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 March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-28443
-------
Cytomedix, Inc.
---------------
(Exact name of small business issuer as specified in its charter)
Delaware 23-3011702
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1523 South Bowman Rd., Suite A, Little Rock, AR 72211
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (501) 219-2111
-------------------------------------------------------
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 l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 13, 2003: 10,915,418 shares of Common Stock, $.0001 par value
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CYTOMEDIX, INC.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements.
Condensed Balance Sheets (unaudited) Page 2
Condensed Statement of Operations (unaudited) Page 3
Condensed Statement of Cash Flows (unaudited) Page 4
Notes to Condensed Financial Statements (unaudited) Page 5
Item 2. Management's Discussion and Analysis or Plan of Operation. Page 13
Overview of Business Page 13
Recent Bankruptcy Page 14
Results of Operations Page 14
Liquidity and Capital Resources as of March 31, 2003 Page 16
Risk Factors Page 16
Prospects for the Future Page 20
Item 3. Controls and Procedures. Page 21
PART II
Item 1. Legal Proceedings. Page 21
Item 2. Changes in Securities. Page 22
Outstanding Common Stock and Dividends Page 22
Issuance of Non-Registered Securities in First
Quarter of 2003 Page 22
Item 3. Defaults Upon Senior Securities Page 23
Item 4. Submission of Matters to a Vote of Security Holders. Page 23
Item 5. Other Information. Page 23
Item 6. Exhibits and Reports on Forms 8-K. Page 23
Signatures Page 24
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Cytomedix, Inc.
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
Successor Company
--------------------------
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
Current assets
Cash $ 494,918 $ 945,298
Receivables 203,205 238,273
Prepaid expenses, other current assets and
inventory 182,773 255,967
----------- -----------
Total current assets 880,896 1,439,538
Cash - restricted 20,000 20,000
Property and equipment, net 291,204 312,706
Intangibles 4,326,886 4,358,465
Other assets 46,000 23,000
----------- -----------
$ 5,564,986 $ 6,153,709
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 544,536 $ 745,124
Deferred revenue 81,448 81,448
Note payable 6,837 37,054
----------- -----------
Total current liabilities 632,821 863,626
----------- -----------
Long-term liabilities
Dividends payable on Series A and Series B
preferred stock 166,138 110,759
Deferred revenue 498,869 519,230
----------- -----------
Total long-term liabilities 665,007 629,989
----------- -----------
Total liabilities 1,297,828 1,493,615
----------- -----------
Commitments and contingencies
Stockholders' equity
Series A Convertible preferred stock;
$.0001 par value, $1.00 liquidation value,
authorized 5,000,000 shares; at March 31,
2003 issued - 1,338,496 shares, issuable -
27,427 shares; at December 31, 2002 issued -
759,760 shares, issuable - 606,163 shares 137 137
Series B Convertible preferred stock; $.0001
par value, $1.00 liquidation value, authorized
5,000,000 shares; at March 31, 2003 issued
1,399,722 shares, issuable - 2,928 shares;
at December 31, 2002 issued - 1,224,034 shares,
issuable - 178,616 shares 140 140
Common stock; $.0001 par value, authorized
40,000,000 shares; at March 31, 2003 issued -
10,915,418 shares, issuable - 61,435 shares; at
December 31, 2002 issued - 10,070,173 shares,
issuable - 649,104 shares 1,101 1,073
Additional paid-in capital 7,252,392 6,942,297
Deferred compensation (128,248) (155,833)
Deficit accumulated in the development stage (2,858,364) (2,127,720)
----------- -----------
Total stockholders' equity 4,267,158 4,660,094
----------- -----------
$ 5,564,986 $ 6,153,709
=========== ===========
The accompanying notes are an integral part of these
condensed financial statements.
2
Cytomedix, Inc.
(A Development Stage Entity)
Condensed Statements of Operations - Unaudited
Successor Predecessor Successor
Company Company Company
-------------- -------------- --------------
July 1, 2002
Three Months Three Months (Inception)
Ended Ended Through
March 31, 2003 March 31, 2002 March 31, 2003
-------------- -------------- --------------
Revenues
Sales $ 43,975 $ 27,250 $ 377,805
Royalties 200,808 143,240 533,161
------------ ------------ -----------
Total Revenues 244,783 170,490 910,966
Cost of revenues
Cost of sales 26,560 -- 88,607
Cost of royalties 165,712 111,489 431,446
------------ ------------ -----------
Total cost of revenues 192,272 111,489 520,053
------------ ------------ -----------
Gross profit 52,511 59,001 390,913
------------ ------------ -----------
Operating expenses
Salaries and wages 227,392 135,587 624,374
Consulting expense 52,835 14,000 285,278
Consulting expense -- related party 42,000 -- 360,552
Professional fees 180,105 110,439 938,791
Royalty expenses -- related party 20,550 18,750 58,050
General and administrative expenses and rent 206,243 188,543 818,947
------------ ------------ -----------
Total operating expenses 729,125 467,319 3,085,992
------------ ------------ -----------
Loss from operations (676,614) (408,318) (2,695,079)
------------ ------------ -----------
Other (income) expense
Interest expense 19 165,639 22,844
Interest and other income (1,368) (695) (25,697)
------------ ------------ -----------
Total other (income) expense, net (1,349) 164,944 (2,853)
------------ ------------ -----------
Net loss from continuing operations before
reorganization items (675,265) (573,262) (2,692,226)
Reorganization items:
Professional fees -- (211,287) --
Consulting -- related party -- (74,053) --
------------ ------------ -----------
Net loss from operations (675,265) (858,602) (2,692,226)
------------ ------------ -----------
Preferred dividend on Series A preferred stock 55,379 -- 166,138
------------ ------------ -----------
Net loss to common stockholders $ (730,644) $ (858,602) $(2,858,364)
============ ============ ===========
Basic and diluted loss per common share $ (0.07) $ (0.07) $ (0.29)
============ ============ ===========
Weighted average shares outstanding 10,848,911 12,800,598 9,995,570
============ ============ ===========
The accompanying notes are an integral part of these
condensed financial statements.
3
Cytomedix, Inc.
(A Development Stage Entity)
Condensed Statements of Cash Flows - Unaudited
Successor Predecessor Successor
Company Company Company
------------ ------------ --------------
Three Months Three Months July 1, 2002
Ended Ended (Inception)
March 31, March 31, Through
2003 2002 March 31, 2003
------------ ------------ --------------
Cash Flows from operating activities $(565,038) $(151,928) $(2,509,904)
--------- --------- -----------
Cash flows from investing activities:
Purchase of equipment -- (6,600) (304,871)
--------- --------- -----------
Net cash used in investing activities -- (6,600) (304,871)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings -- 225,000 --
Commissions on new money raised paid in cash -- -- (57,213)
Proceeds from sale of common stock, net 144,875 -- 3,365,377
Repayment of note payable (30,217) -- (82,326)
--------- --------- -----------
Net cash provided by financing activities 114,658 225,000 3,225,838
--------- --------- -----------
Net increase (decrease) in cash (450,380) 66,472 411,063
Cash, beginning of period 965,298 184,395 103,855
--------- --------- -----------
Cash, end of period $ 514,918 $ 250,867 $ 514,918
========= ========= ===========
The accompanying notes are an integral part of these
condensed financial statements.
4
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Cytomedix. Inc. (the "Company" and "Cytomedix"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments that are, in the opinion of
management, necessary to fairly present such information. All such adjustments
are of a normal recurring nature. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including a description of
significant accounting policies normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to such rules
and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2002 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2003.
Cytomedix is a development stage enterprise, and accordingly, certain additional
financial information is required to be included in the condensed financial
statements from the adoption of fresh-start accounting 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. Basic and diluted net loss
per common share are presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("FAS 128"), for all periods
presented. In accordance with FAS 128, basic and diluted net loss per common
share have been computed using the weighted-average number of shares of common
stock outstanding during the period. Shares associated with stock options, stock
warrants, and convertible preferred stock are not included because the inclusion
would be anti-dilutive (i.e., reduce the net loss per share). The total numbers
of such shares excluded from diluted net loss per common share are 3,829,746 and
6,065,835 at March 31, 2003 and 2002, respectively.
Pursuant to the guidance provided by Statement of Position ("SOP") 90-7 the
Company adopted fresh-start accounting (see Note 5) upon emergence from
bankruptcy. As a result of fresh-start reporting, the Company reflected the
disposition of its pre-petition debt and changes in its equity structure
effected under the Company's First Amended Plan of Reorganization (the "Plan")
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 sheets as of March 31, 2003 and December 31, 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.
5
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS
NATURE OF OPERATIONS
Cytomedix, Inc. is a biotechnology company whose business model is premised upon
developing, producing, and licensing autologous cellular therapies (i.e.,
therapies using the patient's own body products) for the treatment of chronic
non-healing wounds using propriety platelet gel and related product therapies.
To create the proprietary platelet gel product, the patient's own platelets and
other essential blood components for the healing process are separated through
centrifugation and formed into a gel (the "AutoloGel(TM)") that is topically
applied to a wound under the direction of a physician. The Company's
headquarters are in Little Rock, Arkansas.
NOTE 3 - GOING CONCERN
The Company incurred a net loss of $730,644 during the three-month period ended
March 31, 2003. Included in these net loss numbers were non-cash preferred stock
dividends in the amounts of $55,379.
The Company anticipates that the cash on-hand at December 31, 2002 and expected
revenues will not be sufficient to finance its currently anticipated needs for
operating and capital expenditures in 2003.
Consequently, the aforementioned items raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Continuing as a going concern is dependent
upon successfully obtaining additional working capital as described above. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and amounts
and classifications of liabilities that might result from the outcome of this
uncertainty.
Management plans to address the negative cash flow and projected cash shortage
by increasing sales and raising capital through equity financing. Management is
in the process of implementing a network of independent manufacturer
representatives with wound care experience who will focus on niche markets in
chronic wound care.
The Company's ability to continue as a going concern is dependent upon raising
capital through debt and equity financing. There can be no assurance that the
Company will successfully raise the required future financing on terms desirable
to the Company or that sales of AutoloGel(TM) will increase substantially.
6
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 4 - 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):
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
-------------- --------------
Professional fees $ -- $211,287
Consulting -- related party -- 74,053
-------- --------
$ -- $285,340
======== ========
NOTE 5 - 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 was
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 as 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." Securities outstanding prior to the effective
date of the Plan 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 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 new 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 were adjusted
to fair values and the effects of the Plan were recorded. A reorganization value
for the total assets was determined by the Company based upon the estimated fair
value of the enterprise before considering values allocated to debt settled in
the reorganization. The portion of the reorganization value which was not
attributed to specific tangible or identified intangible assets for the
Successor Company was 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 was
included in net reorganization expense in the financial statements at June 30,
2002.
7
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 5 - 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 of the Plan 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 in the
over-the-counter market and quoted on the OTC Bulletin Board, may differ
materially from the reorganization valuation.
The following reconciliation of the Predecessor Company's 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:
8
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 5 - 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 -- -- -- 27,095
Intangibles 603,488 -- 1,796,512 -- (b) 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
------------ ----------- ------------ ----------- ----------
Total liabilities 10,997,031 (7,685,720) -- (30,941) 3,280,370
------------ ----------- ------------ ----------- ----------
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
============ =========== ============ =========== ==========
9
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 5 - FRESH-START ACCOUNTING (Continued)
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
(b) Reflects the adjustment of 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 convertible Preferred stock and New Series B
convertible Preferred stock which was issuable.
NOTE 6 - CAPITAL STOCK ACTIVITY
During the three months ended March 31, 2003, the Company issued 152,500 shares
of common stock, 38,125 Class A warrants and 22,875 Class B warrants for
$152,500 in a private placement.
On March 5, 2003, the Company issued an aggregate of 105,076 shares of common
stock to its attorneys at Robert F. Coleman & Associates in consideration for
legal services rendered during the period September 1, 2002 through December 31,
2002. The Company has agreed to pay its attorneys at Robert F. Coleman &
Associates two-thirds of their legal fees in shares of common stock with all
expenses being paid in cash. On March 5, 2003, the Company issued stock to pay
its legal bills in the following manner: 39,261 shares for legal fees provided
in September 2002, 20,623 shares for legal fees provided in October 2002, 25,457
shares for legal fees provided in November 2002, and 19,735 shares for legal
fees provided in December 2002.
NOTE 7- LONG-TERM INCENTIVE PLAN
On February 4, 2003, the Board of Directors resolved to grant stock options to
three employees under the Company's Long-Term Incentive Plan. The Company
granted an aggregate of 80,000 stock options with an exercise price of $1.50 per
share, with immediate vesting and an exercise period of 10 years form the date
of issue.
10
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 7 - LONG-TERM INCENTIVE PLAN (Continued)
The Company follows the provisions of SFAS No. 123. As permitted under SFAS No.
123, the Company has continued to utilize APB 25 in accounting for its
stock-based compensation to employees. Had compensation expense for the quarters
ended March 31, 2003 and 2002 been determined under the fair value provisions of
SFAS No. 123, as amended by SFAS 148, the Company's net loss and net loss per
share would have differed as follows:
Successor Predecessor
Company Company
------------ ------------
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
------------ ------------
Net loss to common stockholders, as reported $(730,644) $(858,602)
Add: Stock-based employee compensation
expense included in reported net loss
determined under APB No. 25, net of
related tax effects -- --
Deduct: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of related tax
effects 42,461 --
--------- ---------
Pro forma net loss $(773,105) $(858,602)
--------- ---------
Earnings per share:
Basic - as reported $ (0.07) $ (0.07)
Basic - pro forma $ (0.07) $ (0.07)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes option pricing model. The following summarizes the weighted
average of the assumptions used in the model.
Successor Predecessor
Company Company
------------ ------------
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
------------ ------------
Risk free rate 3.83% N/A
Expected years until exercise 10 N/A
Expected stock volatility 100% N/A
Dividend yield -- N/A
============ ============
11
Cytomedix, Inc.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 8 - RELATED PARTY TRANSACTIONS
BDR Inc. is affiliated with BDR Investment LLC through common ownership. The
principal in both entities, Jimmy D. Swink, Jr., provided consulting services to
the Company amounting to $42,000 and $0 for the three months ended March 31,
2003 and 2002, respectively. The consulting expense consisted of monthly
payments of $9,000 and amortization of deferred compensation expense arising out
of options issued to BDR Consulting Inc.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Post-Bankruptcy 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 of the plan. 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(TM) 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 up to a maximum amount of approximately
$50,000.
NOTE 10 - RECLASSIFICATION
For comparability purposes, certain figures for the 2002 and cumulative periods
have been reclassified where appropriate to conform with the financial statement
presentation used in 2003. These reclassifications had no effect on the reported
net loss.
12
Item 2. Management's Discussion and Analysis.
The terms "Cytomedix" and the "Company," as used in this quarterly report,
refer to Cytomedix, Inc. The following discussion and analysis should be read in
conjunction with the financial statements, including notes thereto, filed under
Item 1 of this report. The Company's financial condition and results of
operation are not intended to be indicative of future performance.
In addition to the historical information included in this report, you are
cautioned that this Form 10-QSB contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. When the words
"believes," "plans," "anticipates," "will likely result," "will continue,"
"projects," "expects," and similar expressions are used in this Form 10-QSB,
they are intended to identify "forward-looking statements," and such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Furthermore, the Company's plans,
strategies, objectives, expectations and intentions are subject to change at any
time at the discretion of management and the board of directors.
These forward-looking statements speak only as of the date this report is
filed. The Company does 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
be reported in the Company's ongoing periodic reports filed with the Securities
and Exchange Commission.
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with management's
discussion and analysis of financial condition and results of operations
included in Cytomedix's Form 10-KSB for the year ended December 31, 2002.
OVERVIEW OF BUSINESS
Cytomedix is a biotechnology company, incorporated in Delaware, which
employs nine full-time employees and one part-time employee. Its business model
is premised upon developing, producing, licensing, and distributing autologous
cellular therapies (i.e., therapies using the patient's own body products),
including Cytomedix's proprietary platelet rich plasma gel (hereinafter,
"AutoloGel(TM)") for the treatment of chronic, non-healing wounds. To create
AutoloGel(TM), the patient's own platelets and other essential blood components
for the healing process are separated through centrifugation and formed into a
gel that is topically applied to a wound (under the direction of a physician).
In the past, the Company marketed The AutoloGel Process(TM) through
in-house personnel. The Company, however, has changed its marketing strategy by
utilizing a carefully chosen network of independent manufacturer representatives
with knowledge and relationships within the wound care sector to market
AutoloGel(TM). The Company has engaged a group of nine independent
representatives to begin marketing AutoloGel(TM), and the Company is in the
process of interviewing additional independent salespersons. This is a new
marketing strategy, and the Company cannot guarantee its effectiveness.
The Company is planning and implementing strategies to meet each of the
requirements that are necessary for submitting and obtaining a national Medicare
reimbursement code for AutoloGel(TM). The process is multi-faceted, time
intensive, and expensive. In order to obtain a national reimbursement code, the
Company will need to initiate a multi-site, controlled, randomized prospective
clinical trial ("Trial" and "Trials") to potentially prove the safety and
efficacy of AutoloGel(TM) with respect to the treatment of chronic diabetic foot
wounds. The Trials will be expensive, and the Company plans to commence a
private offering of securities to provide the funds necessary to conduct the
Trials.
The ultimate goals of the Trials are (1) to gain from the Food and Drug
Administration approval for AutoloGel(TM) itself with an indication for wound
healing, and (2) to provide sufficient data as is necessary to obtain Medicare
reimbursement for the therapy. Medicare approval is the standard by which both
the health care industry and private insurance payors accept a new therapy,
drug, or device for use and reimbursement.
13
The Company's target is to complete the Trials and publish and submit the
results to appropriate regulatory bodies during early October 2004. Many factors
affecting completion, publication, and submission of the Trials are out of the
Company's control; therefore, no assurance can be given that all of the
requirements will be satisfied during this time period. While the Trials are
designed to achieve FDA approval and a national reimbursement code, there can be
no assurance that the Trial results will be sufficient to obtain these goals.
A medical device may be marketed in the United States only if the FDA
gives prior authorization or the device is otherwise exempt. The FDA typically
authorizes medical devices by granting premarket clearance under section 510(k)
of the Food, Drug and Cosmetic Act. Prior to the date of this filing, Cytomedix
has received 510(k) clearance from the FDA for The AutoloGel Process(TM)
Centrifuge; this clearance allows the Company to continue to market this device
for the manufacture of platelet gel. The AutoloGel Process(TM) Centrifuge is
used to separate platelets and other essential blood components from the
patient's blood in order to produce AutoloGel(TM).
RECENT BANKRUPTCY
On August 7, 2001, 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 (Case No. 01-27610).
Shareholders who represented 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 a new board of directors. The new board of directors then appointed
Mr. Kent T. Smith as Chief Executive Officer and hired a new management team.
New management immediately began formulating a plan of reorganization that would
enable the Company to reorganize and emerge quickly from Chapter 11 in order to
preserve its value as a going concern. On June 14, 2002, finding that the
required classes had voted to accept the First Amended Plan of Reorganization
(the "Plan"), the Court confirmed the Plan. The confirmation order and Plan
became effective on July 11, 2002.
Because the Company has only recently emerged from bankruptcy, the Company
will not be obtaining extensive debt financing. All working capital required to
implement the Company's business plan will be provided by funds obtained through
the Company's anticipated private offering and revenues generated by the
Company. The Company will need to obtain additional funds to support its future
operational expenses. Based on current plans, the Company believes that it has
cash on hand sufficient to meet its operating expenses and capital requirements
through approximately the end of July 2003. The Company will have to raise
additional funds in the anticipated private offering in order for it to continue
its operations thereafter.
RESULTS OF OPERATION
These results of operations and the notes to the financial statements
pertain solely to the period ending March 31, 2003.
The Company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7 and had only limited operations through
March 31, 2003. The Company's 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(TM) and related disposable treatment kits and
proprietary system. In connection with the market expansion of AutoloGel(TM),
the Company has worked to develop and implement plans to conduct the Trials and
to satisfy other requirements necessary to obtain FDA approval and a national
reimbursement code. The Company generated minimal revenues from inception
through March 31, 2003.
Cytomedix filed for bankruptcy on August 7, 2001 and did not emerge from
bankruptcy until July 11, 2002. This event had a direct impact on all of the
Company's revenues and expenses described below.
The Company as it existed prior to June 30, 2002 is referred to as the
Predecessor Company. The financial statements and Management's Discussion and
Analysis of the Predecessor Company reflect the Predecessor Company's financial
information prior to the implementation of fresh-start reporting. This financial
information is not comparable to th Successor Company and its financial
condition (post-June 30, 2002) after the implementation of fresh-start
reporting. Therefore, the results of operations for the Successor Company and
for the Predecessor Company are described separately below.
14
Three Months ended March 31, 2003 (Successor Company)
Prior to the first quarter of 2003, the Company had focused its sales
efforts in the long-term care market. Although the Company experienced early
success in this market, the costs associated with providing AutoloGel(TM) to
this reimbursement-sensitive market were higher than expected. Therefore, during
the first quarter of 2003, the Company changed its business plan. The Company is
implementing its new strategy of retaining independent, experienced salespersons
who are commission-based thus reducing the Company's overhead. During the
quarter, the Company refocused its resources on initiating and completing the
prospective, clinical Trials necessary to obtain a national reimbursement code.
The Company's sales for the quarter ended March 31, 2003 were $43,975.
Because management focused its efforts on developing and implementing its new
sales strategy, it consequently did not realize significant increases in sales
volume. Net loss during the quarter was $730,644.
The Company had royalty income of $200,808 received from DePuy Acromed,
Inc.
The Company's gross profit for the quarter ended March 31, 2003 was
$52,511. This quarter's sales gross margin was negatively impacted by a
one-time, nonrecurring expense of approximately $13,000 associated with the
Company's providing of additional promotions to a national contract.
Salaries and wages totaled $227,392. During the first quarter of 2003, the
Company employed two sales employees, five clinicians, four full-time
administrative employees and one part-time employee.
Consulting expenses of $42,000 consisted of monthly payments of $9,000 and
amortization of deferred compensation expense arising out of options issued to
BDR, Inc. (a related party) for its activities as consultant to the board of
directors, during the first quarter of 2003. BDR, Inc.'s president (Jim D.
Swink, Jr.) is a significant shareholder and provides full-time consulting
services to the Company. Additional consulting expenses of $52,835 were paid for
consulting services in the areas of clinical research, information technology,
marketing, and investor relations.
Professional fees of $180,105 were incurred during the first quarter.
These fees were incurred primarily for legal services related to patent filing,
patent defense and securities compliance.
The Company incurred $206,243 for general and administrative expenses,
which included $53,081 of depreciation and amortization expense. A related party
royalty expense of $20,550 was paid to Mr. Charles E. Worden, Sr. during the
quarter ended March 31, 2003.
The Company recorded a non-cash preferred stock dividend in the amount of
$55,379 in connection with its cumulative 8% Series A and B Convertible
Preferred Stock.
The Company's financing activities during the first quarter of 2003 were
primarily proceeds from the issuance of common stock through the Company's
private offering commenced in connection with the Company's Plan of
Reorganization. The Company raised $152,500 in this private offering during the
first quarter of 2003 before terminating the offering and deciding not to accept
any more subscriptions for securities.
Three Months ended March 31, 2002 (Predecessor Company)
While operating as debtor-in-possession under Chapter 11 of the Bankruptcy
Code during the first quarter of 2002, the Company could not engage in
transactions outside the ordinary course of business without prior court
approval. As a result, Cytomedix had minimal operations during the first quarter
of 2002, and the Company's revenues of $170,490 and related cost of revenues of
$111,489 resulted in a gross profit of $59,001; the Company incurred a net loss
of $858,602 for the first quarter of 2002.
15
Salaries and wages totaled $135,587 during the first quarter of 2002 as a
result of the Company's decision to employ only a minimal number of employees to
operate the company while in bankruptcy. Similarly, the Company's consulting
expense was $14,000, based on the Company's decision to retain as few
consultants as necessary to operate the Company during bankruptcy.
Professional fees of $110,439 were incurred during the first quarter of
2002 and related to various legal services related to the Company's bankruptcy,
securities compliance, and other corporate matters.
Reorganization expenses of $285,340 were incurred for professional fees
and consulting expense related to the bankruptcy. BDR, Inc. served as the
Company's reorganization manager during bankruptcy.
The Company incurred $188,543 of general and administrative expenses
during the quarter ended March 31, 2002, which included $19,463 of depreciation
and amortization. The Company also incurred a related party royalty expense of
$18,750 during the quarter ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES AS OF MARCH 31, 2003
The Company's unrestricted cash balance at March 31, 2003 was $494,918.
The Company estimates that without raising additional funds in a private
offering (or otherwise) and/or without increasing revenues, the Company will be
unable to meet its cash requirements after July 2003. The Company plans to
conduct a subsequent private offering to raise additional funds to meet its
working capital needs and to fund the Trials necessary to obtain a national
reimbursement code.
Because the Company has been in bankruptcy, the Company will not be
obtaining extensive debt financing. All working capital required to implement
the Company's business plan will be provided by funds obtained through the
private offering and revenues generated by the Company.
If the Company does not have sufficient working capital and are unable to
generate revenues or raise additional funds, the following may occur: delaying
the implementation of the new business plan or significantly reducing the scope
of the business plan; delaying some development and clinical testing; delaying
plans to initiate government regulatory and reimbursement approval processes for
wound treatment technologies; postponing the hiring of new personnel; or, in the
extreme situation, ceasing operations.
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. The risks described below are not
to be deemed an exhaustive list of all potential risks and should be read in
conjunction with the other detailed information in this report.
Cytomedix has limited working capital.
The Company will need to obtain additional funds to support future
operational expenses. Based on current plans, the Company believes that it has
sufficient funds to meet its operating expenses and capital requirements through
approximately the end of July 2003. The Company will need to generate increased
revenues or will need to raise additional funds in a private offering or
otherwise. No assurance can be given that the Company will be able to increase
revenues or that it will successfully sell equity interests in the Company, or
even if such transactions are possible, that they will be on terms reasonable to
the Company or that they will enable it to satisfy its cash requirements.
As a result of the Company's losses and the matters described in the
preceding paragraphs, the Independent Auditors' Report on its audited financial
statements for the fiscal year ended December 31, 2002, included a paragraph
indicating substantial doubt about the Company's ability to continue as a going
concern.
16
The Company has 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.
The Company has 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 products for The AutoloGel Process(TM) 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, the Company began developing a new business model that
would enable it to provide a simpler, lower cost method of wound care. This new
distribution plan includes the sale of single use, licensed disposable kits to
qualifying physicians and wound care centers. The Company is implementing a new
business plan and strategy; its inability to successfully implement this
business plan would adversely affect its business, operating results, and
financial condition.
The Company's intellectual property assets are critical to its success.
Cytomedix regards its patents, trademarks, trade secrets, and other
intellectual property (collectively, the "Intellectual Property Assets") as
critical to its success. Cytomedix relies on a combination of patents,
trademarks, and trade secret and copyright laws, as well as confidentiality
procedures, contractual provisions, and other similar measures, to establish and
protect its Intellectual Property Assets. Cytomedix has endeavored to inhibit
disclosure of its trade secrets through a number of means, including restricting
access to Cytomedix's proprietary information and requiring substantially all of
its employees, consultants, and other persons with access to Cytomedix's
proprietary information to execute confidentiality agreements with Cytomedix.
Despite these efforts, Cytomedix may not be able to prevent misappropriation of
its technology or deter others from developing similar technology in the future.
Furthermore, policing the unauthorized use of its Intellectual Property Assets
is difficult and expensive. Litigation has been necessary in the past and may be
necessary in the future in order to enforce Cytomedix's Intellectual Property
Assets. Litigation could result in substantial costs and diversion of resources.
The AutoloGel Process(TM) is subject to governmental regulation.
The Company's success is also impacted by factors outside of the Company's
control. The Company's current therapies may be subject to extensive regulation
by numerous governmental authorities in the United States, both federal and
state, and in foreign countries by national and provincial regulatory agencies.
Specifically, the Company's therapies may be subject to regulation by the FDA
and state regulatory agencies. The FDA regulates drugs, medical devices and
biologics that move in interstate commerce and requires that such products
receive pre-marketing approval based on evidence of safety and efficacy. 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
17
Process(TM) 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.
The Company's success could be adversely affected if its customers cannot
obtain reimbursement.
AutoloGel(TM) 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. To date, the Company has not submitted an
application for Medicare reimbursement for The AutoloGel ProcessTM. 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 product code for
AutoloGel(TM), the Company will have to conduct prospective, multi-site clinical
Trials 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(TM) 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.
The Company 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 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,
18
relocation and compensation costs for such personnel. These increased costs may
reduce the Company's profit margins or make hiring new personnel impractical.
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
the Company's 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 affecting
AutoloGel(TM). 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(TM) administered by physicians will not be asserted against the Company
in the future.
The production, marketing and sale and use of The AutoloGel Process(TM)
carry the risk 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 might 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 provide assurance that the coverage
limits of this insurance would be adequate to protect it 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(TM) has existing competition in the marketplace.
In the market for biotechnology products, the Company faces competition
from pharmaceutical companies, biopharmaceutical companies and other
competitors. Other companies have developed or are developing products which may
be in direct competition with The AutoloGel Process(TM). 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.
19
The Company's Common Stock is traded in the over-the-counter market and
may never be listed on a national securities exchange.
The Company's Common Stock is currently traded in the over-the-counter
market and quoted on the OTC Bulletin Board ("OTCBB") under the symbol "CYME."
Although Cytomedix is currently a publicly held company, there can be no
assurance that the Company's 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 the Common Stock are subject to the SEC's penny stock rules.
The Company is uncertain as to whether the market price of the Common
Stock will 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 the Company's
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 (generally defined as an investor
with a net worth in excess of $1,000,000 or annual income exceeding $200,000,
$300,000 together with a spouse). 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 Cytomedix Common Stock, which could severely limit the
liquidity of the Common Stock and the ability of shareholders to sell Cytomedix
Common Stock in the secondary market.
PROSPECTS FOR THE FUTURE
Cytomedix's success is directly dependent on the success of AutoloGel(TM),
and the Company believes that AutoloGel(TM) has a good chance for success in the
marketplace for several reasons. In the long-term care, long-term acute care,
and home health markets where healthcare products and services are delivered in
a capitated environment, the weekly use of AutoloGel(TM) saves both the cost of
daily and multiple dressing changes as well as the labor needed to perform these
tasks. Combining this significant cost savings in this economically-driven
environment with a faster wound-healing rate as shown by the Company's
retrospective studies and current reports from clinicians, it expects that both
the facility/agency providing the care as well as the wound patient will see
added value through the use of AutoloGel(TM). The Company believes that this
model of providing easy-to-access advanced therapy with increased healing in a
shorter period of time will be very attractive to all types of capitated health
care providers. The Company is actively pursuing these customers at both the
group level and, to a lesser degree, the individual facility.
In addition, based on the cost of current treatments and competitive
products for this market, the cost of AutoloGel(TM) provides an economic
benefit. With what the Company believes to be a strong patent position, the
Company believes that it is positioned to successfully introduce AutoloGel(TM)
while rapidly gaining a significant market share position in the capitated care
market. Thereafter, upon the successful completion of a strategy to
20
have The AutoloGel Process(TM) reimbursed, the Company believes the product can
be successfully positioned against the higher priced biological and device
alternatives, as well as more traditional wound therapies (such as wet to moist
dressings) based on its efficacy and ease of overall use in hospitals, wound
care centers, and physicians' offices.
Item 3. Controls and Procedures.
The Company's two executive officers and controller have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities
Exchange Act of 1934). Based on their evaluation, they have concluded that the
Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by
Cytomedix in its reports filed with the SEC is recorded, processed, summarized,
and reported within the governing time periods. Given the Company's size and
limited number of employees, these persons have determined that weekly meetings
of all executive officers and significant employees assist in ensuring that
material information is communicated throughout the Company. Other than the
Company's implementing a written policy addressing these weekly meetings, these
persons have concluded that there were no significant changes in the Company's
internal controls or in other factors that could significantly affect our
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II
Item 1. Legal Proceedings.
Before emerging from bankruptcy on 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, filed July 3, 2002; (ii) Cytomedix, Inc. v. Perfusion
Partners & Associates, Inc., Case No. 02 C 4776, filed July 3, 2002; (iii)
Cytomedix, Inc. v. James Gandy, et al., Case No. 02 C 4779, filed July 3, 2002;
(iv) Cytomedix, Inc. v. Little Rock Foot Clinic, P.A., et al., Case No. 02 C
4782, filed July 3, 2002; (v) Cytomedix, Inc. v. Autologous Blood Technology,
L.L.C., et al., Case No. 02 C 4863, filed July 10, 2002; and (vi) Cytomedix v.
Safeblood Technologies, Inc., et. al., Case No. 02 C 4773, filed July 3, 2002.
The court dismissed the cases against Safeblood and LB Hyperbarics for lack of
personal jurisdiction and improper venue. The court also stayed the proceeding
against Autologous Blood Technology. In each of the other cases that are still
pending, the Company has asserted that the defendants have infringed upon the
Company's patents and engaged in unfair competition. In all of these actions the
Company seeks unspecified damages and injunctive relief.
In September 2002, the Company restyled its objection and counterclaims to
the claims of Keith Bennett and affiliates into 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. The Company 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. This
case was subsequently withdrawn to the United States District Court for the
Northern District of Illinois, and the case was assigned to Judge Bucklo. A
motion to dismiss or transfer the case on the same grounds asserted before the
Bankruptcy Court is presently pending before Judge Bucklo and no activity will
occur in this case until Judge Bucklo rules on this motion.
On October 23, 2002, Harvest Technologies Corp. initiated an action
against the Company in the United States 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, on March 27, 2003, filed its answer and
counterclaims against Harvest Technologies Corp. for patent infringement,
tortious interference with prospective business relationships, unfair
competition, and deceptive trade practices. The Company seeks damages and
21
permanent injunctive relief against Harvest Technologies Corp.
Unfavorable resolutions of, settlements of, or costs related to these
lawsuits could have a material adverse effect on the Company's business, results
of operations or financial condition.
Item 2. Changes in Securities.
OUTSTANDING COMMON STOCK AND DIVIDENDS.
There are approximately 10,915,418 shares of Common Stock outstanding as
of May 12, 2003. The Company also has 61,435 shares of Common Stock which are
currently issuable under the Plan but have not yet been issued: (1)
Administrative Claims - 31,078 shares remain issuable to BDR, Inc. for
reimbursement of expenses; (2) Three 12% Convertible Promissory Notes with an
aggregate balance of $54,856 (to be exchanged for combination of new common
stock and new Series A Convertible Preferred at $1.00 per share); and (3) One
10% Convertible Promissory Note with aggregate balance of $5,857 (to be
exchanged for combination of new common stock and new Series B Convertible
Preferred at $1.00 per share). The sum of the total shares of Common Stock
outstanding and shares of Common Stock immediately issuable under the Plan is
10,976,852.
Under the Plan, the Company may have an obligation to issue 353,356 shares
of Common Stock if the Company has revenues exceeding $10,000,000 in four
consecutive quarters. None of these shares are currently issuable and the
revenue goal must be satisfied before these shares can be issued. The Company
does not anticipate issuing these shares in the near future.
The Company did not pay dividends to holders of its Common Stock during
2002 or 2001. The Company does not anticipate paying cash dividends on its
Common Stock in the foreseeable future, but instead will retain any earnings to
fund its growth. In fact, the Company is prohibited from declaring dividends on
its Common Stock as long as any shares of Series A Convertible Preferred or
Series B Convertible Preferred are outstanding. Once there are no shares of
Series A or Series B Convertible Preferred outstanding, any decision to pay cash
dividends will depend on the Company's ability to generate earnings, need for
capital, overall financial condition, and other factors the Board deems
relevant.
ISSUANCE OF NON-REGISTERED SECURITIES IN FIRST QUARTER OF 2003.
In connection with the Plan, the Company initiated a private offering of
its Common Stock and warrants to purchase its Common Stock 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 received one share of Common Stock, 1/4th of a Class A
Warrant (exercisable for two years at $1.00 per share) and 3/20ths of a Class B
Warrant (exercisable for three years at $1.50 per share). During the first
quarter of 2003 prior to the termination of the private offering, the Company
sold securities for an aggregate price of $152,500 and issued 152,500 shares of
Common Stock, 38,125 Class A Warrants, and 22,875 Class B Warrants.
For their services in the private offering, commissions of 10% of the sale
price were paid to the selling agents, with 50% of the commission amount paid in
cash and 50% paid in shares of Common Stock. Total commissions earned during the
quarter ended March 31, 2003 was $15,250. As of December 31, 2003, 3,875 shares
of Common Stock were issuable to a selling agent, Frederick & Company, Inc. of
Milwaukee, Wisconsin; an additional 7,625 became issuable to this selling agent
during the first quarter of 2003.
Since emerging from bankruptcy, the Company has issued stock in lieu of
cash to four legal professionals rendering their services after July 11, 2002.
This stock is issued pursuant to Section 4(2) of the Securities Act of 1933.
During the months of September, October, November, and December 2002, the
Company accrued legal fees payable in cash and stock. At the end of 2002, the
Company owed 105,076 shares of stock to the attorneys at Robert F. Coleman &
Associates; this stock was issued on March 3, 2003.
22
On February 4, 2003, the board of directors resolved to grant stock
options to three employees under the Company's Long-Term Incentive Plan. The
Company granted options representing the right to purchase an aggregate of
80,000 shares of Common Stock with an exercise price of $1.50 per share, all to
vest immediately, to three employees, 40,000 of which were issued to Lance
Jones, the Company's controller.
Pursuant to the Plan and Section 3(a)(7) of the Securities Act of 1933,
the Company continues to exchange new securities for "Allowed Claims" and
"Allowed Equity Interests" as defined in the Plan. The Company has issued or has
an obligation to issue the following securities in exchange for "Allowed Claims"
and "Allowed Equity Interests." During the first quarter of 2003, the Company
issued 389,481 shares of Common Stock and 578,736 shares of Series A Convertible
Preferred Stock to holders of the Company's pre-petition 12% Notes; 175,688
shares of Common Stock and 175,688 shares of Series B Convertible Preferred
Stock to holders of the pre-petition 10% Notes; and 10,000 shares to David Paul
Crews, as Trustee or the Successor Trustee(s) of the David Paul Crews Living
Revocable Trust (John Connally III, the holder of an administrative claim from
the bankruptcy, assigned his right to receive these shares to Crews). David Paul
Crews is a director of Cytomedix.
Item 3. Defaults Upon Senior Securities.
N/A
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders during the first
quarter of 2003. Because of the bankruptcy, the Company was unable to hold an
annual meeting in 2002. The Company plans to have an annual meeting during the
third quarter of 2003.
Item 5. Other Information.
N/A
Item 6. Exhibits and Reports on Forms 8-K.
The exhibits listed in the accompanying Exhibit Index are filed as part of
this report.
No Forms 8-K were filed during the first quarter of 2003.
23
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: May 15, 2003
/s/ Carelyn P. Fylling
Carelyn P. Fylling, Vice President of Professional Services
/s/ Lance Jones
Lance Jones, Controller
Date: May 15, 2003
Signed originals of this written statement have been provided to
Cytomedix, Inc. and will be retained by Cytomedix, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
24
Certification of Chief Executive Officer
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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date");
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Kent T. Smith
Kent T. Smith, Chief Executive Officer
A signed original of this written statement has been provided to Cytomedix, Inc.
and will be retained by Cytomedix, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
25
Certification of Vice-President of Professional Services
Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
I, Carelyn P. Fylling, 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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date");
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Carelyn P. Fylling
Carelyn P. Fylling, Vice President of Professional Services
A signed original of this written statement has been provided to Cytomedix, Inc.
and will be retained by Cytomedix, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
26
Certification of Controller
Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
I, Lance Jones, 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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Lance Jones
Lance Jones
A signed original of this written statement has been provided to Cytomedix, Inc.
and will be retained by Cytomedix, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
27
EXHIBIT LIST
2.1 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 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).
4.2 Form of Class A Warrant issued to New Investors and DIP Lenders.
(Previously filed on December 5, 2002, on Form 10-QSB for quarter ended
September 30, 2001, File No. 000-28443).
4.3 Form of Class B Warrant issued to New Investors and DIP Lenders.
(Previously filed on December 5, 2002, on Form 10-QSB for quarter ended
September 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).
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 Second Amendment to Royalty Agreement, dated as of December 5, 2002, by
and between Cytomedix, Inc. and Curative Health Services, Inc. (Previously
filed on March 31, 2003, on Form 10-KSB for fiscal year ended December 31,
2002, File No. 000-28443).
10.4 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).
10.5 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
for year ended December 31, 2000, File No. 000-28443).
10.6 Employment Agreement with Mr. Kent T. Smith (Previously filed on December
5, 2002, on Form 10-QSB for quarter ended September 30, 2001, File No.
000-28443).
10.7 Employment Agreement with Ms. Carelyn P. Fylling (Previously filed on
December 5, 2002, on Form 10-QSB for quarter ended September 30, 2001,
File No. 000-28443).
10.8 Registration Rights Agreement by and between Cytomedix, Inc. and the New
Investors and Cytomedix, Inc. and the DIP Lenders (Previously filed on
December 5, 2002, on Form 10-QSB for quarter ended September 30, 2001,
File No. 000-28443).
10.9 BDR/Cytomedix Consulting Arrangement (Previously filed on December 5,
2002, on Form 10-QSB for quarter ended September 30, 2001, File No.
000-28443).
10.10 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).
28
16.1 Letter from KPMG dated August 22, 2002 (Previously filed on August 26,
2002, 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 Certificate of Controller of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
29