UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 2002
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to _______
Commission file number 0-28443
Cytomedix, Inc.
---------------
(Exact name of small business issuer as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation or organization)
23-3011702
----------
(I.R.S. Employer Identification Number)
1523 South Bowman Rd., Suite A, Little Rock, AR 72211
-----------------------------------------------------
(Address of principal executive offices)
(501) 219-2111
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. Cytomedix, Inc. had 9,671,211
outstanding shares of common stock, par value $.0001, as of November 19, 2002.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
CYTOMEDIX, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001 3
Condensed Statements of Operations for the three months
and six months ended June 30, 2002 and 2001 (unaudited)
and for the period December 11, 1998 (date of inception)
through June 30, 2002 (unaudited) 4
Condensed Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited) and for the period
December 11, 1998 (date of inception) through June 30, 2002
(unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis 20
Nature of Business 20
Overview of Events through June 30, 2002 22
Results of Operations for Period Ending June 30, 2002 23
Liquidity and Capital Resources 25
The Company Post-Bankruptcy/Subsequent Events 26
Cautionary Statement Regarding Forward-Looking Information
and Risk Factors 28
Forward-Looking Information 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Cytomedix, Inc.
(Debtor-In-Possession)
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
Successor Predecessor
Company Company
------------- -----------------
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
Current assets
Cash $ 103,855 $ 184,395
Receivables and prepaid expenses and other current assets 375,631 286,182
Note receivable - related party -- 8,500
Inventory 8,796 --
---------- ------------
Total current assets 488,282 479,077
Property and equipment, net 27,095 --
Intangibles 2,400,000 641,805
Prepaid expenses and deposits 63,000 63,000
Reorganization value in excess of amounts allowable to identifiable assets 2,021,623 --
---------- ------------
$5,000,000 $ 1,183,882
========== ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Debtor-in-possession financing $ 800,000 $ 212,500
Accounts payable and accrued expenses 1,617,398 480,931
Accrued reorganization bonus - related party 170,526 --
Accrued royalty - related party 47,292 --
Deferred revenue 85,198 92,697
---------- ------------
Total Current Liabilities 2,720,414 786,128
---------- ------------
Long-term liabilities
Liabilities not subject to compromise -- 173,920
Liabilities subject to compromise -- 7,571,761
Deferred revenue 559,956 600,679
---------- ------------
Total long-term liabilities 559,956 8,346,360
---------- ------------
Total liabilities 3,280,370 9,132,488
---------- ------------
Commitment and contingencies
Predecessor mandatorily redeemable Series A 5% cumulative preferred stock
(subject to compromise); $.0001 par value; $1 liquidation value;
authorized, issued and outstanding - 1,625,000 shares -- 1,625,000
---------- ------------
Stockholders' (deficit) equity
Successor Series A Convertible preferred stock; June 30, 2002 issuable -
1,365,923 shares 137 --
Successor Series B Convertible preferred stock; June 30, 2002 issuable -
1,403,045 shares 140 --
Predecessor Series B preferred stock; $.0001 par value; $.0001 liquidation
value; authorized 7,500,000 shares; at 2001 issued and outstanding -
5,115,000 shares -- 512
Successor common stock; at June 30, 2002 issuable - 5,460,307 shares 546 --
Predecessor common stock; $.0001 par value; authorized - 40,000,000
shares; at 2001 issued and outstanding - 12,800,598 shares -- 1,281
Additional paid-in capital 1,718,807 51,258,906
Deficit accumulated in the development stage -- (60,834,305)
---------- ------------
Total stockholders' (deficit) equity 1,719,630 (9,573,606)
---------- ------------
$5,000,000 $ 1,183,882
========== ============
See notes to condensed unaudited financial statements.
3
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Condensed Statements of Operations
December 11,
Predecessor Company 1998
------------------------------------------------------------ (Date of
Three Months Ended Six Months Ended Inception)
June 30, June 30, through
--------------------------- ---------------------------- June 30,
2002 2001 2002 2001 2002
----------- ----------- ----------- ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 90,250 $ 24,112 $ 117,500 $ 34,649 $ 487,606
Cost of sales 16,073 -- 16,073 -- 103,895
----------- ----------- ----------- ------------ ------------
Gross profit 74,177 24,112 101,427 34,649 383,711
----------- ----------- ----------- ------------ ------------
Operating expenses
Salaries and wages 150,319 527,555 285,906 979,922 24,511,324
Consulting expense 60,178 602,019 74,178 1,088,712 11,665,337
Professional fees 165,745 422,484 276,184 1,055,107 3,367,686
Merger costs -- -- -- -- 2,678,700
Royalty expense - related party 18,750 -- 37,500 -- 37,500
General and administrative expenses 216,738 594,829 405,281 1,029,684 4,197,968
----------- ----------- ----------- ------------ ------------
Total operating expenses 611,730 2,146,887 1,079,049 4,153,425 46,458,515
----------- ----------- ----------- ------------ ------------
Loss from operations (537,553) (2,122,775) (977,622) (4,118,776) (46,074,804)
----------- ----------- ----------- ------------ ------------
Other (income) expense
Interest expense 190,330 943,569 355,969 5,237,185 6,013,118
Interest and other income (49,301) (9,680) (81,746) (25,894) (462,456)
----------- ----------- ----------- ------------ ------------
Total other (income) expense, net 141,029 933,889 274,223 5,211,291 5,550,662
----------- ----------- ----------- ------------ ------------
Net loss from continuing operations (678,582) (3,056,664) (1,251,845) (9,330,067) (51,625,466)
Discontinued operations:
Loss from discontinued Procuren
operations (less applicable income
taxes of $0) -- 3,743,555 -- 4,127,893 8,248,244
Loss on disposal of Procuren
operations (less income taxes of $0) -- 1,185,794 -- 1,185,794 1,145,544
Reorganization item:
Debt discount and issue cost -- -- -- -- 815,372
Professional fees 278,403 -- 489,690 -- 599,434
Consulting - related party 45,474 -- 119,526 -- 119,526
----------- ----------- ----------- ------------ ------------
Net loss Before extraordinary items (1,002,459) (7,986,013) (1,861,061) (14,643,754) (62,553,586)
----------- ----------- ----------- ------------ ------------
Extraordinary gain on discharge of
prepetition liabilities 9,306,192 -- 9,306,192 -- 9,306,192
----------- ----------- ----------- ------------ ------------
Net income (loss) 8,303,733 (7,986,013) 7,445,131 (14,643,754) (53,247,394)
Preferred dividend on Series A
preferred stock -- 20,312 -- 40,624 141,780
----------- ----------- ----------- ------------ ------------
Net loss to common stockholders $ 8,303,733 $(8,006,325) $ 7,445,131 $(14,684,378) $(53,389,174)
=========== =========== =========== ============ ============
Basic and diluted loss per common
share $ (0.65) $ (0.75) $ (0.58) $ (1.34)
=========== =========== =========== ============
Weighted average shares outstanding 12,800,598 10,671,875 12,746,482 10,923,041
=========== =========== =========== ============
See notes to condensed unaudited financial statements.
4
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Condensed Statements of Cash Flows
December 11, 1998
Six Months Ended (Inception)
June 30, through
-------------------------- June 30,
2002 2001 2002
---------- ----------- -----------------
(Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities
Net cash used in operating activities $(639,316) $(2,426,360) $ (8,472,664)
--------- ----------- ------------
Cash flows from investing activities
Purchase of equipment (28,724) (38,883) (650,450)
Purchase of business -- (2,441,650) (2,441,650)
Cash acquired in merger -- -- 398,934
Acquisition costs, pre-closing -- -- (721,939)
Repayment from employees and related parties -- 189,488 86,890
--------- ----------- ------------
Net cash used in investing activities (28,724) (2,291,045) (3,328,215)
--------- ----------- ------------
Cash flows from financing activities
Proceeds from line of credit -- -- 100,000
Proceeds from short-term borrowings 587,500 2,970,700 3,770,701
Proceeds from notes payable - stockholder -- -- 193,324
Repayments of line of credit and short-term debt -- -- (119,000)
Loans to related party -- -- (95,391)
Repayment on capital lease obligations -- (8,986) (34,390)
Repayment of notes payable - stockholders -- -- (252,469)
Proceeds from sale of common stock, net of offering costs paid -- 26,580 8,475,086
--------- ----------- ------------
Net cash provided by financing activities 587,500 2,988,294 12,037,861
--------- ----------- ------------
Net increase (decrease) in cash (80,540) (1,729,111) 236,982
Cash, beginning of period 184,395 2,116,232 --
--------- ----------- ------------
Cash, end of period $ 103,855 $ 387,121 $ 236,982
========= =========== ============
Cash paid for interest $ -- $ 57,158 $ 157,494
========= =========== ============
Cash paid for income taxes $ -- $ -- $ --
========= =========== ============
See notes to condensed unaudited financial statements.
5
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Cytomedix, Inc. (the "Company," "our" and "we") has prepared the financial
statements included herein without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Cytomedix Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001.
In the opinion of Cytomedix's management, the accompanying unaudited condensed
financial statements contain all adjustments, consisting solely of those
adjustments (except for those recorded in connection with the adoption of
fresh-start accounting and the extraordinary gain on discharge of debt - see
Note 6) which are of a normal recurring nature necessary to present fairly its
financial position as of June 30, 2002 and the results of its operations and its
cash flows for the interim periods presented and the period from December 11,
1998 (inception) through June 30, 2002. These financial statements do not
purport to present the current financial condition of the Company. Therefore,
this report must be read in conjunction with all reports filed with the SEC
after June 30, 2002 and other subsequent information included in this report.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for any period after June
30, 2002.
Cytomedix is a development stage enterprise, and accordingly, certain additional
financial information is required to be included in the condensed financial
statements from the inception of Cytomedix to the date of this balance sheet.
Basic and diluted net loss per share was calculated based upon the net loss
available to common shareholders divided by the weighted average number of
shares of common stock outstanding during the period.
Certain amounts from December 31, 2001 have been reclassified to conform to the
June 30, 2002 presentation.
Upon entering Chapter 11 bankruptcy protection, the Company began preparing its
financial statements in conformity with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7") on a going concern
basis, which assumes continuity of operations and realization of assets and
settlement of liabilities and commitments in the normal course of business.
"Liabilities Subject to Compromise" refers to liabilities incurred prior to the
commencement of the Chapter 11 filings. These liabilities, consisting primarily
of short-term and long-term debt, accounts payable and accrued liabilities,
represent the Company's estimate of known or potential prepetition claims to be
resolved in connection with the Chapter 11 filing. Such claims remain subject to
actions of the Court (defined below) under the First Amended Plan of
Reorganization with All Technical Amendments (the "Plan") and other events.
Payment terms for these amounts are established in connection with the Plan.
Pursuant to the guidance provided by SOP 90-7 the Company adopted fresh-start
accounting (see Note 6). As a result of fresh-start reporting, the Company
reflected the distributions under the Company's Plan of Reorganization in its
balance sheet as of June 30, 2002 (the effective date of the consummation of the
plan for accounting purposes). Accordingly, all financial statements prior to
July 1, 2002 (except for the June 30, 2002 balance sheet) are referred to as the
"Predecessor Company" as they reflect the periods prior to the implementation of
the fresh-start reporting and are not comparable to the financial statements for
periods after the implementation of fresh-start reporting. The balance sheet as
of June 30, 2002 and the financial statements for periods subsequent to June 30,
2002, are referred to as the "Successor Company." Under fresh-start reporting,
the Company's assets and liabilities were adjusted to their fair values, and a
reorganization value for the entity was determined by the Company based upon the
estimated fair value of the enterprise before considering values allocated to
debt to be settled in the reorganization.
6
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
The Company filed a voluntary petition for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court of the Northern District of
Illinois, Eastern Division (the "Court") on August 7, 2001 (the "Petition
Date"). After the Petition Date, the Company was authorized to continue to
conduct its business as debtor and debtor-in-possession. As a
debtor-in-possession, the Company was authorized to operate its business but
could not engage in transactions outside its ordinary course of business without
the approval of the Court. While the Chapter 11 filing constituted a default
under the Company's various financing arrangements, Section 362 of the
Bankruptcy Code imposes an automatic stay that generally precludes creditors and
other interested parties under such arrangements from taking any remedial action
in response to any such resulting default without prior Court approval. In
addition, under the Bankruptcy Code the Company could assume or reject executory
contracts, including lease obligations. Parties affected by these rejections
could file claims with the Court in accordance with the reorganization process.
The Company actively engaged in this process and reviewed all claims and
executory contracts, reaching final decisions with respect to assuming or
rejecting the contracts. These decisions were included in the Company's Plan.
The Company began developing a new business model that would enable the Company
to provide a simpler, lower cost method of providing platelet rich plasma gel.
This new sales and distribution plan includes the sale of single use, licensed
disposable packs to qualifying health care providers. The Company has directly
and indirectly entered into license agreements that have enabled the Company to
introduce its treatment capabilities in wound care treatment centers and
long-term nursing home facilities.
The Company emerged from Bankruptcy on July 11, 2002, pursuant to the terms of
the Plan as approved by the Court. In connection with the Plan, the Company
completed the initial phase of its financing plan by raising $2.8 million
through a private offering of common stock with warrants. Since that time, an
additional $479,252 has been raised in the private offering.
Summary of Classification and Treatment of Allowed Claims and Equity Interests
Under the Plan
Under the Plan, allowed claims against and equity interests in the Company
are divided into classes according to their relative seniority and other
criteria. A "Claim" is any claim against the Debtor, whether or not asserted, as
defined in section 101(5) of the Bankruptcy Code. An "Equity Interest" in the
Company is defined as any ownership interest evidenced by any share certificate
or other instrument, whether or not transferable or denominated "stock"
(including, without limitation, interests denominated as common stock or
preferred stock), or similar security, and any warrant or right (other than a
right to convert) to purchase or subscribe to any such ownership interest. The
term "Allowed" as used in this report means that the Claim or Equity Interest
has been approved by final order of the Court or authorized by the Plan.
The classes of Claims and Equity Interests, the treatment of those
classes under the Plan, and the securities and other property to be distributed
under the Plan are described below. The Plan separates the classified Claims and
Equity Interests into the following classes:
"Class 1A Claims" Secured Claims under the 12% Convertible
Secured Promissory Notes ("12% Notes")
"Class 1B Claims" Secured Claims under the 10% Convertible
Secured Promissory Notes ("10% Notes")
"Class 1C Claims" Secured Claims of Charles Worden, Sr.
"Class 1D Claims" Secured Claims Under the Curative Royalty
Agreement
"Class 2 Claims" Priority Employee Claims
"Class 3 Claims" General Unsecured Claims
7
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
"Class 4A Claims" Existing Series A Preferred Stock
"Class 4B Claims" Existing Series B Preferred Stock
"Class 5 Claims" Existing Common Stock
"Class 6 Claims" Existing Stock Options
"Class 7 Claims" Other Equity Interests
Securities outstanding prior to the effective date of the Plan (the "Effective
Date") are identified as "Existing" or Predecessor Company securities.
Securities issued upon or after the Effective Date are identified as "New" or
Successor Company securities. The Plan provides that upon receipt of shares of
New common stock under the Plan, the recipient shall be deemed to have
affirmatively covenanted to the "Short-Selling Bar Representation," which
requires the recipient of the New common stock to refrain from engaging in short
sales for a period of five years following the Effective Date.
The Plan also provides treatment for certain unclassified Claims represented by
Administrative Claims, Postpetition Senior Secured Notes, and certain Priority
Tax Claims.
Administrative Claims, Priority Tax Claims, and Secured Tax Claims have not been
classified and are excluded from classification. The treatment under the Plan of
these unclassified Claims is set forth below.
o Administrative Claims represent Claims for payment relating to
Postpetition Senior Secured Notes (representing the Debtor-In-Possession
Financing), the costs and expenses incurred after the Petition Date of
preserving the estate and operating the business of the Cytomedix
(including wages, salaries, or commissions for services rendered after the
Petition Date), Professional Claims, and other fees and charges.
In lieu of receiving cash on account of its Allowed Administrative Claim,
if agreed to by the Company, each holder of an Allowed Administrative
Claim may elect to exchange its Allowed Administrative Claim for shares of
New common stock at the administrative rate of $1.00 per share (a
Claimholder receives one share of New common stock in exchange for each
$1.00 of Allowed Claim, the "Administrative Rate").
o Allowed Tax Claims primarily represent Claims for unpaid withholding or
sales taxes. Based on the Company's review of filed proofs of claim, the
Company estimates total Allowed Priority Tax Claims at $58,931 prior to
the fresh-start adjustments.
The Plan provides that each holder of an Allowed Tax Claim will receive
deferred cash payments over a period not exceeding six years from the date
of assessment of such Allowed Tax Claim, in an aggregate amount equal to
the amount of such Allowed Tax Claim, plus interest at a rate of 4% per
annum. In exchange for the treatment provided herein, all liens securing
an Allowed Secured Tax Claim shall be deemed discharged and released as of
the Effective Date.
Class 1A - Holders of 12% Notes:
Class 1A is comprised of the Allowed Secured Claims of the holders of the 12%
Notes. These claims as of June 30, 2002 were approximately $2,442,912, prior to
the fresh-start adjustments.
On the Effective Date, most of the holders of the 12% Notes elected to convert
50% of their claims into shares of New common stock at the Administrative Rate
of $1.00 per share. The remaining amounts of their claims were converted to
shares of New Series A Convertible Preferred stock at a rate of one share of New
Series A Convertible Preferred stock for each $1.00 of claim not converted into
New common stock.
8
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
The Company is prohibited, so long as any shares of New Series A Convertible
Preferred Stock are outstanding, from granting any security interest, lien, or
encumbrance on any of the Company's intellectual property assets.
Class 1B - Holders of 10% Notes:
Class 1B is comprised of the Allowed Secured Claims of the holders of the 10%
Notes. These claims as of June 30, 2002 were approximately $2,794,243, prior to
the fresh-start adjustments.
On the Effective Date, most of the holders of the 10% Notes elected to convert
50% of their claims into shares of New common stock at the Administrative Rate
of $1.00 per share. The remaining amounts were converted to shares of New Series
B Convertible Preferred stock at a rate of one share of New Series B Convertible
Preferred stock for each $1.00 of claim not converted to New common stock.
The Company is prohibited, so long as any shares of New Series B Convertible
Preferred stock are outstanding, from granting any security interest, lien, or
encumbrance on any of the Company's intellectual property assets.
Class 1C - Secured Claims of Worden:
Class 1C is comprised of the Allowed Secured Claims of Charles Worden Sr. which
total approximately $107,774 prior to the fresh-start adjustments. This estimate
includes projected accrued interest on the principal balance of $72,100 notes
payable and reimbursement claims of $35,674. The holder of these claims receives
New common stock at the Administrative Rate of $1.00 in full and complete
satisfaction of his claims.
Class 1D - Secured Claims Under the Curative Royalty Agreement:
Class 1D is comprised of the Allowed Secured Claims under the royalty agreement
entered into as of December 26, 2000, between Curative and the Company, as
amended by a first amendment thereto dated as of April 20, 2001 (collectively,
the "Curative Royalty Agreement"). The total Allowed Class 1D Secured Claims are
$61,443 based on payments on the DePuy Royalty received through the period
ending June 30, 2002, that have not been distributed to the holders of Class 1D
Claims.
The Plan provides that to the extent not already paid, the holder of these
claims will receive cash on the Effective Date in an amount equal to the Allowed
amount of its Class 1D Claim. The Plan also provides that, after the Effective
Date, all rights under the Curative Royalty Agreement shall continue in full
force and effect (including the retention of all prepetition liens granted under
the Curative Royalty Agreement); provided, however, that following the Effective
Date, distributions to Waverly Holdings, LLC, an Arkansas Limited Liability
Company ("Waverly") of its proportionate share of royalties payable under the
Curative Royalty Agreement may be made directly to Waverly instead of to
Curative.
Class 2 - Allowed Priority Unsecured Claims of Employees:
Class 2 is comprised of the Allowed Claims of employees against Cytomedix, which
are limited by the Bankruptcy Code not to exceed $4,650 per employee. These
claims include certain Claims by employees for unpaid prepetition wages,
salaries, or commissions. We estimate total Allowed Class 2 Claims as of June
30, 2002 are approximately $114,989, prior to the fresh-start adjustment.
Claims in Class 2 are unimpaired under the Plan. Each holder of an Allowed Class
2 Claim will receive cash on the Effective Date equal to the amount of their
claim. In lieu of receiving cash, if agreed to by the Company, each holder may
elect in writing to exchange each $1.00 of their claim into shares of New common
stock at such rate as is agreed to by the Company. Upon receipt of shares of New
common stock, each recipient shall be deemed to have affirmatively covenanted to
the Short-Selling Bar Representation which requires the recipient of the New
common stock to refrain from engaging in short sales for a period of five years
following the Effective Date.
9
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Class 3 - Allowed General Unsecured Claims:
Class 3 is comprised of the Allowed General Unsecured Claims of Cytomedix that
are not cured, paid, released, or waived pursuant to the Plan, assumed by the
Company or agreements incorporated in the Plan, or classified in any other class
of Claims. Class 3 Claims include, without limitation, claims for goods sold and
services rendered, for monies lent, amongst others.
Option 3A (Distribution of Cash Only). The Company will pay to holders of
Allowed Class 3 Claims under Option 3A a sum of cash equal to 12% of their claim
according to the following distribution schedule: one-third shall be paid on the
initial distribution date; one-third on the sixth month anniversary of the
initial distribution date; and one-third on the first anniversary of the initial
distribution date. The Company is contemplating accelerating these remaining
distributions for administrative convenience reasons.
Option 3B (Distribution of New Common Stock Only). The holders of Allowed Class
3 Claims under Option 3B will receive one share for each $5.00 of their claims
under Option 3B, with the New common stock to be distributed in 12 equal monthly
installments commencing on August 30, 2002. Upon receipt of shares of New common
stock as provided hereunder, each recipient shall be deemed to have
affirmatively covenanted to the Short-Selling Bar Representation and to be bound
by its terms.
Holders of Allowed Class 3 Claims aggregating less than $1,000 are treated under
Option 3A in respect of such Claims and may not elect treatment of such Claims
under Option 3B.
Class 4 - Allowed Preferred Stock Interests:
Class 4A is comprised of all Allowed Equity Interests represented by the
1,625,000 shares of Existing Series A Preferred stock issued and outstanding
prior to the Effective Date. The Existing Series A Preferred stock had a
liquidation preference in the event of the Cytomedix's liquidation, dissolution,
or winding up of $1.00 per share in all assets remaining after payment of
liabilities. Additionally, Cytomedix was required to redeem the Existing Series
A Preferred stock on the earlier of the seventh anniversary of the date of
issuance of the securities or the end of the fiscal quarter at which the Company
had gross revenues for four consecutive fiscal quarters of not less than $50
million.
The Plan provides that, at such time, if at all, that the Company attains
aggregate gross revenues for four consecutive fiscal quarters of not less than
$10 million (the "Series A Precondition"), holders of Allowed Class 4A Equity
Interests will receive one share of New common stock for every five shares of
Existing Series A Preferred stock held as of the Effective Date.
Class 4B is comprised of all Allowed Equity Interests represented by the
Existing Series B Preferred stock issued and outstanding prior to the Effective
Date. There are approximately 5,115,000 shares of Existing Series B Preferred
stock issued and outstanding. The Existing Series B Preferred stock had a
liquidation preference in the event of the Company's liquidation, dissolution,
or winding up of $0.0001 per share in all assets remaining after payment of
liabilities and the liquidation preference of the Existing Series A Preferred
stock.
Allowed Class 4B Equity Interests will be redeemed in cash by the Company on the
Effective Date at the stipulated liquidation preference of $0.0001 per share, or
$511.50 in the aggregate.
Class 5 - Existing Common Stock:
Class 5 is comprised of all Allowed Equity Interests represented by the Existing
common stock of Cytomedix that is issued and outstanding as of the Effective
Date.
Holders of Allowed Class 5 Existing common stock receive one share of New common
stock for every five shares of Existing common stock. As a result of this
exchange, these holders receive approximately 2,560,120 shares of New common
stock in exchange for the estimated 12,800,598 shares of Existing common stock
outstanding on the
10
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Petition Date. Upon receipt of shares of New common stock as provided hereunder,
the recipient shall be deemed to have affirmatively covenanted to the
Short-Selling Bar Representation and to be bound by its terms.
Class 6 - Existing Stock Options:
Class 6 is comprised of all Allowed Equity Interests represented by the Existing
stock options. Cytomedix had over 6,000,000 options or warrants representing
contractual rights of persons prior to the Effective Date to purchase or acquire
Existing common stock. Holders of Allowed Class 6 Existing stock options do not
receive or retain any property or distributions for such Allowed Equity
Interests.
Class 7 - Other Equity Interests, Including Section 510(b) Claims:
Class 7 is comprised of all other Allowed Claims or Equity Interests in
Cytomedix, including Allowed Section 510(b) Claims, any Allowed Claims arising
from the rejection of agreements granting Existing stock options (to the extent,
if any, that they constitute executory contracts), and any Claims based upon
indemnification rights. The Company is not aware of any filed or scheduled Class
7 Claims and estimates these Claims at zero.
Class 7 is Impaired under the Plan. Holders of Class 7 Claims and Equity
Interests, if any, do not receive or retain any property or distributions on
account of such Allowed Claims or Allowed Equity Interests.
NOTE 3 - LOSS PER SHARE
As of June 30, 2002 and 2001, prior to fresh-start adjustments Cytomedix had
issued and issuable warrants and options to acquire 6,065,835 shares of common
stock of Cytomedix with exercise prices ranging from $.02 to $10.00 per share.
These options and warrants were not included in the calculation of weighted
average common stock outstanding as of June 30, 2002 and 2001, because the
effect would have been anti-dilutive (i.e., reduce the net loss per share).
NOTE 4 - EXTRAORDINARY GAIN
A summary of the principal categories of claims classified as liabilities
subject to compromise at June 30, 2002 which were settled under the plan of
reorganization are as follows:
12% secured debt $2,442,912
10% secured debt 2,794,243
Note payable and accrued interest - related party 107,774
Accrued expenses - related party 99,825
Accounts payable and accrued expenses 1,640,699
Accrued employee claims 679,367
Series A Preferred Stock and accrued dividends 1,766,780
----------
Total Liabilities Subject to Compromise 9,531,600
----------
Less consideration exchanged:
Cash payments 219,088
Par value of Predecessor common stock 543
Par value of Predecessor preferred stock 277
Related party receivable 5,500
----------
Extraordinary Gain on Discharge of Prepetition
Liabilities $9,306,192
==========
11
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 4 - EXTRAORDINARY GAIN (Continued)
All but approximately $2,442,912 of liabilities subject to compromise would have
been classified as current liabilities if the Company had not filed bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code.
NOTE 5 - REORGANIZATION ITEMS
In accordance with SOP 90-7, the Company has recorded all transactions incurred
as a result of the bankruptcy filings as reorganization items. A summary of the
principal categories of reorganization items follows (in thousands of dollars):
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2001 June 30, 2001
------------- ------------- ------------- -------------
Professional fees $278,403 $489,690 $ -- $ --
Consulting - related party 45,474 119,526 -- --
-------- -------- -------- --------
$323,877 $609,216 $ -- $ --
======== ======== ======== ========
NOTE 6 - FRESH-START ACCOUNTING
In accordance with the provisions of AICPA SOP 90-7, the Company adopted
fresh-start reporting upon confirmation of the Plan. For financial reporting
purposes, the effective date of the adoption of fresh-start reporting is
considered to be June 30, 2002, although the Company's confirmation date was
July 11, 2002. The results of operations from July 1 to July 11, 2002 were not
significant. The financial statements for the Company for the periods subsequent
to June 30, 2002, are referred to the "Successor Company" and are not comparable
to those for the periods prior to June 30, 2002, which are referred to as the
"Predecessor Company." The Company adopted fresh-start reporting because, as a
result of implementation of the Plan, holders of the Company's Existing common
stock immediately before filing for bankruptcy and confirmation of the Plan
retained less than 50% of the common stock of the emerging entity and the
Company's reorganization value at emergence was less than its post-petition
liabilities and allowed claims as shown below:
Post-petition liabilities $ 1,524,973
Liabilities deferred pursuant to Chapter 11 proceedings 9,705,520
-----------
Total post petition liabilities and allowed claims 11,230,493
Less: reorganization value 5,000,000
-----------
Excess of liabilities over reorganization value $ 6,230,493
===========
Under fresh-start reporting, the Company's assets and liabilities are adjusted
to fair values and the effects of the plan of reorganization were recorded. A
reorganization value for the total assets has been determined by the Company
based upon the estimated fair value of the enterprise before considering values
allocated to debt to be settled in the reorganization. The portion of the
reorganization value which could not be attributed to specific tangible or
identified intangible assets for the Successor Company (defined below) is
referred to as reorganization value in excess of amounts allocable to
identifiable assets in the financial statements and will be treated similar to
goodwill. The adjustment of assets and liabilities to fair values is included in
net reorganization expense in the financial statements at June 30, 2002.
12
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 6 - FRESH-START ACCOUNTING (Continued)
Consequently, the Successor Company had no accumulated deficit as of July 1,
2002. The reorganization value in excess of amounts allocable to identifiable
assets recognized in fresh-start reporting will not be amortized, but will be
reviewed annually for impairment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Tangible Assets."
Future impairment of the excess reorganization value may result if actual
results of operations or changes in economic or industry conditions differ
significantly from assumptions used to derive the reorganization value.
The reorganization value of the Company on the effective date was established at
$5,000,000 based upon a calculation of discounted cash flows under the Company's
financial projections and trading multiples of comparable companies. The
valuation was based upon a number of estimates and assumptions, which are
inherently subject to significant uncertainties and contingencies beyond the
Company's control. Accordingly, there can be no assurance that the values
reflected in the valuation will be realized, and actual results could vary
materially. Moreover, the value of our New Common Stock, as traded on the pink
sheets, may differ materially from the reorganization valuation.
The following reconciliation of the Predecessor Company's consolidated balance
sheet as of June 30, 2002 to that of the Successor Company as of June 30, 2002
was prepared to present the adjustments that give effect to the reorganization
and fresh-start reporting.
The adjustments entitled "Reorganization Plan" and "Conversion of Liabilities
Not Subject to Compromise" reflect the consummation of the Plan, including the
elimination of existing liabilities subject to compromise, liabilities not
subject to compromise, Existing Series A Preferred Stock, Existing Common Stock
and Existing Series B Preferred.
Also recorded was the New common and preferred stock which was issuable.
The adjustments entitled "Fresh-Start Adjustments" reflect the adoption of
fresh-start reporting, including the adjustments to record property and
equipment and identifiable intangible assets at their fair values and to reflect
the aforementioned $5,000,000 reorganization value, which includes the
establishment of approximately $2,000,000 of reorganization value in excess of
amounts allocable to net identifiable assets. The assets and liabilities have
been recorded at their fair values based on a preliminary allocation. Management
estimated the fair values of the Company's assets and liabilities by utilizing
both independent appraisals and commonly used discounted cash flow valuation
methods. A reconciliation of fresh-start accounting recorded as of June 30,
2002, is as follows:
13
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 6 - FRESH-START ACCOUNTING (Continued)
Predecessor Conversion of Successor
Company Reorgani- Liabilities Not Company
------------ zation Fresh-Start Subject to -------------
June 30,2002 Plan Adjustments Compromise June 30, 2002
------------ ----------- ------------- --------------- -------------
Current assets:
Cash and cash equivalents $ 103,855 $ -- $ -- $ -- $ 103,855
Receivables and prepaid expenses and
other current assets 375,631 -- -- -- (a) 375,631
Note receivable - related party 5,500 (5,500) -- -- --
Inventory 8,796 -- -- -- 8,796
------------ ----------- ------------ ----------- ------------
Total current assets 493,782 (5,500) -- -- 488,282
Property and equipment, net 27,095 -- -- -- (b) 27,095
Intangibles 603,488 -- 1,796,512 -- 2,400,000
Prepaid expenses and deposits 63,000 -- -- -- 63,000
Reorganization value in excess of
amounts allocable to identifiable assets -- -- 2,021,623 -- (c) 2,021,623
------------ ----------- ------------ ----------- ------------
$ 1,187,365 $ (5,500) $ 3,818,135 $ -- $ 5,000,000
============ =========== ============ =========== ============
Current liabilities
Short-term borrowings and current
portion of long-term debt 800,000 -- -- -- 800,000
Accounts payable and accrued expenses 1,471,357 220,880 -- 142,979 (d) 1,835,216
Deferred revenue 85,198 -- -- -- 85,198
------------ ----------- ------------ ----------- ------------
Total current liabilities 2,356,555 220,880 -- 142,979 2,720,414
Long-term liabilities -- --
Liabilities not subject to compromise 173,920 -- -- (173,920) (e) --
Liabilities subject to compromise 7,906,600 (7,906,600) -- -- (f) --
Deferred revenue 559,956 -- -- -- 559,956
------------ ----------- ------------ ----------- ------------
Total long-term liabilities 8,640,476 (7,906,600) -- (173,920) 559,956
------------ ----------- ------------ ----------- ------------
Mandatorily Series A preferred stock 1,625,000 (1,625,000) -- -- --
Stockholders' equity (deficit):
Successor company Series A Preferred
stock -- 137 -- -- (g) 137
Successor company Series B Preferred
stock -- 140 -- -- (g) 140
Predecessor company Series B
Preferred stock 512 (512) -- -- --
Successor company common stock -- 543 -- 3 (g) 546
Predecessor company common stock 1,281 (1,281) -- -- (g) --
Additional paid-in capital 51,258,907 -- (49,571,038) 30,938 (g) 1,718,807
Accumulated deficit (62,695,366) 9,306,193 53,389,173 -- (g) --
------------ ----------- ------------ ----------- ------------
Total stockholders equity (deficit) (9,809,666) 7,680,220 3,818,135 30,941 (g) 1,719,630
------------ ----------- ------------ ----------- ------------
$ 1,187,365 $ (5,500) $ 3,818,135 $ -- $ 5,000,000
============ =========== ============ =========== ============
Explanation of Adjustments
(a) Reflects the reclassification of note receivable - related party
which was used to offset a portion of the liabilities subject to
compromise
14
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 6 - FRESH-START ACCOUNTING (Continued)
(b) Reflects the adjustment to the intangible to fair value which was
determined by an independent valuation
(c) Reflects the establishment of reorganization value in excess of
amounts allocable to identifiable assets determined by an
independent valuation
(d) Reflects the liability set up by the Company to pay the liabilities
subject to compromise and the liabilities not subject to compromise
at the determined amounts
(e) Reflects the reclassification of the liabilities not subject to
compromise to the new liability and a portion of the liabilities not
subject to compromise to be paid in stock
(f) Reflects the reclassification of the liabilities subject to
compromise to either the new liability for the portion to be paid in
cash or to the new common stock and new preferred stock for the
portion to be paid by the issuance of stock
(g) Reflects the cancellation of the Predecessor Company's Existing
common stock, Existing options and warrants, Existing Preferred
stock, accumulated deficit as of June 30, 2002, and the New common
stock and New Series A Preferred stock and New Series B Preferred
stock which was issuable.
NOTE 7 - DEBTOR-IN-POSSESSION SECURED PROMISSORY NOTES
In 2001, the Company commenced the issuance of Debtor-in-Possession secured
promissory notes ("DIP" Notes) in the amount of $212,500. The Company had issued
a total of $800,000 in DIP Notes which had accrued interest of $23,058 as of
June 30, 2002. These notes are secured by a first priority and senior lien on
all assets of the Company pursuant to Bankruptcy Code Section 364d. Interest
accrued on the DIP Notes at a rate of 10% per annum. The DIP Notes provide that
principal and accrued interest shall be repaid the earlier of (1) six months
from the date of the note, (2) the effective date of a plan of reorganization,
(3) appointment of a Chapter 11 trustee over the Company, (4) conversion of the
case to a Chapter 7, or (5) dismissal of the case. Subsequent to July 11, 2002,
the noteholders elected to convert their DIP Notes into New common stock and New
Class A and B warrants. Each holder of a DIP Note received one share of common
stock, 1/4 of a Class A warrant (exercisable for 2 years at $1.00 per share) and
3/20's of a New Class B warrant (exercisable for 3 years at $1.50 per share) for
each $1.00 of principal and interest owed.
NOTE 8 - NEW ACCOUNTING STANDARDS
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" in
August 2001. This statement is effective for fiscal years beginning after
December 15, 2003. This new statement is not expected to have any impact on the
results of operations or financial position of the Company.
FASB Statement 146, "Accounting for Costs Associated with Exit or Disposal
Activities," addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between Statement 146 and Issue 94-3 relates to Statement 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. Statement 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at
15
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 8 - NEW ACCOUNTING STANDARDS (Continued)
the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the FASB in this Statement is that an entity's commitment to a plan,
by itself, does not create an obligation that meets the definition of a
liability. Therefore, this Statement eliminates the definition and requirements
for recognition of exit costs in Issue 94-3. This Statement also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002, and is not expected to have a material
impact on the results of operations or financial position of the Company.
NOTE 9 - STOCKHOLDERS' EQUITY
In accordance with the Plan, all outstanding shares of Existing common stock,
Series A Preferred stock, Existing Series B Preferred stock and Existing
warrants/options were cancelled. As of June 30, 2002, the Company has not yet
distributed shares of New common stock, New Series A Preferred stock or New
Series B Preferred stock and therefore have reported the entire value of Common
and Preferred stock as "New Common Equity-Issuable," "New Series A Preferred
stock-Issuable" and "New Series B Preferred stock-Issuable."
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Under the Plan the predecessor Company's Existing Series A Preferred stock and
the dividends accrued on the Series A Preferred stock are exchanged into one
share of New common stock for every five shares of Existing Series A Preferred
shares held as of the Effective Date. This exchange is contingent on the
successor Company's attaining aggregate gross revenues for four consecutive
quarters of at least $10,000,000.
We outsource the manufacturing of AutoloGel process kits to Tri-State Hospital
Supply Corporation. Under a purchase agreement dated August 1, 2002, Cytomedix
agreed to purchase kits in pre-established usage levels. Should the Company
terminate the 36 month agreement, it is required to purchase unique components
and finished goods inventory to a maximum amount of $50,873.
NOTE 11 - SUBSEQUENT EVENTS
Upon confirmation of the Plan on July 11, 2002, all of the Company's securities
were canceled on the Company's books and of no further force or effect. Under
the Plan, new common stock is issued to creditors and existing stockholders in
amounts approved by the Court, as is explained in further detail in Note 2.
Under the Plan, the Company's Existing common stock was exchanged for New common
stock at a rate of one New share for every five Existing shares. The New common
stock succeeded to the registered status of the Existing common stock under Rule
12g-3 as explained in 3S and 5S Rule 12g-3 in the Division of Corporation
Finance: Manual of Publicly Available Telephone Interpretations - March 1999
Supplement. The Company will adopt Fresh-Start Accounting in accordance with SOP
90-7. Because the share exchange was part of the Plan and is required to be
reflected in the Fresh-Start Accounting, it has been reflected in these
financial statements.
In the third quarter of 2002 the Company adopted a new Long-Term Incentive Plan.
The new incentive plan permits incentive awards of options, SARs, restricted
stock awards, phantom stock awards, performance unit awards, dividend equivalent
awards or other stock-based awards. It provides that the Company is authorized
to make awards of up to 15% of the fully diluted stock of the Company on the
Effective Date. On October 16, 2002, the Board reserved and allocated 2,336,523
shares of common stock to the new plan.
On July 11, 2002 and upon emergence from bankruptcy, the Company's Board of
Directors (the "Board") reached an agreement with BDR Consulting Inc. ("BDR") to
provide such management, financing, marketing and strategic consulting services
as requested by the Board of Directors. In exchange, the Company compensates BDR
at the rate of $108,000 per annum paid on a monthly basis at the rate of $9,000
per month. Additionally, on August 17, 2002,
16
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 11 - SUBSEQUENT EVENTS (Continued)
the Board granted BDR a stock option for three hundred thousand (300,000) shares
of common stock. Options for 100,000 shares vested immediately with another
100,000 shares to fully vest on the first anniversary of the date of grant, the
remaining 100,000 shares to be fully vested on the second anniversary of the
date of grant. The exercise price of $1.50 was the fair market value on the date
of grant. In the event that the Company terminates the Agreement with 45-day
notice, and in addition to any options already vested as of the termination
date, options for an additional 50,000 shares shall immediately vest; provided
that the total number of shares under this Agreement shall not exceed the
300,000 shares. The options expire 10 years from the date of grant.
Additionally, on July 11, 2002, the Company's Board of Directors (the "Board")
reached an agreement with HMA Advisors Inc. ("HMA") to provide assistance to the
Company to reach the Company's financing goals. The Financial Services Agreement
is for a term of a minimum of 12 months and shall renew automatically on a
month-to-month basis thereafter unless either party gives written notice of
termination. As compensation, the Board of Directors granted HMA 600,000 Common
Stock Purchase Warrants exercisable at $1.00 per share, with an expiration date
of August 1, 2007.
On August 7, 2002, in accordance with the Company's 2002 Long-Term Incentive
Plan, the Company's Board of Directors (the "Board") granted the following key
management and Board members stock options:
o Robert Burkett, an option for 100,000 shares of common stock to vest
immediately and with an exercise price at fair market value on date
of grant of $1.50 per share.
o David Crews, an option for 100,000 shares of common stock to vest
immediately and with an exercise price at fair market value on date
of grant of $1.50 per share.
o Kent T. Smith, an option for 521,928 shares of common stock with
70,000 shares vested immediately and 1/24th of the remaining amount
vests on each monthly anniversary of the date of grant over a
two-year period. The exercise price is the fair market value on date
of grant of $1.50 per share.
o Carelyn P. Fylling, an option for 250,000 shares of common stock
with 80,000 shares vested immediately and 1/24th of the remaining
amount vests on each monthly anniversary of the date of grant over a
two-year period. The exercise price is the fair market value on date
of grant of $1.50 per share.
On August 16, 2002, in accordance with the Company's 2002 Long Term Incentive
Compensation Plan and as compensation for participation on the Company's Board
of Directors, the Board granted Stephen Holden an option to purchase 33,000
shares of common stock at $1.50 per share to vest and become exercisable on
August 16, 2003.
On July 11, 2002 the Successor Company filed an Amended and Restated Certificate
of Designation of the Relative Rights and Preferences of New Series A
Convertible Preferred, New Series B Convertible Preferred and New common stock.
The new authorized capital stock of the Successor Corporation consists of
55,000,000 shares of capital stock, of which 40,000,000 shares is New common
stock, with a par value of $.0001 per share, and 15,000,000 shares are New
Preferred stock, with a par value of $.0001 per share. The voting powers,
designations, preferences and relative, participating, optional or other special
qualifications, limitations or restrictions thereof are set forth as follows:
New Common Stock:
The New common stock is subordinate to both the New Series A Convertible
Preferred and New Series B Convertible Preferred stock and to all other classes
and series of equity securities of the Company which by their terms rank senior
to the New common stock, in the event of a liquidation, dissolution, or winding
up of the
17
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 11 - SUBSEQUENT EVENTS (Continued)
Company or with regard to any other rights, privileges or preferences. Each
share of New common stock represents the right to one vote. Holders of New
common stock are entitled to receive dividends as may be declared by the Board
of Directors. The Company is prohibited from declaring and paying dividends on
the New common stock as long as shares of New Series A Convertible Preferred
and/or New Series B Convertible Preferred stock are outstanding.
New Series A Convertible Preferred Stock.
The New Series A Convertible Preferred stock, par value $.0001 per share (the
"New Series A Preferred") is limited to a maximum of 5,000,000 shares. The New
Series A Preferred will have a stated liquidation preference of $1.00 per share
and have preference over and rank (i) senior to the New Series B Preferred
stock, (ii) senior to the New common stock, and (iii) senior to all other
classes and series of equity securities of the Company which by its terms do not
rank senior to the New Series A Preferred. The New Series A Preferred contains a
negative covenant prohibiting the Company from granting any security interest in
the Company's patents and/or future royalty streams ("Intellectual Property").
The holders of record of shares are entitled to receive cumulative dividends at
the rate of 8% of the stated liquidation preference amount per share per annum,
payable quarterly in arrears. These dividends are prior and in preference to any
declaration or payment of any distribution on any outstanding shares of New
common stock or any other equity securities of the Company ranking junior as to
the payment of dividends. The dividends are to be paid annually in additional
shares of New Series A Preferred. The number of shares to be paid is to be based
on the fair market value of a share of New Series A Preferred. Each year
thereafter dividends are to be paid in shares of New Series A Preferred or, in
the sole discretion of the Board of Directors, in cash. So long as any shares of
New Series A Convertible are outstanding, the Company may not declare, any
dividend on Junior Stock (other than dividends or distributions payable in
additional shares of Junior Stock), unless at the time the Company shall have
paid all accrued and unpaid dividends on the outstanding shares of New Series A
Preferred. If the Company fails to pay dividends as required for six consecutive
quarters, a majority of the holders of New Series A Preferred will have the
power to elect one director to the Company's Board of Directors, either by
filling an existing vacancy on the Board or by removing a Director of their
choice. Each share of New Series A Convertible Preferred stock shall entitle the
holder thereof to vote on all matters voted on by holders of the New common
stock of the Company voting together as a single class with the other shares
entitled to vote.
Limited Conversion Rights. All New Series A Convertible Preferred stock not
converted into shares of New Common Stock prior to the Confirmation of the Plan
cannot be converted into New common stock until the first year anniversary of
the date the New Series A Preferred was issued. On this first anniversary date
and every six months thereafter, the holder of the New Series A Preferred may
convert up to 25% of remaining holdings of New Series A Preferred into New
common stock. Preferred shares are converted based on the liquidation preference
amount and the conversion price of the New common stock shall be equal to 90% of
the twenty-day average closing ask price of the New common stock, but in no case
shall this price be less than $3.00 per share.
Redemption.
The New Series A Convertible Preferred stock is not subject to redemption except
as provided below:
The Company shall redeem for cash at a price per share equal to (i) 105% of the
New Series A Liquidation Preference Amount plus all accrued but unpaid dividends
if redeemed within one year of the date of issuance; (ii) 104% of the New Series
A Liquidation Preference Amount plus all accrued but unpaid dividends if
redeemed later than one year from the date of issuance (the "Corresponding
Redemption Price").
The Company may redeem all of the then outstanding shares of New Series A
Convertible Preferred stock at the Corresponding Redemption Price at any time as
long as proper notice of not less than 10 days nor more than 60 days prior to a
redemption date set by the Company.
18
Cytomedix, Inc.
(A Development Stage Entity)
(Debtor-In-Possession)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 11 - SUBSEQUENT EVENTS (Continued)
New Series B Convertible Preferred Stock:
The New Series B Convertible Preferred stock, par value $.0001 per share (the
"New Series B Preferred") is limited to a maximum of 5,000,000 shares. These
shares have a stated liquidation preference of $1.00 per share. They are
subordinate to the New Series A Preferred, but have preference over and rank
senior to (i) the New common stock, and (ii) all other classes and series of
equity securities of the Company which by its terms do not rank senior to the
New Series B Preferred stock. These shares contain a negative covenant
prohibiting the Company from granting a security interest in the Company's
Intellectual Property. The holders of record are entitled to receive cumulative
dividends at the rate of 8% (the "Dividend Rate") of the stated liquidation
preference amount annually. Such dividends are prior and in preference to any
declaration or payment of any distribution on any outstanding shares of New
common stock or any other equity securities of the Company ranking junior. The
Company will initially pay dividends at the Dividend Rate in additional shares
of New Series B Preferred. The number of shares to be paid is to be based on the
fair market value of a share to the holder of the New Series B Preferred stock.
Each year thereafter dividends are to be paid in shares or, in the sole
discretion of the Board of Directors, in cash.
Voting Rights. Each share of New Series B Convertible Preferred stock shall
entitle the holder thereof to vote on all matters voted on by holders of the New
common stock of the Company voting together as a single class with the other
shares entitled to vote.
Limited Conversion Rights. All New Series A Convertible Preferred stock not
converted into shares of New common stock prior to the Confirmation of the Plan
cannot be converted into New common stock until the first year anniversary of
the date the New Series A Preferred was issued. On this first anniversary date
and every six months thereafter, the holder of the New Series A Preferred may
convert up to 25% of his/her/its remaining holdings of New Series A Preferred
into New common stock. Preferred shares are converted based on the liquidation
preference amount and the conversion price of the New common stock shall be
equal to 90% of the twenty-day average closing ask price of the New common
stock, but in no case shall this price be less than $3.00 per share.
Redemption.
The New Series B Preferred is not subject to redemption except as follows:
The Company shall redeem for cash at a price per share equal to (i) 105% of the
New Series A Liquidation Preference Amount plus all accrued but unpaid dividends
if redeemed within one year of the date of issuance; (ii) 104 %of the New Series
A Liquidation Preference Amount plus all accrued but unpaid dividends if
redeemed after one year but within two years of the date of issuance; or (iii)
103% of the New Series B Liquidation Preference Amount plus all accrued but
unpaid dividends if redeemed later than two years from the date of issuance (the
"Corresponding Redemption Price").
The Company may redeem all of the then outstanding shares of New Series B
Convertible Preferred stock at the Corresponding Redemption Price at any time as
long as proper notice of not less than 10 days nor more than 60 days prior to a
redemption date set by the Company.
19
Item 2. Management's Discussion and Analysis.
The following discussion should be read in conjunction with our condensed
financial statements and related notes thereto included in Item 1 above and in
conjunction with our audited financial statements and related notes thereto and
management's discussion and analysis for the year ended December 31, 2001,
included in our annual report filed on Form 10-KSB for such period. This
discussion and analysis pertains to the Company's financial position on June 30,
2002.
The terms "Cytomedix," the "Company," "our" and "we," as used in this
quarterly report, refer to Cytomedix, Inc.
When used in this Form 10-QSB and in other filings by Cytomedix with the
SEC, the words "believes," "plans," "anticipates", "will likely result," "will
continue," "projects," "expects," and similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those projected.
Cytomedix cautions the readers not to place undue reliance on any
forward-looking statements, which are based on certain assumptions and
expectations which may or may not be valid or actually occur, and which involve
certain risks, including these risks defined below. Sales and other revenues may
not commence and/or continue as anticipated due to delays or otherwise. As a
result, our actual results for future periods could differ materially from those
anticipated or projected.
These forward-looking statements speak only as of the date this report is
filed. We do not intend to update the forward-looking statements contained in
this report, so as to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events, except as may occur as part
of our ongoing periodic reports filed with the SEC.
NATURE OF BUSINESS
Cytomedix is a biotechnology company whose business model is premised upon
the research, development, licensing and distribution of autologous cellular
therapies (i.e., therapies using the patient's own body products) for the
treatment of chronic non-healing wounds using our propriety platelet rich plasma
gel and related product therapies. To create the proprietary platelet rich
plasma gel product, the patient's own plasma, platelets and other essential
blood components are separated through centrifugation and formed into a gel,
AutoloGel(TM) (the "AutoloGel") that is topically applied to a wound under the
direction of a physician.
Our proprietary autologous platelet rich plasma gel, branded AutoloGel, is
being used by healthcare providers for treating chronic wounds. This product
contains autologous multiple growth factors, platelet membranes and fibrin
matrix scaffold, and it provides a moist covering.
By definition, a chronic cutaneous ulcer is defined as a wound that has
failed to proceed through an orderly and timely series of events to produce a
durable structural, functional, and cosmetic closure. Many patients have wounds
often lasting for months or even years. The three most common types of chronic
wounds are diabetic foot ulcers, venous stasis ulcers and pressure ulcers,
formerly known as decubitus ulcers. AutoloGel is being used to treat these
recalcitrant wounds. While our intellectual property covers the use of platelet
rich plasma gel across both the acute and chronic wound areas, our management
team believes the chronic wound market affords the most opportunity for success.
The AutoloGel process begins by drawing a small volume of blood from the
patient using a standard blood draw medical procedure. After separating the
plasma and platelets from the red blood cells through an activation process, the
liquid platelet rich plasma forms a gel. The physician or care provider applies
the gel onto the wound. AutoloGel mimics the natural healing process by
maintaining a moist wound environment and delivering multiple growth factors
into the wound bed with the gel while also providing a cellular matrix. Growth
factors are cellular proteins that act as signals for cells to regulate both the
growth and movement of cells.
20
The entire process to produce the gel, including the platelet harvesting,
takes approximately five to fifteen minutes and is done at the point of care by
nurses, nurse practitioners, physician assistants, or physical therapists under
the direction of a physician. The patient's own blood is used as the source of
the platelets, eliminating the risk of infection that would be present if donor
blood products were used. Because the blood can be collected at any time and the
resulting gel is applied immediately after preparation, there are no issues with
shelf life or transportation of the product.
AutoloGel is physician directed and does not require training of the
patient to apply the gel or to change dressings. In addition, since the
healthcare provider applies it, the use of AutoloGel aids in assuring the
continued assessment of the wound by the healthcare provider.
CUSTOMERS AND MARKETING
We are currently marketing AutoloGel into the chronic wound care market
through the sale of disposable kits (the "Kits") that provide single treatment
of the platelet rich plasma gel. We provide the disposable Kits to customers
desiring to use the AutoloGel process for the treatment of their patients. In
addition, we provide each customer with a specially-calibrated table-top
centrifuge which the customer uses solely for the purpose of performing the
AutoloGel process using the purchased Kits. We also provide the customer's
personnel with an initial training program of the AutoloGel process. The
end-user purchases the Kits (each Kit representing the right to a single-use
license of the AutoloGel process) at a fixed price, which vary depending on the
customer's size, supply needs, term of contract, and related factors.
Since the beginning of 2002, we have entered into license and supply
agreements with nationally-recognized long-term care providers, including
National Healthcare Corporation, Extendicare Health Services, Total Blood
Services, Provident Home Care and other long-term care, long-term acute care and
wound care providers.
COMPETITION
In the market for biotechnology products, we face competition from
pharmaceutical companies, biopharmaceutical companies and other competitors
whose products are marketed into the long-term care market. Other companies have
developed or are developing products which may be in direct competition with the
AutoloGel process. Biotechnology development projects are characterized by
intense competition. Many of these companies have substantially greater capital
resources, larger marketing staffs and more experience in commercializing
products. Recently developed technologies, or technologies that may be developed
in the future, may be the basis for developments which will compete with the
Company's products.
It has become generally accepted that growth factors can aid significantly
in wound healing. The current market leader is Regranex marketed by a division
of Johnson & Johnson, Inc. The Regranex product has had great success in the
marketplace, and the Company cannot guarantee that its AutoloGel product can
successfully compete with Regranex.
In 2001, Apligraf, a cultured skin graft product which was developed by
Organogenesis, an American Stock Exchange company and marketed by Novartis, a
large U.S. based pharmaceutical company was available. The product was being
widely used and was reimbursed under Medicare but in the third quarter of 2002,
it was withdrawn from the market due to voluntary manufacturing recall.
Organogenesis subsequently filed for Chapter 11 protection and ended its sales
and marketing agreement with Novartis. Recently approved for sale in the U.S. is
a product called Dermagraft, which is produced by Advanced Tissue Sciences, a
Nasdaq company. Dermagraft is a dermal fibroblast skin substitute used to help
in the wound closure of diabetic foot ulcers. It is being marketed by Smith and
Nephew, a large healthcare company with an established wound care presence. It
is easier to apply than its predecessor, Apligraf, in that it can be applied in
a physician's office. However, it requires storage in a -70 degree Centigrade
freezer which most physicians do not own. It is covered under Medicare
reimbursement as well.
It also is generally accepted that the V.A.C. as marketed by KCI, Inc., is
the market leader in treating chronic wounds in the long-term care and home
healthcare markets. "V.A.C." stands for vacuum assisted closure which consists
of a sponge that is placed in the wound connected by tubing to a vacuum
canister. This provides
21
negative pressure wound therapy. The V.A.C. has been very well received since
its introduction two years ago and the Company cannot guarantee its AutoloGel
can successfully compete with the V.A.C.
OVERVIEW OF EVENTS THROUGH JUNE 30, 2002 (DURING BANKRUPTCY)
In January 2001, we acquired certain technology and other assets of
Curative Health Services, Inc. and CHS Services, Inc., (collectively,
"Curative") including the intellectual property rights related to the
development and production of platelet-derived growth factors (the "Procuren
Acquisition"). The Procuren Acquisition included assets relating to the
production of Curative's proprietary wound treatment agent, Procuren. We
sustained recurring losses from the Procuren Acquisition and, in 2001, shut down
the entire Procuren operation.
Because management had focused its resources on the Procuren Acquisition,
the AutoloGel operations had diminished. By the end of the second quarter of
2001, we had curtailed our operations substantially and had terminated the
majority of our workforce. On August 7, 2001 (the "Petition Date"), the Company
filed bankruptcy under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court of the Northern District of Illinois, Eastern
Division (the "Court") (Case No. 01-27610). After the Petition Date and during
bankruptcy, we were authorized to continue to conduct our business as debtor and
debtor-in-possession. As a debtor-in-possession, we were authorized to operate
our business but could not engage in transactions outside the ordinary course of
business without the approval of the Court.
While the Chapter 11 filing constituted a default under our various
financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic
stay that generally precludes creditors and other interested parties from taking
any remedial action in response to such resulting default without prior
Bankruptcy Court approval. In addition, under the Bankruptcy Code, we had the
power to assume or reject executory contracts, including lease obligations.
Parties affected by these rejections were able to file claims with the Court in
accordance with the reorganization process. We actively engaged in this process
and reviewed all claims and executory contracts, reaching final decisions with
respect to assuming or rejecting the contracts and paying claims.
No trustee or creditors' committee was appointed in this case. The
management at the time of the Petition Date moved to retain a business broker
that would market our assets, including our intellectual property assets, with a
view towards conducting an auction of our assets. A group of shareholders
objected to this contemplated disposition of our assets and sought to remove our
then-existing board of directors by soliciting support from other shareholders.
Pursuant to this consent solicitation, shareholders representing a
majority of the Company's voting shares submitted written consents for the
removal of the then-existing board of directors and the election of the
following three new directors: Messrs. Robert Burkett, Charles Worden and David
Crews (the "Board"). Initially, former management objected to the consent
solicitation, but later withdrew that objection and tendered their resignations
as officers; the new directors were recognized by the Court on October 16, 2001.
This event was reported on a Form 8-K filed with the SEC on October 17, 2001,
which is incorporated herein by reference.
Upon former management's withdrawal of its objections, the Company
delivered prompt notice of those actions authorized pursuant to the consent
solicitation to the shareholders who did not consent in writing but who, if such
action had been taken at a shareholders' meeting, would have been entitled to
notice of the meeting. These notices were mailed to shareholders on October 17,
2001.
The Board then appointed Mr. Kent T. Smith as Chief Executive Officer. Mr.
Smith had served as our Vice President of Sales and Marketing from April 2000
until being laid off in late June 2001. The Board also approved the hiring of
BDR, Inc. (President and sole shareholder Jimmy D. Swink, Jr.), as our
Reorganization Manager. Mr. Swink has been a contract consultant with us since
our inception, was the collateral agent for the holders of the 10% Notes
(defined below) and is a holder of a substantial amount of our equity.
During bankruptcy, the Court allowed us to obtain approximately $800,000
in debtor-in-possession financing ("DIP Financing"). This money provided us with
working capital during bankruptcy and funding to pay post-petition bills. We
continue to pay post-petition bills in the ordinary course of business.
22
Shortly after removal of prior management, new management focused on the
formulation of a plan of reorganization that would enable us to reorganize and
emerge quickly from Chapter 11 in order to preserve our value as a going
concern. Our limited available funds mandated that we move swiftly to
reorganize.
We engaged in negotiations with several interested parties in the case,
including holders of the 12% convertible secured promissory notes (the "12%
Notes") and 10% convertible secured promissory notes (the "10% Notes"), Charles
Worden, Curative Health Services, Inc., and others. Concurrently, we had
discussions with prospective new investors about the terms of an investment in
the Company to fund our reorganization. Among the numerous factors considered in
these various discussions and negotiations were our business plan and projected
financial results, the amounts and nature of claims asserted, the time, expense,
and risks involved in failing to obtain consensus on a plan of reorganization,
the adverse impact of a prolonged case, and the alternatives to reorganization.
On March 21, 2002, we filed our initial plan of reorganization with the
accompanying disclosure statement and filed a motion to approve the adequacy of
the disclosure statement. On April 23, 2002, the Court approved the disclosure
statement and related notices, established voting procedures and set the
confirmation hearing date for June 6, 2002. We then amended the plan of
reorganization, and on April 24, 2002, we filed our First Amended Plan of
Reorganization with the accompanying disclosure statement. After such date, we
made certain technical amendments to the Plan. On June 14, 2002, finding that
the required debt holders had voted to accept the First Amended Plan of
Reorganization, the Court confirmed the Company's First Amended Plan of
Reorganization with Technical Amendments. On June 27, 2002, the Court approved
other technical amendments to the Plan and confirmed the Company's First Amended
Plan of Reorganization with All Technical Amendments (the "Plan"). The Court's
confirmation of the Plan was reported on an 8-K filed with the SEC on June 28,
2002. Both the confirmation order and the Plan were attached as exhibits to that
report and are incorporated herein by reference.
The Plan reflects understandings reached with certain noteholders,
prospective new investors, and Charles Worden regarding the terms to be
incorporated in a plan of reorganization. We developed the Plan in a manner that
we believe most fairly treats all classes, taking into consideration the
relative rights and negotiating positions of new investors and various competing
claimants and equity interest holders.
Although the Court entered the initial confirmation order on June 14,
2002, the Plan could not become effective until we raised the minimum aggregate
amount of $2.8 million through a private offering of common stock with warrants.
During bankruptcy, we initiated this private offering to accredited investors
only (as said term is defined by Rule 501(a) of Regulation D) pursuant to
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
promulgated thereunder. For each $1.00 invested in the private offering,
investors received one share of common stock, 1/4th of a Class A Warrant
(exercisable for 2 years at $1.00 per share) and 3/20ths of a Class B Warrant
(exercisable for 3 years at $1.50 per share). On July 11, 2002, it was
determined that the Company had raised the minimum aggregate amount and the
proceeds were released from the escrow account to the Company; said date serves
as the "Effective Date" of the Plan (see below under The Company
Post-Bankruptcy/Subsequent Events).
For accounting purposes, the effects of the consummation of the Plan as
well as adjustments for fresh-start reporting have been recorded as of June 30,
2002, rather than July 11, 2002. The accounting transactions between June 30,
2002, and July 11, 2002, were minimal.
RESULTS OF OPERATIONS FOR PERIOD ENDING JUNE 30, 2002
We are a development stage company as defined in Statement of Financial
Accounting Standards No. 7 and had only limited operations through June 30,
2002. Our main activities during this start-up phase have consisted of
recruiting and hiring a new management team and corresponding personnel, as well
as the development of the licensing strategy for, and market expansion of,
AutoloGel and related disposable treatment packs and proprietary system. We
generated minimal revenues from inception through June 30, 2002.
As noted above, we filed for bankruptcy on August 7, 2001 and emerged from
bankruptcy on July 11, 2002. This event had a direct impact on all of our
revenues and expenses as described herein.
23
Since filing for protection under the Bankruptcy Code, the Company
operated its business as a debtor-in-possession subject to the jurisdiction of
the Court until its emergence from bankruptcy on July 11, 2002. Accordingly, the
Company's financial statements for periods during its bankruptcy were prepared
in conformity with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7") on a going concern basis, which assumes
continuity of operations and realization of assets and settlement of liabilities
and commitments in the normal course of business.
In connection with its emergence from bankruptcy, the Company reflected
the terms of the Plan in its financial statements by adopting the principles of
fresh-start reporting in accordance with SOP 90-7. For accounting purposes, the
effects of the consummation of the Plan as well as adjustments for fresh-start
reporting have been recorded in the accompanying unaudited condensed financials
statements as of June 30, 2002. Therefore as used in this Form 10-QSB, the term
"Predecessor Company" refers to the Company and its operations for periods prior
to emergence from bankruptcy which, for accounting purposes, was prior to June
30, 2002, while the term "Successor Company" is used to describe the Company for
periods after its emergence from bankruptcy which, for accounting purposes, is
after June 30, 2002. Under fresh-start reporting, the effects of the Plan are
recorded and the assets and liabilities are adjusted to reflect their estimated
fair values. In addition, the value of the total assets was adjusted to the
reorganization value of the Company. The reorganization value in excess of the
fair value amount allocable to identified assets is labeled as such and is
treated similar to goodwill. The Company also recorded an extraordinary gain on
discharge of pre-petition liabilities in the amount of $9,306,192.
The Successor Company continues to apply the accounting policies of the
Predecessor Company as described in the audited financial statements of the
Predecessor Company as filed in Form 10-KSB for the year ending December 31,
2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Our revenues, cost of sales and gross profit for the six months ended June
30, 2002 increased as compared to the same period in 2001. During 2001 our
management focused resources on the Procuren acquisition described above and the
AutoloGel operations diminished.
Our losses of $1,861,061 from operations during the first half of 2002
decreased as compared to losses of $14,643,754 in the first half of 2001. The
decrease in losses is due to implementation of the new AutoloGel distribution
model while operating within the guidelines of a business in Chapter 11
bankruptcy and the closing of the Procuren operations.
Our compensation expense for the six months ended June 30, 2002 was
approximately $285,906 as compared to $979,922 for the same period in 2001. The
decrease in the compensation expense in 2002 compared to 2001 was primarily due
to the minimal number of employees utilized during the first two quarters of
2002 to operate the Company while in bankruptcy.
Our consulting and professional services expenses for the six months ended
June 30, 2002 were approximately $350,362, as compared to $2,143,819 for the
same period in 2001. The decrease in the consulting expenses in 2002 compared to
2001 was primarily due to our decision to retain only those consultants
necessary to effect the reorganization of the Company and to operate the Company
during bankruptcy.
Our general and administrative expenses for the six months ended June 30,
2002, were $405,281, as compared to $1,029,684 for the same period in 2001. The
decrease was due to reduced expenses to operate the business and the relocation
to a much smaller corporate office and the closing of the Procuren operations.
Our royalty expense of $37,500 for the six months ended June 30, 2002
reflects royalty expense under the amended Royalty Agreement with Mr. Charles
Worden as more fully described below under Material Agreements. There was no
royalty expense during the same period in 2001.
Our interest expense, net of interest income, for the 2002 period was
$274,223, as compared to $5,211,291 for the 2001 period. The material portion of
our interest expense in the first half of 2001 was primarily due to our
24
recording of $5,077,306 in non cash interest charges related to financing
obtained in connection with our purchase of the Procuren operations.
During the six months period ended June 30, 2002, we incurred
reorganization expenses of $609,216 for professional fees and consulting expense
related to the bankruptcy.
In connection with the Plan, the Company recorded an extraordinary gain on
discharge of pre-petition liabilities in the amount of $9,306,192.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30,
2001
Our revenues, cost of sales and gross profit for the three months ended
June 30, 2002 increased as compared to the same period in 2001. During 2001, the
Procuren operations had to be closed, and because our management focused
resources on the Procuren Acquisition described above, the AutoloGel operations
diminished.
Our losses of $1,002,459 from operations during the three months ended
June 30, 2002 decreased as compared to losses of $7,986,013 in the same period
in 2001. The decrease in losses is due to implementation of the new AutoloGel
distribution model while operating within the guidelines of a business in
Chapter 11 bankruptcy and the closing of the Procuren operations.
Our compensation expense for the three months ended June 30, 2002 was
approximately $150,319 as compared to $527,555 for the same period in 2001. The
decrease in the compensation expense in 2002 compared to 2001 was primarily due
to the minimal number of employees utilized during the second quarter of 2002 to
operate the Company while in bankruptcy.
Our consulting and professional services expenses for the three months
ended June 30, 2002 were approximately $225,923 as compared to $1,024,503 for
the same period in 2001. The decrease in the consulting expenses in 2002
compared to 2001 was primarily due to our decision to retain only those
consultants necessary to effect the reorganization of the Company and to operate
the Company during bankruptcy.
Our general and administrative expenses for the three months ended June
30, 2002, were $216,738, as compared to $594,829 for the same period in 2001.
The decrease was due to reduced expenses to operate the business and the
relocation to a much smaller corporate office and the closing of the Procuren
operations.
Our royalty expense of $18,750 for the three months ended June 30, 2002
reflects royalty expense under the amended Royalty Agreement with Mr. Charles
Worden as more fully described below under Material Agreements. There was no
royalty expense during the same period in 2001.
Our interest expense, net of interest income, for the 2002 period was
$141,029, as compared to $933,889 for the 2001 period. The material portion of
our interest expense in the second quarter of 2001 was primarily due to our
recording of $880,459 in non cash interest charges related to financing obtained
in connection with our purchase of the Procuren operations.
During the three months period ended June 30, 2002, we incurred
reorganization expenses of $323,877 for professional fees and consulting expense
related to the bankruptcy.
In connection with the Plan, the Company recorded an extraordinary gain on
discharge of pre-petition liabilities in the amount of $9,306,192.
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 2002
As of June 30, 2002, the Company had not generated positive cash flow from
operations. At June 30, 2002, we had cash and cash equivalents of approximately
$103,855. Working capital at June 30, 2002 was a deficit of approximately
$2,232,132.
The Court did authorize the Company to initiate a private offering of
common stock with warrants to provide the Company with working capital. Upon
raising the minimum aggregate amount of $2,800,000 on July 11, 2002, this amount
was released from the escrow account to the Company. Since that date, the
Company has raised $3,279,252 in aggregate proceeds from the private offering.
We believe that if the Company raises the maximum aggregate amount in this
private offering of $4,800,000, the funds raised in the private offering and the
Company's generated revenues will be sufficient to meet our cash needs through
June 30, 2003.
25
THE COMPANY POST-BANKRUPTCY/SUBSEQUENT EVENTS
OVERVIEW OF EVENTS
Although the Court entered the initial confirmation order on June 14,
2002, the Plan could not become effective until we raised the minimum aggregate
amount ($2.8 million) through the private offering. On July 11, 2002, it was
determined that the Company had raised the minimum aggregate amount from private
accredited investors and the Plan was deemed effective. (For accounting
purposes, the effects of the consummation of the Plan as well as adjustments for
fresh-start reporting have been recorded as of June 30, 2002, rather than July
11, 2002.) We raised aggregate proceeds totaling $3,279,252 in the private
offering.
In conjunction with the Plan, we adopted new corporate documents including
the Restated Certificate of Incorporation, the Amended and Restated Certificate
of Designation and the Restated By-Laws. We filed the Restated Certificate of
Incorporation and the Amended and Restated Certificate of Designation with the
Delaware Secretary of State on July 11, 2002, which were filed with Form 10-QSB
on November 7, 2002, for quarter ended June 30, 2001, and which are incorporated
herein by reference.
We also approved and implemented a new Long-Term Incentive Plan. The
purpose of the Long-Term Incentive Plan approved in connection with the Plan is
to promote the success and enhance the value of the Company by linking the
personal interests of the employees, officers, consultants, independent
contractors, advisors and directors of the Company to the interests of the
Company. The Long -Term Incentive Plan permits incentive awards of options,
SARs, restricted stock awards, phantom stock awards, performance unit awards,
dividend equivalent awards or other stock-based awards. The Long-Term Incentive
Plan also provides that the Company is authorized to make awards of up to 15% of
the fully diluted stock of the Company on the Effective Date. On October 16,
2002, the Board reserved and allocated 2,336,523 shares of common stock to the
Long-Term Incentive Plan, finding that said amount is 15% of the fully diluted
stock of the Company as of the effective date of the Plan.
Under the Plan, the only remaining members of the Board as of July 11,
2002 were Messrs. Robert Burkett and David Crews. On August 19, 2002, our Board
appointed Mr. Steve Holden as the third member of the Board.
In August 2002, we moved our corporate headquarters from Northfield,
Illinois to 1523 S. Bowman, Suite A, Little Rock, Arkansas 72211. Our telephone
number at the Arkansas location is (501) 219-2111.
Since emerging from bankruptcy, we have entered into license and supply
agreements with nationally-recognized long term care providers, including
National Healthcare Corporation, Extendicare Health Services, Total Blood
Services, Provident Home Care and other long term care, long term acute care and
wound care providers.
SUMMARY OF THE FIRST AMENDED PLAN OF REORGANIZATION
Under the Plan, effective July 11, 2002, all of the Company's securities
or other instruments or documentation representing a claim against or an equity
interest in the Company were canceled and of no further force or effect. Holders
of certain claims or securities ("Existing" securities) were entitled to receive
new securities ("New" securities) from the Company in exchange for their claims
or equity interests in the Company prior to bankruptcy. Under the Plan, holders
of Existing common stock receive one share of New common stock for every five
shares of Existing common stock. On July 26, 2002, this exchange was recognized
by the markets and our New common stock began trading under a new symbol - CYME.
The New common stock succeeded to the registered status of the old common stock
under Rule 12g-3 as explained in 3S and 5S Rule 12g-3 in the Division of
Corporation Finance: Manual of Publicly Available Telephone Interpretations -
March 1999 Supplement.
Holders of Existing Series A Preferred stock will receive one share of New
common stock for every five shares of Existing Series A Preferred Stock, if the
Company has revenues exceeding $10,000,000 in four consecutive quarters. Holders
of Existing Series B Preferred stock receive $.0001 for each share owned.
Under the Plan, the Company no longer has any outstanding 12% Notes or 10%
Notes. Holders of the 12% Notes receive a combination of shares of common stock
(up to 50% of their claim) and shares of new Series A
26
Convertible Preferred Stock. Holders of the 10% Notes receive a combination of
shares of New common stock (up to 50% of their claim) and shares of New Series B
Convertible Preferred Stock. Noteholders are entitled to one share (of either
common or preferred stock) for every $1.00 owed to them under their respective
notes.
In addition, under the Bankruptcy Code we could assume or reject executory
contracts, including lease obligations. Parties affected by these rejections
could file claims with the Court in accordance with the reorganization process.
We actively engaged in this process and reviewed all claims and executory
contracts, reaching final decisions with respect to assuming or rejecting the
contracts. These decisions were included in the Plan. See the 10-KSB for the
year ended December 31, 2001 and the Notes to the Financial Statements included
in this report for a more detailed analysis of the Plan.
MATERIAL AGREEMENTS
In conjunction with the Procuren Acquisition on January 2, 2001, we
agreed, among other things, to pay future royalties to Curative as set forth in
the royalty agreement dated as of December 26, 2000, and as amended on April 20,
2001, by and between Cytomedix and Curative (the "Curative Royalty Agreement").
Under the Curative Royalty Agreement, we must make royalty payments to Curative
for sales of Procuren products. In consideration for Curative's agreement to
enter into a Consent, Waiver, Payoff and Exchange Agreement, we agreed to amend
the royalty agreement on April 20, 2001, to give Curative a security interest in
and a lien on all of the patents Cytomedix, acquired from Curative as collateral
to secure royalty payments that Cytomedix is required to make to them. We also
agreed to certain other amendments to the Curative Royalty Agreement including
providing Curative with 30% of all aggregate proceeds we may recover from
third-parties for infringement of the patents we acquired from Curative and 20%
of any up-front license fees we may acquire from third-parties from future
licenses we may grant using patents acquired from Curative.
On March 21, 2001, Cytomedix signed an exclusive licensing agreement with
DePuy AcroMed, Inc. ("DePuy"), a subsidiary of Johnson & Johnson, Inc. (the
"DePuy Licensing Agreement"). Under this agreement, Cytomedix has granted to
DePuy an exclusive, worldwide license to use certain of the U.S. and foreign
issued patents relating to platelet-based growth factors that Cytomedix acquired
from Curative. In consideration of these rights, DePuy paid to Cytomedix a
one-time up front license fee of $750,000 and agreed to pay running royalties of
6.5% on all relevant sales as defined under the terms of the agreement for the
life of the patents, which is, on average, approximately nine years. Under the
terms of the Curative Royalty Agreement, Cytomedix must pay Curative 92.3% of
the royalties Cytomedix collects from DePuy. It also provides for certain
minimum annual royalties, beginning in fiscal 2001.
The Plan provides that all rights under both the Curative Royalty
Agreement and the DePuy Licensing Agreement continue in full force and effect
after bankruptcy, and the legal, equitable, and contractual rights arising
thereunder are unaltered (including the retention of all prepetition liens
granted under the Curative Royalty Agreement). However, the Plan does allow for
the Company to make distributions directly to Waverly Holdings, LLC, an Arkansas
limited liability company ("Waverly") of its proportionate share of royalties
(that Waverly purchased from Curative) payable under the Curative Royalty
Agreement instead of to Curative.
We also entered into a substitute royalty agreement with Mr. Charles
Worden on November 14, 2001, which supercedes the agreement dated October 29,
1999. Under this agreement, we have agreed to pay to Worden a royalty of five
percent of the gross profit from the sale, licensing or other exploitation of
the Worden patent. The royalty payment during any calendar year is limited to
$600,000. We have agreed to pay Worden a minimum royalty of $6,250 per month in
advance. We have granted to Worden a security interest and lien in the Worden
patent. In addition, we have granted Worden a reversionary interest in the
patent if we discontinue substantially all efforts to commercialize the Worden
patent.
Mr. Kent T. Smith was appointed in October 2001, immediately following the
consent solicitation, and Ms. Carelyn P. Fylling was hired in December 2001.
Subsequently, upon emerging from bankruptcy in 2002, the Company entered into
formal employment agreements with both Smith and Fylling.
Under the employment agreement with Kent T. Smith, the Company has agreed
to employ Kent T. Smith as the Company's President and CEO. The term of the
employment contract is one year from effective date. Both
27
parties, upon mutual written agreement, may extend the contract for an
additional two years. After the two year extension, both parties may make
additional extensions in one year increments thereafter. Mr. Smith's
compensation will be a base salary of $200,000 per year (which may be increased
by consent of the Board), stock options, annual bonus in accordance with Company
performance, and various other benefits.
The employment agreement with Ms. Carelyn P. Fylling to serve as the
Company's Vice President of Professional Services is also a one-year contract
and provides for an extension of the contract for an additional two years. After
the two year extension, both parties may make additional extensions in one year
increments thereafter. Under the contract, Fylling's base salary is $130,000
(which may be increased by consent of the Board), stock options, annual bonus in
accordance with Company performance, and various other benefits.
We entered into a consulting agreement with BDR, Inc. to provide such
management, financing, marketing and strategic consulting services as requested
by the Board. In exchange, BDR, Inc. is compensated at a rate of $9,000 per
month. This agreement may be terminated at any time by either party.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS
Cytomedix cautions the readers not to place undue reliance on any
forward-looking statements, which are based on certain assumptions and
expectations which may or may not be valid or actually occur. The risk factors
which follow may cause actual results to differ materially from those expressed
or implied by any forward-looking statement included in this report. The risks
described below are not to be deemed an exhaustive list of all potential risks.
We are a Company which filed for bankruptcy with limited working capital.
Because the Company has been in bankruptcy, the Company cannot anticipate
how the market will receive it or its products. Furthermore, the Company will
not be obtaining extensive debt financing. All working capital required to
implement the Company's business plan after confirmation of the Plan will be
provided by funds obtained through its private offering and revenues generated
by the Company.
If we do not have sufficient working capital and are unable to generate
revenues or raise additional funds, the following may occur: delaying the
implementation of our new business plan or significantly reducing the scope of
the business plan; delaying some of our development and clinical testing;
delaying our plans to initiate government regulatory and reimbursement approval
processes for our wound treatment technologies; and postponing the hiring of new
personnel. The occurrence of any or all of these events could have a material
adverse effect on the Company.
We have a history of losses.
The Company has a history of losses and expects to incur substantial
losses and negative operating cash flows for the foreseeable future. The Company
may never achieve or maintain profitability. The Company is not currently
profitable and expects to continue to incur net losses in the foreseeable
future. The Company also expects to experience negative cash flow for the
foreseeable future. The Company will need to generate significant revenues to
achieve and maintain profitability. The Company cannot guarantee that it will be
able to generate these revenues and it may never achieve profitability in the
future.
We have a short operating history and limited operating experience.
The Company must be evaluated in light of the uncertainties and
complexities affecting an early stage biotechnology company. The Company is a
development stage company and has only recently begun to implement its current
business plan since the change in management occurring in October 2001. Thus,
the Company has a very limited operating history and limited experience in
conducting these operations. Continued operating losses, together with the risks
associated with the Company's ability to gain new customers in the sale of
disposable Kits for the AutoloGel process may have a material adverse effect on
the Company's liquidity. The Company may also be forced to respond to unforeseen
difficulties, such as decreasing demand for its products and services,
regulatory requirements and unanticipated market pressures.
During bankruptcy, we began developing a new business model that would
enable us to provide a simpler, lower cost method of wound care. We have
directly and indirectly entered into license agreements that have enabled
28
us to introduce our treatment capabilities for testing in nationally recognized
wound care treatment centers and long-term nursing home facilities. However, we
are implementing a new business plan and strategy, and our failure to
successfully implement our business plan would adversely affect our business,
prospects, operating results and financial condition.
AutoloGel is subject to governmental regulation.
The Company's success is also impacted by factors outside of the Company's
control. Our therapies are subject to governmental regulation by numerous
governmental authorities, including the United States Food and Drug
Administration (the "FDA"). Changes in regulation or failure to obtain required
approvals would have a material adverse impact on the Company.
The Company's current therapies will be subject to extensive regulation by
numerous governmental authorities in the United States, both federal and state,
and in foreign countries by regulatory agencies. Specifically, the Company's
therapies will be subject to regulation by the FDA and state regulatory
agencies. The regulations of government health ministries in foreign countries
are analogous to those of the FDA in both application and scope. In addition,
any change in current regulatory interpretations by, or positions of, state
regulatory officials where the AutoloGel process is practiced, could materially
and adversely affect the Company's ability to sell products in those states.
Further, as the Company expands and offers additional products in the
United States and in foreign countries, the Company may require approval from
the FDA and comparable foreign regulatory authorities prior to introduction of
any such products into the market. The Company has no assurance that it will be
able to obtain all necessary approvals from the FDA or comparable regulatory
authorities in foreign countries for these products. Failure to obtain the
required approvals would have a material adverse impact on the Company's
business and financial condition.
Our success could be adversely affected if our customers cannot obtain
reimbursement.
AutoloGel is provided to healthcare providers. Some of these providers, in
turn, seek reimbursement from third party payors such as Medicare, Medicaid, and
other private insurers. The Company has not submitted an application for
Medicare reimbursement for the AutoloGel process. At present, the AutoloGel
process does not qualify for Medicare or Medicaid reimbursement. Many foreign
countries also have comprehensive government managed healthcare programs that
provide reimbursement for healthcare products. Under such healthcare systems,
reimbursement is often a determining factor in predicting a product's success,
with some physicians and patients strongly favoring only those products for
which they will be reimbursed.
In order to achieve a national reimbursement procedure code for AutoloGel,
the Company will have to undertake a prospective, randomized, controlled clinic
trial so as to provide the necessary data as required by the Center for Medicare
and Medicaid Services, formerly known as the Healthcare Financing Agency
("HCFA"). In addition, a 1992 HCFA ruling prohibiting the reimbursement of
growth factor products for chronic wounds will have to be dismissed. The
Company's ability to obtain reimbursement approval from governmental agencies
and private insurers may be a significant factor in determining its abilities to
increase its revenues. The Company cannot guarantee that third-party payors will
elect to reimburse treatments using the Company's products or processes or, if
such reimbursement is approved, that the level of reimbursement granted will be
sufficient to cover the cost of the product or process to the physician or to
the patient.
Healthcare providers' inability to obtain third-party reimbursement for
the treatment could have an adverse effect on the Company's success.
The success of AutoloGel is dependent on acceptance by the medical
community.
The commercial success of the Company's products and processes will depend
upon the medical community and patients accepting the therapies as safe and
effective. If the medical community and patients do not ultimately accept the
therapies as safe and effective, the Company's ability to sell the products and
processes will be materially and adversely affected.
29
We may be unable to attract and retain key personnel.
The future success of the Company depends on the ability to attract,
retain and motivate highly-skilled management, including sales representatives.
The Company has retained a team of highly-qualified officers and consultants,
but the Company cannot assure you that it will be able to successfully integrate
these officers and consultants into its operations, retain all of them or be
successful in recruiting additional personnel as needed. The Company's inability
to do so will materially and adversely affect the business prospects, operating
results and financial condition.
The Company's ability to maintain and provide additional services to its
existing customers depends upon its ability to hire and retain business
development and scientific and technical personnel with the skills necessary to
keep pace with continuing changes in cellular therapy technologies. Competition
for such personnel is intense, the Company competes with pharmaceutical,
biotechnology and healthcare companies. The Company's inability to hire
additional qualified personnel may lead to higher recruiting, relocation and
compensation costs for such personnel. These increased costs may reduce the
Company's profit margins or make hiring new personnel impracticable.
Legislative and administrative action may have an adverse effect on the
Company.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company cannot
predict what other legislation relating to its business or to the health care
industry may be enacted, including legislation relating to third-party
reimbursement, or what effect such legislation may have on the Company's
business, prospects, operating results and financial condition. The Company
expects federal and state legislators to continue to review and assess
alternative health care delivery and payment systems, and possibly adopt
legislation affecting fundamental changes in the health care delivery system.
Such laws may contain provisions, which may change the operating environment for
our targeted customers, including hospitals and managed care organizations.
Health care industry participants may react to such legislation by
curtailing or deferring expenditures and initiatives, including those relating
to our products. Future legislation could result in modifications to the
existing public and private health care insurance systems that would have a
material adverse effect on the reimbursement policies discussed above.
The Company could be affected by malpractice claims.
Providing medical care entails an inherent risk of professional
malpractice and other claims. The Company does not control or direct the
practice of medicine by physicians or health care providers who use the products
and does not assume responsibility for compliance with regulatory and other
requirements directly applicable to physicians. The Company cannot guarantee
that claims, suits or complaints relating to the use of the AutoloGel process
administered by physicians will not be asserted against the Company in the
future.
The marketing, sale and use of the AutoloGel process entail risks that
product liability claims will be asserted against the company. These risks
cannot be eliminated and the Company could be held liable for any damages that
result from adverse reactions or infectious disease transmission. Such liability
could materially and adversely affect the Company's business, prospects,
operating results and financial condition.
The Company currently maintains professional and product liability
insurance coverage, but the Company cannot assure you that the coverage limits
of this insurance would be adequate to protect us against all potential claims.
The Company cannot guarantee that it will be able to obtain or maintain
professional and product liability insurance in the future on acceptable terms
or with adequate coverage against potential liabilities.
AutoloGel has existing competition in the marketplace.
In the market for biotechnology products, the Company faces competition
from pharmaceutical companies, biopharmaceutical companies and other competitors
whose products are marketed into the long-term care market. Other companies have
developed or are developing products which may be in direct competition with the
AutoloGel
30
process. Biotechnology development projects are characterized by intense
competition. Thus, the Company cannot assure any investor that it will be the
first to the market with any newly developed products or that it will
successfully be able to market these products. If the Company is not able to
participate and compete in the cellular therapy market, the Company's financial
condition will be materially and adversely affected. The Company cannot
guarantee that it will be able to compete effectively against such companies in
the future. Many of these companies have substantially greater capital
resources, larger marketing staffs and more experience in commercializing
products. Recently developed technologies, or technologies that may be developed
in the future, may be the basis for developments which will compete with the
Company's products.
Our common stock is quoted on the Pink Sheets and we may never be listed
on a National Exchange.
Our common stock is currently traded in the over-the-counter market and
quoted on the Pink Sheets LLC(R) (the "Pink Sheets") (until July 26, 2002, our
common stock was quoted under the symbol "CYDX" and since said date has been
quoted under the symbol "CYME"). Although Cytomedix is currently a publicly held
company, there can be no assurance as to whether an active trading market for
our common stock will be developed or maintained or that our common stock will
ever be listed on a national securities exchange. This means that it may be hard
or impossible to find a willing buyer for the Company's common stock in the
future.
Purchases of our shares are subject to the SEC's penny stock rules.
If a trading market for our common stock develops in the future, the
Company is uncertain as to whether the market price would be above $5.00 per
share. Securities which trade below $5.00 per share are subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934. These rules require additional disclosure by broker-dealers in connection
with any trades involving the stock defined as a "Penny Stock." Generally, any
non-Nasdaq equity security that has a market price of less than $5.00 per share
is a Penny Stock. As a result of our common stock being characterized as a Penny
Stock, the market liquidity for the common stock may be adversely affected by
the regulations. This could restrict an investor's ability to sell the common
stock in a secondary market.
The rules governing Penny Stock require the delivery, prior to any Penny
Stock transaction, of a disclosure schedule explaining the Penny Stock market
and the risks associated therewith, and impose various sales practice
requirements on broker-dealers who sell Penny Stocks to persons other than
established customers and accredited investors as defined in Rule 501(a) of
Regulation D. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The broker-dealer
also must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the Penny Stock and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing prior to effecting the transaction and in writing
before or with the customer confirmation. Monthly statements must be sent
disclosing recent price information for the Penny Stock held in the account and
information on the limited market in Penny Stock.
The additional burdens imposed on broker-dealers may discourage them from
effecting transactions in our common stock, which could severely limit the
liquidity of the common stock and the ability of shareholders to sell our common
stock in the secondary market.
FORWARD-LOOKING INFORMATION
Initial reports from healthcare providers treating hard-to-heal chronic
wounds with AutoloGel have stated that they have found increased healing in a
shorter period of time than they have experienced with other products. There is
an existing long-term care market where we believe AutoloGel is perfectly
positioned for success. With what we believe to be a strong patent position and
an easy-to-use system to treat wounds, we believe we are positioned to
successfully introduce AutoloGel into the long-term care market.
31
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 7, 2001, the Company filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. We were not involved in any other legal
proceeding in the second quarter of 2002, other than those actions and claims
brought in connection with the bankruptcy.
However, after July 11, 2002, the Company commenced the following
litigation in the District Court for the Northern District of Illinois, Eastern
Division: (i) Cytomedix, Inc. v. LB Hyperbarics, Inc., et al., Case No. 02 C
4774; (ii) Cytomedix, Inc. v. Perfusion Partners & Associates, Inc., Case No. 02
C 4776; (iii) Cytomedix, Inc. v. James Gandy, et al., Case No. 02 C 4779; (iv)
Cytomedix, Inc. v. Little Rock Foot Clinic, P.A., et al., Case No. 02 C 4782;
(v) Cytomedix, Inc. v. Autologous Blood Technology, L.L.C., et al., Case No. 02
C 4863; and (vi) Cytomedix, Inc. v. Safeblood Technologies, Inc., et al., Case
No. 02 C 4773. In each of these cases, the Company has asserted that the
Defendants have infringed the Company's patents and engaged in unfair
competition. In the Gandy and Little Rock proceedings, breaches of contract are
also asserted. In all these actions the Company seeks unspecified damages and
injunctive relief. The cases are generally in the early stages involving motions
to dismiss by the defendants in each case, and responses by the Company. Thus
far, the Company has successfully defended against a motion to dismiss in the LB
Hyperbarics case. Briefing on the motions to dismiss in all the other pending
cases (except the Gandy adversary, where a responsive pleading has not yet been
filed) is proceeding and rulings on these pending motions are expected by year
end 2002.
In September 2002, the Company filed with the Bankruptcy Court for the
Northern District of Illinois, Eastern Division, an adversary proceeding
captioned Cytomedix, Inc. v. Keith Bennett, et al., Adv. No. 02 A 01292. In this
action, the Company objects to Bennett's $1.1 million claim asserted as a Class
3 general unsecured claim under Option 3A (under which Bennett would receive a
12% cash recovery on his Allowed Claim, if any) in the Company's bankruptcy
case. In addition, the Company asserts affirmative claims of patent
infringement, breach of contract, and unfair competition. Management intends to
vigorously pursue the litigation. The Company has successfully defended against
Bennett's motions to dismiss or, alternatively, to compel arbitration or
transfer venue of the case to a federal court in Arkansas.
Although the Company has not yet been served with the complaint, it has
come to our attention that on October 23, 2002, Harvest Technologies Corp.
initiated an action against the Company in the Federal District Court for the
District of Massachusetts, Case No. 02-12077. Plaintiff seeks a declaratory
judgment that its activities do not constitute the infringement of any patent
rights claimed by the Company, and it seeks damages for alleged false
advertising, unfair competition, intentional interference with contractual
rights or a prospective business relationship and unfair and deceptive trade
acts or practices as defined by Massachusetts law. The claim for damages is
unliquidated. The Company vigorously disputes the allegations, and intends to
bring counterclaims against Harvest for patent infringement and unfair
competition.
Unfavorable resolutions of, settlements of, or costs related to these
lawsuits could have a material adverse effect on our business, results of
operations or financial condition.
Item 2. Changes in Securities.
ADOPTION OF AN AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
In connection with the Plan, the Company adopted and filed with the
Delaware Secretary of State, an Amended and Restated Certificate of Designation
of the Relative Rights and Preferences of Series A Preferred, Series B Preferred
and Common Stock of Cytomedix, Inc. (the "Certificate of Designation"). Under
the Plan, all Existing Securities were canceled and the rights of the holders of
the Company's New Common Stock and New Preferred Stock are governed by the
Certificate of Designation. The Certificate of Designation was attached as an
exhibit to Form 10-QSB filed on November 7, 2002, and is incorporated herein by
reference.
32
Under the Certificate of Designation, the New Common Stock is subordinate
to both the Series A Convertible Preferred and Series B Convertible Preferred
Stock and to all other classes and series of equity securities of the Company
which by their terms rank senior to the Common Stock. Each share of Common Stock
represents the right to one vote. Holders of Common Stock do not have any
cumulative voting rights, preemptive rights, conversion rights, redemption
rights or sinking fund rights. Holders of Common Stock are entitled to receive
dividends as may from time to time be declared by the Board of Directors at the
Board of Directors' sole discretion. The Company is prohibited from declaring
and paying dividends on the Common Stock as long as any shares of Series A
Convertible Preferred and/or Series B Convertible Preferred Stock are
outstanding. It should also be noted that each share of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock entitles the holder
thereof to cast the number of votes equal to the number of votes which could be
cast in such vote by a holder of one share of New Common Stock of the Company.
ISSUANCE OF NEW SECURITIES
Between January 1, 2002 and June 30, 2002, we did not issue any additional
securities.
However, the Company has issued additional securities in connection with
the Plan. During bankruptcy, we initiated a private offering of Common Stock of
Cytomedix, Inc. and Warrants to Purchase Common Stock of Cytomedix, Inc. to
accredited investors only (as said term is defined by Rule 501(a) of Regulation
D). The private offering was exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated thereunder. For each $1.00 invested in the private
offering, investors in the private offering (the "New Investors") received one
share of New common stock, 1/4th of a Class A Warrant (exercisable for 2 years
at $1.00 per share) and 3/20ths of a Class B Warrant (exercisable for 3 years at
$1.50 per share). The Company is using the $3,147,539 in net aggregate proceeds
($3,279,252 less $131,713 in commissions paid or to be paid) for working
capital. Since raising the minimum aggregate amount of $2,800,000 on July 11,
2002, the Company has issued or is obligated to issue 3,279,252 shares of New
common stock, 819,813 Class A Warrants and 491,888 Class B Warrants to the New
Investors. The Company has agreed to use its best efforts to prepare and file a
registration statement covering the resale of the New common stock (including
the New common stock underlying the Class A and Class B Warrants) by the New
Investors.
For their services in the private offering, commissions of 10% of the sale
price were paid to certain selling agents, with 50% of the commission amount
paid in cash and 50% paid in shares of common stock (one share of common stock
for each $1.00 of commission earned payable in stock). To date, the Company has
issued or has an obligation to issue an aggregate amount of 131,713 shares of
restricted common stock to the selling agents. R.M. Duncan Securities of Little
Rock, Arkansas, Founder's Equity of Dallas, Texas, Crews & Associates of Little
Rock, Arkansas and Frederick & Company, Inc. of Milwaukee, Wisconsin, served as
the principal selling agents.
During bankruptcy, the Company raised $800,000 in DIP Financing. We
executed promissory notes to each of these private investors providing the DIP
Financing (the "DIP Lenders"). Upon emerging from bankruptcy, the DIP Lenders
agreed to accept shares of common stock and warrants in lieu of cash under the
same terms as offered to the investors in the private offering (for each $1.00
loaned, the DIP Lender receives one share of common stock, 1/4th of a Class A
Warrant and 3/20ths of a Class B Warrant). The Company issued an aggregate of
828,852 shares of common stock, 207,213 Class A Warrants and 124,328 Class B
Warrants to the DIP Lenders. The Company has agreed to use its best efforts to
prepare and file a registration statement covering the resale of the New Common
Stock (including the New Common Stock underlying the Class A and Class B
Warrants) by the DIP Lenders.
On July 29, 2002, we entered into a financial services agreement with HMA
Advisors ("HMA") to provide assistance to the Company to reach the Company's
financing goals. As compensation, the Board granted HMA a warrant to purchase
600,000 shares of common stock exercisable at $1.00 per share, with an
expiration date of August 1, 2007.
On August 7, 2002, our Board granted options to certain persons under the
Company's Long-Term Incentive Plan approved in conjunction with the Plan. The
Board granted options representing the right to purchase a specified number of
shares of New Common Stock at $1.50 per share to the following persons: Robert
Burkett - option representing 100,000 shares (vested
33
immediately); David Crews - option representing 100,000 shares (vested
immediately); Kent T. Smith - option representing 521,928 shares (70,000 shares
vested immediately, and 1/24th of the remaining amount vests on each monthly
anniversary of the date of grant over a two-year period commencing on the date
of grant); Carelyn P. Fylling - option representing 250,000 shares (80,000
shares vested immediately; 1/24th of the remaining amount vests on each monthly
anniversary of the date of grant over a two-year period commencing on the date
of grant); BDR, Inc. (President and sole shareholder, Jimmy D. Swink, Jr.) -
option representing 300,000 shares (100,000 shares vested immediately, 100,000
shares vest on August 7, 2003, and 100,000 on August 7, 2004).
On August 19, 2002, our Board appointed Mr. Stephen Holden as a director
of the Company. In consideration for his agreement to serve on the Board, the
Board granted Holden an option to purchase 33,000 shares of common stock at
$1.50 to vest on August 16, 2003.
On October 25, 2002, we issued shares of New common stock in lieu of cash
to certain legal professionals rendering their services after July 11, 2002.
This stock is being issued pursuant to Section 4(2) of the Securities Act of
1933. To date, the Company has issued 68,014 shares to the attorneys at Robert
F. Coleman & Associates (who served as the Company's bankruptcy counsel) and
6,660 shares to the attorneys at Cummins & Cronin, LLC (who served as the
Company's intellectual property counsel).
The Plan included an issuance of a reorganization bonus to certain persons
contingent on those persons' success in having a plan of reorganization
confirmed. On October 16, 2001, our Board reached an agreement with Mr. Jimmy D.
Swink, Jr. providing that in exchange for his full-time commitment to the
Company's reorganization efforts as our reorganization manager, the Board would
provide a reorganization bonus to Mr. Swink in any Board-sponsored plan of
reorganization. Upon the effectiveness of a Board-sponsored plan, the Board
resolved that Mr. Swink would receive 4% of all Plan-Issued Securities.
("Plan-Issued Securities" include all new securities to be issued under the
Plan, exclusive of the following: (i) the Reorganization Bonus; (ii) the
Long-Term Incentive Plan; (iii) the New Warrants; and (iv) all shares issued to
new investors in the private offering in excess of the initial $1,700,000
raised. ) The Board also approved a reorganization bonus of 1/3% for Messrs.
Burkett and Crews for their services as directors and for Mr. Kent Smith for his
services as Chief Executive Officer during the bankruptcy. On October 16, 2002,
the Board determined that 5% of all Plan-Issued Securities equaled 487,218
shares of common stock. The Board resolved that 389,775 shares of New common
stock should be issued to Mr. Jimmy D. Swink, Jr. and that 32,481 shares of New
common stock should be issued to each of Messrs. Burkett, Crews and Smith.
Pursuant to the Plan and Section 1145 of the U.S. Bankruptcy Code, the
Company continues to exchange New securities for "Allowed Claims" and "Allowed
Equity Interests" as defined in the Plan. See the Notes to the Financial
Statements in Item 1 for a more detailed explanation of the exchange
consideration issued under the Plan. After this exchange is complete, the
Company anticipates having issued the following amounts of securities to the
following classes for "Allowed Claims" and "Allowed Equity Interests":
- --------------------------------------------------------------------------------
Administrative Claims 599,745 Shares of New Common Stock
- --------------------------------------------------------------------------------
Class 1A - Holders of 12% Notes 1,086,155 Shares of New Common Stock
1,365,923 Shares of New Series A
Convertible Preferred Stock
- --------------------------------------------------------------------------------
Class 1B - Holders of 10% Notes 1,403,471 Shares of New Common Stock
1,403,471 Shares of New Series B
Convertible Preferred Stock
- --------------------------------------------------------------------------------
Class 1C - Claims of 111,381 Shares of New Common Stock
Charles Worden, Sr.
- --------------------------------------------------------------------------------
Class 1D Claims - Claims under No Securities
the Curative Royalty Agreement
- --------------------------------------------------------------------------------
Class 2 Claims -Priority 32,730 Shares of New Common Stock
Employee Claims
- --------------------------------------------------------------------------------
Class 3 Claims -General 180,910 Shares of New Common Stock
Unsecured Claims
- --------------------------------------------------------------------------------
Class 4A Claims - Existing Series 353,356 Shares of New Common Stock (if
A Preferred Stock the Company has revenues exceeding
$10,000,000 in four consecutive
quarters)
- --------------------------------------------------------------------------------
Class 4B Claims -Existing Series B No Securities
Preferred Stock
- --------------------------------------------------------------------------------
Class 5 Claims - Existing Common Stock 2,560,120 Shares of New Common Stock
- --------------------------------------------------------------------------------
Class 6 Claims - Existing Stock Options No Securities
- --------------------------------------------------------------------------------
Class 7 Claims - Other Equity Interests No Securities
- --------------------------------------------------------------------------------
34
Item 3. Defaults Upon Senior Securities.
Our filing for bankruptcy constituted a default under both the 12% Notes
and 10% Notes. However, under the Plan, both the 12% Notes and the 10% Notes
have been cancelled and are of no further force or effect. See the Notes to the
Financial Statements in Item 1 for more detailed information.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the interim
period covered by this report.
However, it should be noted that the entry of the Court's order confirming
the Plan authorized the Company to take certain corporate actions without the
need for any further action by the Court or any of the officers, directors, or
shareholders of the Company. Pursuant to this order, the Company was authorized
and did take all actions necessary and appropriate to execute and adopt the
following: the Restated Certificate of Incorporation, the Restated Bylaws, the
Amended and Restated Certificate of Designation, and the Long-Term Incentive
Plan. The Court's confirmation of the Plan also authorized the Company, among
other things, to select our initial directors and officers and to remove any
directors or officers of the Company. The Plan included the removal of Mr.
Charles Worden from the Board. As authorized, the Board subsequently appointed
Mr. Steve Holden as the third member of the Board.
Item 5. Other Information.
Although the Company did not emerge from bankruptcy until July 11, 2002,
this report, for accounting purposes, includes information as if the Company
emerged on June 30, 2002. All events occurring simultaneous with the
effectiveness of the Plan actually occurred on July 11, 2002.
Item 6. Exhibits and Reports on Form 8-K.
The Exhibits listed in the accompanying Exhibit Index are filed as part of
this report.
On Form 8-K filed December 10, 2001, we reported our intentions to file
our monthly operating reports, required to be filed with the Court, with the SEC
under the cover of Forms 8-K. On April 12, 2002, we filed our monthly operating
reports with the SEC for February 2002 and March 2002. On June 7, 2002, we filed
our monthly operating report for April 2002. These monthly operating reports are
incorporated herein by reference.
On Form 8-K filed April 8, 2002, we reported our filing of our initial
plan of reorganization with the accompanying disclosure statement and a motion
to approve the adequacy of the disclosure statement. The initial plan of
reorganization, the accompanying disclosure statement and some of the exhibits
to the initial plan of reorganization were attached as exhibits to that report.
On May 21, 2002, we reported on Form 8-K the Court's approval of our
disclosure statement to the initial plan of reorganization. We reported that the
Court had established voting procedures and set the confirmation hearing date
for June 6, 2002. We also reported our filing of our First Amended Plan of
Reorganization with the accompanying disclosure statement. The First Amended
Plan of Reorganization, the accompanying disclosure statement, and some of the
exhibits thereto were included in that filing as exhibits.
On June 28, 2002, we reported the Court's approval and confirmation of our
First Amended Plan of Reorganization with All Technical Amendments. We reported
that, although confirmed, the Plan was not yet effective. The Plan and the
confirmation order confirming the Plan were included in that filing and are
incorporated herein by reference.
Subsequent to June 30, 2002, we have reported other material events on
Forms 8-K filed with the SEC as follows:
35
July 16, 2002 Effective Date of Plan and Removal of Director under the Plan
July 25, 2002 Reverse Split of Common Stock and Trading under New Symbol
August 21, 2002 Engagement of New Independent Accountant
August 26, 2002 Dismissal of Independent Accountant
October 3, 2002 May 2002 Monthly Operating Report
36
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cytomedix, Inc.
/s/ Kent T. Smith
- -----------------------
Kent T. Smith
Chief Executive Officer
Date: December 4, 2002
37
Certification Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Kent T. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cytomedix,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: December 4, 2002
/s/ Kent T. Smith
Kent T. Smith
Chief Executive Officer
38
EXHIBIT LIST
2.1 Amended and Restated Asset Purchase Agreement, effective as of October 12,
2000 and executed as of December 26, 2000, by and among Cytomedix, Inc.,
CHS Services, Inc. and Curative Health Services, Inc. (Previously filed on
January 17, 2001, on Form 8-K, File No. 000-28443).
2.2 First Amended Plan of Reorganization with All Technical Amendments
(Previously filed on June 28, 2002, on Form 8-K, File No. 000-28443).
3.1 Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed
on November 7, 2002, on Form 10-QSB for quarter ended June 30, 2001, File
No. 000-28443).
3.2 Restated Bylaws of Cytomedix, Inc. (Previously filed on November 7, 2002,
on Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
4.1 Convertible Secured Promissory Note issued to Curative Health Services,
Inc., dated as of December 26, 2000 (Previously filed on January 17, 2001,
on Form 8-K, File No. 000-28443).
4.2 Convertible Secured Promissory Note issued to TSENVI, LLC, dated as of
December 26, 2000 (Previously filed on January 17, 2001, on Form 8-K, File
No. 000-28443).
4.3 Convertible Secured Promissory Note issued to Bel-Cap Delaware, LLC, dated
as of December 26, 2000 (Previously filed on January 17, 2001, on Form
8-K, File No. 000-28443).
4.4 Convertible Secured Promissory Note issued to Bristol Investment Fund,
LLC, dated as of December 26, 2000 (Previously filed on January 17, 2001,
on Form 8-K, File No. 000-28443).
4.5 Warrant issued to Curative Health Services, Inc., dated as of December 26,
2000 (Previously filed on January 17, 2001, on Form 8-K, File No.
000-28443).
4.6 Warrant issued to TSENVI, LLC, dated as of December 26, 2000 (Previously
filed on January 17, 2001, on Form 8-K, File No. 000-28443).
4.7 Warrant issued to Bel-Cap Delaware, LLC, dated as of December 26, 2000
(Previously filed on January 17, 2001 on Form 8-K, Registration No.
000-28443).
4.8 Warrant issued to Bristol Investment Fund, LLC, dated December 26, 2000.
(Previously filed on January 17, 2001, on Form 8-K, Registration No.
000-28443).
4.9 Warrant issued to FAC Enterprises, Inc., dated as of December 26, 2000
(Previously filed on February 16, 2001, on Form SB-2, File No. 333-55818).
4.10 Warrant issued to Smoke Rise Investments, LLC dated as of February 13,
2001. (Previously filed on February 16, 2001, on Form SB-2, File No.
333-55818).
4.11 Warrant issued to The Kriegsman Group, dated as of December 26, 2000
(Previously filed on February 16, 2001, on Form SB-2, File No. 333-55818).
4.12 Amended and Restated Certificate of Designation of the Relative Rights and
Preferences of Series A Preferred, Series B Preferred and Common Stock of
Cytomedix, Inc. (Previously filed on November 7, 2002, on Form 10-QSB for
quarter ended June 30, 2001, File No. 000-28443).
10.1 Royalty Agreement, dated as of December 26, 2000, by and between
Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed on
January 17, 2001, on Form 8-K, File No. 000-28443).
39
10.2 First Amendment to Royalty Agreement, dated as of April 20, 2001, by and
between Cytomedix, Inc. and Curative Health Services, Inc. (Previously
filed on May 25, 2001, on SB-2/A, File No. 333-55818)
10.3 Supply Agreement, dated as of December 26, 2000, by and between Cytomedix,
Inc. and Curative Health Services, Inc. (Previously filed on January 17,
2001, on Form 8-K, File No. 000-28443).
10.4 Securities Purchase Agreement, dated as of December 26, 2000, by and among
Cytomedix, Inc., TSENVI, LLC, Bel-Cap Delaware, LLC, Bristol Investment
Fund, Ltd. and Curative Health Services, Inc. (Previously filed on January
17, 2001, on Form 8-K, File No. 000-28443).
10.5 Registration Rights Agreement, dated as of December 26, 2000, by and among
Cytomedix, Inc., TSENVI, LLC, Bel-Cap Investments, Ltd., Bristol
Investment Fund, LLC and Curative Health Services, Inc. (Previously filed
on January 17, 2001, on Form 8-K, File No. 000-28443). 21
10.6 Security Agreement, dated as of December 26, 2000, by and among Cytomedix,
Inc., TSENVI, LLC, Bel-Cap Investments, Ltd., Bristol Investment Fund, LLC
and Curative Health Services, Inc. (Previously filed on January 17, 2001,
on Form 8-K, File No. 000-28443).
10.7 Assignment and Assumption Agreement, dated as of December 26, 2000, by and
between Cytomedix, Inc. and Curative Health Services, Inc. (Previously
filed on January 17, 2001, on Form 8-K, File No. 000-28443).
10.8 Form of Lease Assignment and Assumption Agreement, dated as of December
26, 2000, by and between Cytomedix, Inc. and Curative Health Services,
Inc. (Previously filed on January 17, 2001, on Form 8-K, File No.
000-28443).
10.9 Assignment of Marks, dated as of December 26, 2000, by and among
Cytomedix, Inc., Curative Health Services, Inc. (formerly known as
Curative Technologies, Inc. and Curatech, Inc.) and CHS Services, Inc.
(Previously filed on January 17, 2001, on Form 8-K, Registration No.
000-28443).
10.10 Assignment of Patents, dated as of December 26, 2000, by and among
Cytomedix, Inc., Curative Health Services, Inc. (formerly known as
Curative Technologies, Inc. and Curatech, Inc.) and CHS Services, Inc.
(Previously filed on January 17, 2001, on Form 8-K, Registration No.
000-28443).
10.11 Assignment of Copyrights, dated as of December 26, 2000, by and among
Cytomedix, Inc., Curative Health Services, Inc. and CHS Services, Inc.
(Previously filed on January 17, 2001, on Form 8-K, Registration No.
000-28443).
10.12 License Agreement dated March 21, 2001, by and between Cytomedix, Inc. and
DePuy AcroMed, Inc. (Previously filed on April 16, 2001, on Form 10-KSB,
File No. 000-28443).
10.13 Consent, Waiver, Payoff and Exchange Agreement dated April 20, 2001, by
and among Cytomedix, Inc., Curative Health Services, Inc., Bel-Cap
Delaware, LLC, Bristol Investment Fund, Ltd. and TSENVI, LLC (Previously
filed on April 27, 2001, on Form 8-K, File No. 000-28443).
20.1 Notice to Shareholders of Cytomedix, Inc. dated October 17, 2001
(Previously filed on November 12, 2002, on Form 10-QSB, File No.
000-28443).
99.1 Certificate of Chief Executive Officer of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
99.2 Cytomedix, Inc. Long-Term Incentive Plan (Previously filed on November 7,
2002, on Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
40