708 | | | $ | — | |
All shares issued were exempt from registration pursuant to Section 3(a)(7) of the Securities Act of 1933. No cash proceeds were received as part of these conversions.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders during the first three months of 2008.
Item 5. Other Information
N/A
Item 6. Exhibits
The exhibits listed in the accompanying Exhibit Index are furnished as part of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CYTOMEDIX, INC.
| By: | /s/ Kshitij Mohan
Kshitij Mohan, CEO and Chairman of the Board of Directors |
Date: April 30, 2008
| By: | /s/ Andrew S. Maslan
Andrew S. Maslan, Chief Financial Officer and Chief Accounting Officer |
Date: April 30, 2008
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EXHIBIT INDEX
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Number | | Exhibit Table |
2.1 | | First Amended Plan of Reorganization with All Technical Amendments (Previously filed on June 28, 2002, as exhibit to Current Report on Form 8-K, File No. 000-28443). |
2.2 | | Amended and Restated Official Exhibits to the First Amended Plan of Reorganization of Cytomedix, Inc. with All Technical Amendments (Previously filed on May 10, 2004, as exhibit to Form 10-QSB for the quarter ended March 31, 2004, File No. 000-28443). |
3(i) | | Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed on November 7, 2002, as exhibit to Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443). |
3(i)(1) | | Amendment to Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed on November 15, 2004, as exhibit to Form 10-QSB for quarter ended September 30, 2004, w File No. 000-28443). |
3(ii) | | Restated Bylaws of Cytomedix, Inc. (Previously filed on November 7, 2002, as exhibit to Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443). |
10 | | Employment Agreement by and between Cytomedix, Inc. and Martin Rosendale (Previously filed on March 18, 2008 as exhibit to Current Report on Form 8-K, File No. 001-32518). |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350. |
32.2 | | Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350. |
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