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 September 30, 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 Identification Number) incorporation or organization) 1523 South Bowman Rd., Suite A, Little Rock, AR 72211 - ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number (501) 219-2111 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 |X| No |_| 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 November 13, 2003: 13,211,839 shares of Common Stock, $.0001 par value Transitional Small Business Disclosure Format (Check one): Yes |_| No |X| CYTOMEDIX, INC. TABLE OF CONTENTS PART I--FINANCIAL INFORMATION Item 1. Financial Statements. 1 Item 2. Management's Discussion and Analysis. 14 Overview of Business 14 Results of Operations 15 Liquidity and Capital Resources as of September 30, 2003 17 Risk Factors 18 Prospects for the Future 23 Item 3. Controls and Procedures. 23 PART II--OTHER INFORMATION Item 1. Legal Proceedings. 24 Item 2. Changes in Securities. 25 Outstanding Common Stock and Dividends 25 Sales of Non-Registered Securities in the Third Quarter of 2003 25 Sales of Non-Registered Securities Subsequent to the Third Quarter of 2003 26 Item 3. Defaults Upon Senior Securities. 26 Item 4. Submission of Matters to a Vote of Security Holders. 26 Item 5. Other Information. 26 Item 6. Exhibits and Reports on Forms 8-K. 27 SIGNATURES 28 PART I FINANCIAL INFORMATION Item 1. Financial Statements. Cytomedix, Inc. (A Development Stage Entity) Condensed Balance Sheets ASSETS Successor Company -------------------------------- September 30, December 31, 2003 2002 ------------ ----------- (Unaudited) (Audited) Current assets Cash $ 1,618,247 $ 945,298 Receivables 230,519 238,273 Prepaid expenses, other current assets and inventory 319,784 255,967 ------------ ----------- Total current assets 2,168,550 1,439,538 Cash - restricted 20,460 20,000 Property and equipment, net 258,137 312,706 Intangibles 4,263,728 4,358,465 Other assets 34,500 23,000 ------------ ----------- Total assets $ 6,745,375 $ 6,153,709 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 660,356 $ 745,124 Deferred revenue 81,448 81,448 Note payable 22,666 37,054 ------------ ----------- Total current liabilities 764,470 863,626 ------------ ----------- Long-term liabilities Dividends payable on Series A and Series B preferred stock 65,674 110,759 Deferred revenue 458,145 519,230 ------------ ----------- Total long-term liabilities 523,819 629,989 ------------ ----------- Total liabilities 1,288,289 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 2003 issued - 1,359,067 shares, issuable - 261,010 shares; at 2002 issued - 759,760 shares, issuable - 606,163 shares 163 137 Series B Convertible preferred stock; $.0001 par value, $1.00 liquidation value, authorized 5,000,000 shares; at 2003 issued - 1,402,650 shares, issuable - 260,989 shares; at 2002 issued - 1,224,034 shares, issuable - 178,616 shares 166 140 Common stock; $.0001 par value, authorized 40,000,000 shares; at 2003 issued - 12,541,639 shares, issuable - 659,614 shares; at 2002 issued - 10,070,173 shares, issuable - 649,104 shares 1,323 1,073 Additional paid-in capital 11,123,582 6,942,297 Deferred compensation (599,651) (155,833) Deficit accumulated in the development stage (5,068,497) (2,127,720) ------------ ----------- Total stockholders' equity 5,457,086 4,660,094 ------------ ----------- $ 6,745,375 $ 6,153,709 ============ =========== The accompanying notes are an integral part of these condensed financial statements. 1 Cytomedix, Inc. (A Development Stage Entity) Condensed Statements of Operations - Unaudited Predecessor Successor Company Company ------------------------------------------------------------------- ------------ Three Months Three Months Nine Months July 1, 2002 Six Months Ended Ended Ended Through Ended September 30, September 30, September 30, September 30, June 30, 2003 2002 2003 2003 2002 ------------ ----------- ------------ ----------- ------------ Revenue Sales $ 104,892 $ 135,140 $ 229,407 $ 563,237 $ 117,500 Royalties 166,431 35,289 547,596 879,949 309,770 ------------ ----------- ------------ ----------- ------------ Total revenue 271,323 170,429 777,003 1,443,186 427,270 ------------ ----------- ------------ ----------- ------------ Cost of revenue Cost of sales 43,025 29,652 115,624 177,671 16,073 Cost of royalties 134,834 -- 448,233 713,967 234,376 ------------ ----------- ------------ ----------- ------------ Total cost of revenue 177,859 29,652 563,857 891,638 250,449 ------------ ----------- ------------ ----------- ------------ Gross profit 93,464 140,777 213,146 551,548 176,821 ------------ ----------- ------------ ----------- ------------ Operating expenses Salaries and wages 239,098 173,847 696,556 1,093,538 285,906 Consulting expense 370,663 147,326 805,816 1,038,259 74,178 Consulting expense - related party 65,971 -- 202,635 521,187 -- Professional fees 157,595 386,879 569,539 1,328,225 189,201 Royalty expense - related party 18,750 18,750 57,926 95,426 37,500 General and administrative expenses 234,440 270,867 657,052 1,269,756 492,264 ------------ ----------- ------------ ----------- ------------ Total operating expenses 1,086,517 997,669 2,989,524 5,346,391 1,079,049 ------------ ----------- ------------ ----------- ------------ Loss from operations (993,053) (856,892) (2,776,378) (4,794,843) (902,228) ------------ ----------- ------------ ----------- ------------ Other (income) expense Interest expense 491 22,824 654 23,479 355,969 Interest and other income (8,330) (16,212) (12,682) (37,011) (6,352) ------------ ----------- ------------ ----------- ------------ Total other (income) expense, net (7,839) 6,612 (12,028) (13,532) 349,617 ------------ ----------- ------------ ----------- ------------ Net loss from continuing operations (985,214) (863,504) (2,764,350) (4,781,311) (1,251,845) Reorganization item: Professional fees -- -- -- -- 489,690 Consulting - related party -- -- -- -- 119,526 ------------ ----------- ------------ ----------- ------------ Net loss Before extraordinary items (985,214) (863,504) (2,764,350) (4,781,311) (1,861,061) ------------ ----------- ------------ ----------- ------------ Extraordinary gain on discharge of prepetition liabilities -- -- -- -- 9,306,192 ------------ ----------- ------------ ----------- ------------ Net income (loss) (985,214) (863,504) (2,764,350) (4,781,311) 7,445,131 Preferred dividend on Series A and B preferred stock 65,674 55,379 176,428 287,187 -- ------------ ----------- ------------ ----------- ------------ Net income (loss) to common stockholders $ (1,050,888) $ (918,883) $ (2,940,778) $(5,068,498) $ 7,445,131 ============ =========== ============ =========== ============ Basic and diluted income (loss) per common share $ (0.09) $ (0.10) $ (0.25) $ 0.58 ============ =========== ============ ============ Weighted average shares outstanding 12,214,767 8,763,342 11,575,484 12,746,482 ============ =========== ============ ============ The accompanying notes are an integral part of these condensed financial statements. 2 Cytomedix, Inc. (A Development Stage Entity) Condensed Statements of Cash Flows - Unaudited Predecessor Successor Company Company ------------------------------------------------ ----------- July 1, 2002 Nine Months (Inception) Three Months Six Months Ended Through Ended Ended September 30, September 30, September 30, June 30, 2003 2003 2002 2002 ----------- ----------- ----------- --------- Cash Flows from operating activities $(1,925,780) $(3,870,646) $ (872,068) $(639,316) ----------- ----------- ----------- --------- Cash flows from investing activities: Purchase of equipment (12,903) (317,774) (98,438) (28,724) ----------- ----------- ----------- --------- Net cash used in investing activities (12,903) (317,774) (98,438) (28,724) ----------- ----------- ----------- --------- Cash flows from financing activities: Proceeds from short-term borrowings -- -- -- 587,500 Commissions on new money raised paid in cash -- (57,213) -- -- Proceeds from sale of common stock, net of offering costs 2,678,158 5,898,660 3,085,789 -- Repayment of note payable (66,066) (118,175) -- -- ----------- ----------- ----------- --------- Net cash provided by financing activities 2,612,092 5,723,272 3,085,789 587,500 ----------- ----------- ----------- --------- Net increase (decrease) in cash 673,409 1,534,852 2,115,283 (80,540) Cash, beginning of period 965,298 103,855 103,855 184,395 ----------- ----------- ----------- --------- Cash, end of period $ 1,638,707 $ 1,638,707 $ 2,219,138 $ 103,855 =========== =========== =========== ========= The accompanying notes are an integral part of these condensed financial statements. 3 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. 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 5,916,188 and 2,827,917 at September 30, 2003 and 2002, respectively. The Company follows the provisions of SFAS No. 123 as amended by SFAS 148. 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 September 30, 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: 4 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements NOTE 1 - BASIS OF PRESENTATION (Continued) Predecessor Successor Company Company -------------------------------------------------- ------------ Three Months Nine Months Three Months Six Months Ended Ended Ended Ended September 30, September 30, September 30, June 30, 2003 2003 2002 2002 ------------- ----------- ------------- ------------- Net income (loss) to common stockholders, as reported $ (1,050,888) $(2,940,778) $ (918,883) $ 7,445,131 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 -- 70,832 -- -- ------------- ----------- ------------- ------------- Pro forma net income (loss) $ (1,050,888) $(3,011,610) $ (918,883) $ 7,445,131 ------------- ----------- ------------- ------------- Earnings per share: Basic and diluted - as reported $ (0.09) $ (0.25) $ (0.10) $ (0.58) Basic and diluted - pro forma $ (0.09) $ (0.26) $ (0.10) $ (0.58) 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 ------------- ------------- Nine Months Six Months Ended Ended September 30, June 30, 2003 2002 ------------- ------------- Risk free rate 3.96% N/A Expected years until exercise 10 N/A Expected stock volatility 100% N/A Dividend yield N/A N/A ======== ======== 5 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements NOTE 1 - BASIS OF PRESENTATION (Continued) 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 September 30, 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. 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 $2,940,778 during the nine-month period ended September 30, 2003. Included in the calculation of net loss were non-cash preferred stock dividends totaling $176,428. The Company anticipates that the cash on-hand at September 30, 2003 and expected revenues will be sufficient to finance its currently anticipated needs for operating, clinical trials and capital expenditures to the first quarter of 2004. 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 offerings of the Company's securities. To increase sales, management is in the process of implementing a network of independent sales representatives with wound care experience who will focus on niche markets in chronic wound care. 6 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements NOTE 3 - GOING CONCERN (Continued) The Company's ability to continue as a going concern is dependent upon the Company's success in increasing revenues and raising capital through 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. 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: Predecessor Company ------------- Six Months Ended June 30, 2002 ------------- Professional fees $489,690 Consulting - related party 119,526 -------- $609,216 ======== 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 financial statements of the "Successor Company" and are not comparable to those for the periods prior to June 30, 2002, which are referred to as the financial statements of the "Predecessor Company." As of the effective date of the Plan, all of the Company's securities were cancelled and of no further force or effect. 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 confirmation of the Plan retained less than 50% of the New common stock and the Company's reorganization value at confirmation 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 =========== 7 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements NOTE 5 - FRESH-START ACCOUNTING (Continued) 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. 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 Stock. Also recorded was the New common and preferred stock which was issuable under the Plan. 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) Conversion of Predecessor Reorgani- Liabilities Not Successor Company zation Fresh-Start Subject to Company 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 -- 137 -- -- (g) 137 stock Successor company Series B Preferred -- 140 -- -- (g) 140 stock 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 issuance of 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 nine months ended September 30, 2003, the Company issued 2,481,976 shares of common stock. The Company received $177,500 of additional monies in the original private placement commenced in connection with the Plan and issued 177,500 shares of common stock, 44,375 Class A warrants and 26,625 Class B warrants before closing the private placement in April 2003. On June 4, 2003, the Company initiated a new private offering at $1.25 per share to provide the Company with working capital to implement a new business plan and to fund the Company's prospective clinical trials. As of June 30, 2003, the Company has raised $1,050,000 under the new private placement and issued 840,000 shares of common stock. From July 1 through September 30, 2003, an additional $1,449,000 was raised under the new private placement with 1,159,200 shares of common stock issued or immediately issuable. The Company incurred $41,565 of offering costs related to the private placement. On May 29, 2003, the Company issued 25,500 shares of common stock for commissions on monies raised in the private placement terminated in April 2003. On June 24, 2003, the Company issued 15,000 shares of common stock for commission on monies raised in the new private placement. 10 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements NOTE 6 - CAPITAL STOCK ACTIVITY (Continued) 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 value of these services amounted to $105,076. The Company had an agreement 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. On June 19, 2003, the Company issued an additional 68,318 shares of common stock to Robert F. Coleman & Associates in consideration for legal services rendered during the period of January 1, 2003 through March 31, 2003 as follows: 20,714 shares for legal fees provided in January 2003, 22,152 shares for legal fees provided in February 2003, and 25,452 shares for legal fees provided in March 2003. The value of these services amounted to $91,169. On June 19, 2003, the Company issued 31,037 shares of common stock to the Company's attorney Cummins & Cronin, LLC for legal services rendered October 1, 2002 through March 31, 2003 as follows: 6,997 shares for legal fees provided in October 2002, 2,807 shares for legal fees provided in November 2002, 5,963 shares for legal fees provided in December 2002, 1,267 shares for legal fees provided in January 2003, 3,020 shares for legal fees provided in February 2003, and 10,983 shares for legal fees provided in March 2003. The value of these services amounted to $15,540. The Company has agreed to pay Cummins & Cronin, LLC two-thirds of their legal fees in shares of common stock with all expenses being paid in cash. Subsequent to the first quarter of 2003, the Company no longer utilized these services. On July 7, 2003, the Company issued 20,345 shares of common stock in exchange for warrants with a total exercise price of $24,160. On August 27, 2003, the Company entered into an agreement with The Research Works, Inc. ("Research Works"), whereby Research Works will prepare an equity research report on Cytomedix. This research report is to be published on the Research Works website and periodically updated. Cytomedix authorized and issued 40,000 shares of Common Stock to Research Works as consideration under the agreement. The shares were valued at the current market price totaling $68,000. As stated in the Plan, holders of the Company's Series A Convertible Preferred Stock and the Company's Series B Convertible Preferred Stock are entitled to dividends at the rate of eight percent per annum, payable quarterly in arrears. The first year dividend is to be paid in additional shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock. As of September 30, 2003, there were 254,155 shares of Series A Convertible Preferred Stock issuable, but not yet issued, to holders of the Series A Convertible Preferred Stock, as dividends on the Series A Convertible Preferred Stock. As of September 30, 2003, there were 260,989 shares of Series B Convertible Preferred Stock issuable, but not yet issued, to holders of the Series B Convertible Preferred Stock, as dividends on the Series B Convertible Preferred Stock. The Company is currently in the process of issuing these additional shares of Preferred Stock to its holders of Preferred Stock. 11 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements 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 from the date of issue. NOTE 8 - DEFERRED COMPENSATION On April 1, 2003, the Company entered into a consulting agreement with Nadine C. Smith (the "Consultant") to provide consulting services for a period of twelve months. The Consultant will receive $125,000 per annum paid monthly as compensation for providing consulting services to the Company. The Consultant was also issued a warrant to purchase 1,000,000 shares of the Company's common stock at an exercise price of $1.00. The first 500,000 shares vested upon signing and are exercisable immediately and the remaining 500,000 shares vest and are exercisable after the first anniversary date of the issuance unless the consulting agreement is terminated by the Company for cause. This warrant expires on April 1, 2010. The Company has recorded deferred compensation of $852,750 in relation to this agreement of which $426,375 was amortized as of September 30, 2003 as a non-cash charge to the Company. In connection with the warrant, the Company has agreed to provide certain registration rights. During the second quarter 2003, the Company entered into various sales representative agreements in which the representatives received an option representing the right to purchase an aggregate of 4,500 shares of common stock at an exercise price of $1.50. These options vest immediately. The agreements provide for future options being granted contingent on quarterly sales. Deferred compensation of $2,776 was recorded of which $712 was expensed through September 30, 2003 as a non-cash charge to the Company. During the third quarter 2003, the Company entered into a further sales representative agreement in which the representative received an option representing the right to purchase an aggregate of 500 shares of common stock at an exercise price of $1.50. These options vest immediately. The agreements provide for future options being granted on quarterly sales. Deferred compensation of $630 was recorded of which $105 was expensed through September 30, 2003 as a non-cash charge to the Company. NOTE 9 - 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 $202,635 and $180,103 for the nine months ended September 30, 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. The Carmen Group, Inc. was engaged during the second quarter 2003 as a business consultant to strategically position and represent the Company before the federal government. A director of the Company is also a senior consultant with the Carmen Group, Inc. As of September 30, 2003, the Carmen Group, Inc. provided services to the Company amounting to $64,892 for the nine months ended September 30, 2003. 12 Cytomedix, Inc. (A Development Stage Entity) Notes to Condensed Financial Statements NOTE 10 - 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 The AutoloGel(TM) System 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. On July 30, 2003, Cytomedix entered into an agreement with Fitch, Even, Tabin, and Flannery, Attorneys ("Fitch"), of Chicago. Fitch will provide litigation and licensing legal representation of a straight contingency basis with respect to certain litigation and licensing matters relating to the Company's intellectual property utilized in connection with The AutoloGel(TM) System. NOTE 11 - 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. NOTE 12 - SUBSEQUENT EVENTS On October 21, 2003, the Company's Board of Directors approved a Services Agreement with IVC Group ("IVC"). Pursuant to the Services Agreement, IVC received options to purchase 400,000 shares of Common Stock at an exercise price of $1.00 per share. The options vest immediately and expire three years from the date of issue. The transaction was exempt from registration pursuant to Section 4(20) of the Securities Act of 1933. On October 21, 2003, the Board of Directors authorized Kent Smith and Carelyn Fylling to be issued 47,693 and 19,077 options to purchase common stock at $1.25 per share, respectively, as required under their employment agreements which were entered into in 2002. On October 21, 2003, the Company's Board of Directors approved a Services Agreement with Stern & Co. ("Stern"). Pursuant to the Services Agreement, Stern received options to purchase 100,000 shares of Common Stock at an exercise price of $1.25 per share. The options vest immediately and expire three years from the date of issue. The transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On November 7, 2003, the Company received notice of intent to resign from the Company's Chief Executive Officer and President, Mr. Kent Smith. Mr. Smith served in these capacities from August 22, 2002, and will continue to serve as the Company's President until his successor is named. 13 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 report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When the words "believes," "feels," "plans," "anticipates," "will likely result," "will continue," "projects," "expects," and similar expressions are used in this report, 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 of this report or to reflect the occurrence of unanticipated events, except as may be reported in the Company's future reports filed with the Securities and Exchange Commission. This report should be read in conjunction with the Company's Form 10-KSB for the year ended December 31, 2002, and the Company's Forms 10-QSB for the periods ended March 31, 2003, and June 30, 2003. OVERVIEW OF BUSINESS Cytomedix is a biotechnology company incorporated in Delaware with its principal offices in Arkansas. 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, "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). The process of creating and utilizing AutoloGel(TM) is referred to as "The AutoloGel(TM) System". The Company is implementing a business strategy focused generally on three areas: (1) commencing a prospective, multi-center, randomized, blinded, controlled clinical trial ("Trial" and "Trials") as discussed below; (2) retaining a carefully selected network of independent sales representatives with knowledge and relationships within the wound care sector to market The AutoloGel(TM) System; and (3) implementing a contingency-based patent enforcement and intellectual property licensing initiative pursuant to a contingency-based agreement with Fitch, Even, Tabin, and Flannery, attorneys. The Company is planning and implementing strategies to meet each of the requirements that are necessary for submitting and obtaining a national reimbursement code for The AutoloGel(TM) System. The process is multi-faceted, time intensive, and expensive. In order to obtain a national reimbursement code, the Company will need to initiate the Trials to potentially prove the safety and efficacy of The AutoloGel(TM) System. The ultimate goals of the Trials are (1) to gain an approval from the United States Food and Drug Administration ("FDA") the use of The AutoloGel(TM) System in the treatment of diabetic foot ulcers, and (2) to provide sufficient data as is necessary to obtain Medicare reimbursement for the therapy. FDA approval is the standard by which Medicare, health care providers and private insurance payors accept a new therapy, drug, or device for use and reimbursement. The Company has submitted its application seeking the necessary FDA approval to initiate the Trials. The Company's goal is to complete the Trials, publish and submit the results to appropriate regulatory bodies during the fourth quarter of 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 14 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. In order to obtain the preliminary funds necessary to perform the Trials, the Company commenced a private offering of its Common Stock in June 2003 (the "Second Offering"). The Second Offering was closed in October 2003, generating gross proceeds of $2,499,000. There is no assurance that the amount raised in the Second Offering will be sufficient to initiate, perform and complete the Trials or publish and submit the results from the Trials. Cytomedix believes it will be required to seek further financing in connection with its efforts to complete the Trials. RESULTS OF OPERATION The Company is a development stage company as defined in Statement of Financial Accounting Standards No. 7. The Company's main activities during this start-up phase have consisted of recruiting and hiring a new management team and corresponding personnel, recruiting a network of independent sales representatives, and developing the licensing strategy for, and market expansion of, The AutoloGel(TM) System and related disposable component kits and proprietary system. In connection with the market expansion of The AutoloGel(TM) System, 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 for the company's wound treatment technologies. Cytomedix filed for bankruptcy on August 7, 2001, and did not emerge from bankruptcy until July 11, 2002. 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 financial statements of the "Successor Company" and are not comparable to those for the periods prior to June 30, 2002, which are referred to as the financial statements of the "Predecessor Company." The bankruptcy had a direct impact on all of the Company's revenues and expenses described below. Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 The Company's gross revenues from sales for the three months ended September 30, 2003, decreased as compared to the same period in 2002. During the three-month period ended September 30, 2003, the Company generated $104,892 in gross revenues from sales compared to $135,140 for the three-month period ended September 30, 2002. This decrease is due principally to revenues of approximately $100,000 resulting from an initial order and servicing of a national contract during the three-month period ended September 30, 2002. For the three months ended September 30, 2003, the Company realized royalty income of $166,431 from DePuy Acromed, Inc., a division of Johnson & Johnson, Inc. For the corresponding three-month period ended September 30, 2002, royalty income totaled $35,289. The cost of revenue was $177,859 resulting in gross profit of $93,464 for the three-month period ended September 30, 2003. For the corresponding three-month period in 2002, the cost of revenue was $29,652 resulting in gross profit of $140,777. The increase in cost of revenue is due mainly to training expenses, supply expenses, and patient evaluation expenses resulting from the Company's retention and equipping of its team of independent sales representatives. Compensation expense for the three months ended September 30, 2003, was approximately $239,098 as compared to $173,847 for the same period in 2002. The increase in the compensation expense was due primarily to the retention of new personnel to expand Company operations. During the third quarter of 2003, the Company employed a Chief Executive Officer/President, Vice-President of Professional Services, Controller, one sales employee, four clinicians and three administrative employees. 15 Consulting expense for the three months ended September 30, 2003, totaled approximately $370,663 as compared to $147,326 for the same period in 2002. The increase in consulting expense results from the addition of Nadine C. Smith as a consultant and the additional consulting expenses incurred in connection with the Trials. Deferred compensation totaled $599,651, after $225,500 was expensed as a non-cash consulting services expense during the three months ended September 30, 2003. The remaining $145,163 of consulting expenses for the three months ended September 30, 2003, related to consulting services in the areas of clinical research, information technology, marketing, and investor relations. Related party consulting expense for the three months ended September 30, 2003, totaled $65,971. BDR, Inc. was paid $9,000 per month for its activities as consultant to the Board of Directors. BDR, Inc.'s president is a significant shareholder and provides full-time consulting services to Cytomedix. BDR, Inc. was also granted a warrant which was recorded to deferred compensation as of December 31, 2002. $24,314 of this deferred compensation was expensed as a non-cash consulting services expense for the three months ended September 30, 2003. Professional fees for the three months ended September 30, 2003, totaled approximately $157,595 as compared to $386,879 for the same period in 2002. After the Company emerged from bankruptcy, the need for bankruptcy-related professional services was alleviated greatly. The Company also reduced professional fees through execution of a contingency-based contract with Fitch, Even, Tabin, and Flannery, attorneys, with respect to certain litigation and licensing matters relating to the Company's intellectual property utilized in connection with The AutoloGel(TM) System. The professional fees for the three months ended September 30, 2003, were incurred primarily for legal services, including corporate and securities compliance, the Second Offering, patent maintenance and patent litigation. For the three months ended September 30, 2003, $11,382 of the total professional fees related to accounting fees. General and administrative expenses for the three months ended September 30, 2003, were $234,440 as compared to $270,867 for the same period in 2002. The decrease was due to improved cost controls in 2003. General and administrative expenses for the three months ended September 30, 2003, include $6,582 for the rental of the Company's principal executive offices. The Company subleases its offices from Mr. Charles E. Worden, Sr., a related party, for $2,194 per month. This rental payment reduces the amount of royalty payments actually paid to Mr. Worden. Also included in the general and administrative expense is depreciation and amortization of $53,990 for the three months ended September 30, 2003. The Company incurred a related party royalty expense of $18,750 payable to Mr. Charles E. Worden, Sr. during the three months ended September 30, 2003. This royalty expense totaled $18,750 for the three months ended September 30, 2002. The Company's losses of $985,214 from operations during the three months ended September 30, 2003, increased as compared to losses of $863,504 for the same period in 2002. The Company recorded a non-cash preferred stock dividend in connection with its cumulative 8% Series A and B Convertible Preferred Stock in the amount of $65,674 for the three months ended September 30, 2003. On the date the dividends are to be paid, the Board may pay the dividend either in additional shares of Preferred Stock or in cash. The Company received $1,499,000 in proceeds from the Second Offering during the three months ended September 30, 2003. In connection therewith, the Company accrued $41,565 in commissions during 16 the three months ended September 30, 2003. The Company also issued 10,200 shares of Common Stock for commissions payable in connection with the Second Offering for the three months ended September 30, 2003. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Cytomedix filed for bankruptcy on August 7, 2001, and did not emerge from bankruptcy until July 11, 2002. 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 financial statements of the "Successor Company" and are not comparable to those for the periods prior to June 30, 2002, which are referred to as the financial statements of the "Predecessor Company." LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2003 For the nine months ended September 30, 2003, but prior to the Company's April 2003 termination of the private offering initiated in connection with the Company's bankruptcy (the "Bankruptcy Offering"), the Company received $177,500 in proceeds from seven investors. During the second quarter of 2003, the Company refocused its resources on initiating the prospective, clinical Trials necessary to obtain FDA approval, and ultimately, a national reimbursement code. In connection therewith, the Company terminated the Bankruptcy Offering and commenced the Second Offering. The Company received $2,499,000 in proceeds from the Second Offering during the nine months ended September 30, 2003. The Second Offering was terminated in October 2003. In connection therewith, the Company paid $33,899 and accrued an additional $41,565 in commissions during the nine months ended September 30, 2003. The Company also issued 25,200 shares of Common Stock for commissions payable in connection with the Second Offering. All working capital required to implement the Company's business plan will be provided by funds obtained through offerings of the Company's securities 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 to approximately the first quarter of 2004. Therefore, the Company will be required to commence further financing activities in order to continue operations beyond the first quarter of 2004. Net cash used in operating activities during the nine months ended September 30, 2003, was $1,925,780. The primary use of cash during the period was to fund the net loss. Net cash used in investing activities during the nine months ended September 30, 2003, was $12,903 and consisted of purchases of equipment. Net cash provided by financing activities during the nine months ended September 30, 2003, was $2,612,092 and consisted primarily of the monies raised in the Bankruptcy Offering and the Second Offering, net of offering costs. Working capital totaled $1,404,080 at September 30, 2003, compared to $575,912 as of December 31, 2002, an increase of $828,168. This increase was primarily due in cash from the monies raised in the Bankruptcy Offering and the Second Offering. The Company's unrestricted cash balance at September 30, 2003, was $1,618,247. This amount includes $2,499,000 of proceeds from the Second Offering. The Company estimates that without raising additional funds through offerings of the Company's securities and/or without increasing revenues, it will be unable to meet its cash requirements during the first quarter of 2004. If the Company does not have sufficient working capital and is 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 the Trials; delaying plans to 17 initiate government regulatory and reimbursement approval processes; postponing the hiring or retention of new personnel; or, in the extreme situation, ceasing operations. RISK FACTORS Cytomedix cautions readers of this report 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. Readers should also consider the following risk factors which may cause actual results to differ materially from those expressed or implied by any forward-looking statement. The risk factors 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. The Company has limited working capital and immediate needs for additional capital. 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 offerings of the Company's securities and revenues generated by the Company. The Company will need to obtain additional funds to support its future operational expenses and capital requirements. It will need to generate increased revenues or will need to raise additional funds through securities offerings 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. Even if such transactions are possible, there is no assurance that they will be on terms reasonable to Cytomedix or that they will enable Cytomedix to satisfy its capital requirements. If adequate funds are not available or are not available on acceptable terms when required, the Company may be required to significantly curtail its operations or may not be able to fund expansion, fund the Trials, take advantage of unanticipated opportunities, develop or enhance services or products or respond to competitive pressures. Such inability could have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of Cytomedix stockholders will be reduced, stockholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of Cytomedix Common Stock. 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. As a result of the Company's losses and the matters described in this report and prior reports filed with the SEC, the Independent Auditors' Report on the 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. The Company has a short operating history and limited operating experience. The Company must be evaluated in light of the uncertainties and complexities affecting a development stage biotechnology company. The Company is a development stage company which has been fully operational under current management only since it emerged from bankruptcy in July 2002. Beginning in the second quarter of 2003, the Company initiated a new, more aggressive business plan to provide sales and service support locally to markets with significant populations of chronic wound patients. This new business plan will be implemented through a network of independent sales representatives to 18 market and sell component kits for The AutoloGel(TM) System. Thus, the Company has a very limited operating history and limited experience in conducting operations pursuant to the new business plan. The Company's inability to successfully implement its new business plan and strategy would adversely affect its business, operating results, and financial condition. Continued operating losses, together with the risks associated with the Company's ability to gain new customers in the sale of The AutoloGel(TM) System component kits 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. 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(TM) System 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 or positions of state regulatory officials where The AutoloGel(TM) System is practiced, could materially and adversely affect the Company's ability to sell products in those states. 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 customers cannot obtain reimbursement. The AutoloGel(TM) System is provided to health care providers. Some of these providers, in turn, seek reimbursement from third party payors such as Medicare, Medicaid, and other private insurers. Many foreign countries also have comprehensive government-managed health care programs that provide reimbursement for health care products. Under such health care programs, reimbursement is often a determining factor in predicting a product's success, with some physicians and patients strongly favoring 19 only those products for which they will be reimbursed. To date, The AutoloGel(TM) System has been approved for Medicaid reimbursement in certain circumstances by the Illinois Department of Public Aid and the Company is in discussions with appropriate agencies in four other states seeking approval for Medicaid reimbursement. The Company has no assurance that these four state agencies, or agencies in other states or foreign countries will approve The AutoloGel(TM) System for Medicaid reimbursement, or that the Illinois Department of Public Aid or any other state agency or foreign countries that approve reimbursement will continue to do so. In order to achieve a national reimbursement product code for The AutoloGel(TM) System, the Company will have to undertake a prospective, multi-center, randomized, blinded, controlled clinical trial to receive FDA approval. This type of approval and data is required by the Center for Medicare and Medicaid Services ("CMS"), formerly known as the Healthcare Financing Agency ("HCFA"). In addition, a 1992 HCFA ruling prohibiting the reimbursement of growth factor products for chronic wounds may have to be dismissed in order to secure a national reimbursement product code. In May 2003, CMS announced a review of "Autologous Blood-Derived Products for Chronic Non-Healing Wounds" and Cytomedix provided materials to CMS for its use in connection with the review. To date, CMS has not announced the results of its review. 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 procedure to the physician or to the patient. Health care providers' inability to obtain third-party reimbursement for the treatment could have an adverse effect on the Company's success. The success of The AutoloGel(TM) System 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. Cytomedix 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, and the Company's ability to locate and engage independent sales representatives with expertise and contacts in the wound care market. The Company has retained a team of highly-qualified officers, consultants and independent sales representatives, but the Company cannot assure that it will be able to successfully integrate these officers, consultants and independent sales representatives into its operations, retain any or 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 health care companies. The Company's inability to retain additional qualified personnel may lead to higher recruiting and compensation costs for such personnel. These increased costs may reduce the Company's profit margins or make retaining new personnel impractical. 20 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 relating to the Company's 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(TM) System ordered by physicians will not be asserted against the Company in the future. The production, marketing and sale and use of The AutoloGel(TM) System 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 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. The AutoloGel(TM) System 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(TM) System. 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. The Company's Common Stock is traded in the over-the-counter market, and it may never be listed on a national exchange. The Company's Common Stock is currently traded in the over-the-counter market and quoted on the Over-The-Counter 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 21 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. The price of the Company's Common Stock could be affected adversely by sales of the Common Stock. To date, there has been very limited trading volume in Cytomedix Common Stock. As long as this condition continues, the sale of a significant number of shares of Common Stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered. In addition, sales of substantial amounts of Common Stock, including shares issued upon the exercise of outstanding options and warrants, under Securities and Exchange Commission Rule 144 or otherwise could adversely affect the prevailing market price of Cytomedix Common Stock and could impair the Company's ability to raise capital through the sale of securities. The price of the Company's Common Stock is likely to be volatile and subject to swings based on sales and other market conditions. The market price of the Company's Common Stock is likely to be highly volatile. In addition to market volatility unrelated to the Company's operating performance, the relatively low trading volume of the Company's Common Stock increases the likelihood and severity of volume fluctuations. These volume fluctuations will likely result in a corresponding increase in the volatility of the Company's Common Stock price. Factors that could cause such volatility in the price of Cytomedix Common Stock may include among other things: (a) actual or anticipated fluctuations in the Company's quarterly operating results; (b) announcements of technological innovations or new sales; (c) changes in financial estimates by securities analysts; (d) governmental regulations; (e) developments in efforts to protect Intellectual Property Assets; (f) conditions or trends in the health care industry; (g) changes in the market valuations of other comparable companies; (h) general market conditions; and (i) timing of decisions by existing shareholders to sell large positions in Cytomedix Common Stock. Purchases of Cytomedix shares 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. 22 The additional burdens imposed on broker-dealers may discourage them from effecting transactions in the Company's 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 The AutoloGel(TM) System, and the Company believes that The AutoloGel(TM) System has a good chance for success in the marketplace for several reasons. In the long-term care and long-term acute care markets, and with health maintenance organizations (HMOs), preferred provider organizations (PPOs), and home health providers where health care products and services are delivered in a capitated environment, the weekly use of The AutoloGel(TM) System is a cost effective treatment modality that saves the expense of daily and multiple dressing changes as well as the labor needed to perform these tasks. Combining these significant cost savings in this economically-driven environment with a faster wound-healing rate as reported by clinicians, the Company expects that both the facility and agency providing the care as well as the wound patient will see added value through the use of The AutoloGel(TM) System. The Company believes that this model of providing easy-to-access advanced therapy with reported increased healing in a shorter period of time will be very attractive to all types of capitated health care providers. The Company believes that obtaining favorable results from the Trials and a subsequent national reimbursement code will directly affect the long-term success of the Company. Whether a product or system is reimbursed by Medicare is a deciding factor for many patients and providers. The Illinois Department of Public Aid has decided to provide reimbursement for The AutoloGel(TM) System kits used to treat Medicaid patients in home health agencies, outpatient facilities, and physician's offices. The Company believes that this decision by the Illinois Department of Public Aid could serve as a precedent that other states agencies could choose to follow. If other state agencies begin to reimburse The AutoloGel(TM) System and/or the Company is successful in obtaining a national reimbursement code, the Company believes that sales of The AutoloGel(TM) System will increase. The Company's success in marketing The AutoloGel(TM) System is directly dependent on the Company's ability to protect its patents. The Company has commenced lawsuits against alleged infringers of its patents and parties it believes are inducing end-users to infringe its patents. In most of these cases, the Company has sought damages and injunctive relief in order to stop the infringement of the Company's intellectual property. The Company's ability to protect its patented technology and to enter into licensing and royalty agreements with persons desiring to use the Company's intellectual property will be vital to the Company's success. In summary, the Company believes that The AutoloGel(TM) System provides an economic benefit to health care providers and reimbursement sources, based on the cost of current treatments and competitive wound care products. Combined with what the Company believes to be a strong patent position, Cytomedix feels it is positioned to successfully market The AutoloGel(TM) System to the capitated care market. Thereafter, upon the successful completion of a strategy to have The AutoloGel(TM) System approved by the FDA and reimbursed by third party payors such as Medicare, Medicaid and other private insurers, the Company intends to aggressively market The AutoloGel(TM) System to all segments of the large and rapidly growing wound care market with the objective of securing a significant market share position. 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) as of the end of the period covered by this report. 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 23 determined that weekly meetings of all executive officers and significant employees and consultants assist in ensuring that material information is communicated throughout the Company. The Company's two Executive Officers and Controller have concluded that there were no significant changes in the Company's internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II OTHER INFORMATION Item 1. Legal Proceedings. One of the key elements of the Company's current business strategy is the use of a contingency-based patent enforcement and licensing initiative to further the Company's operational goals. To that end, the Company has commenced lawsuits against certain alleged infringers of its Intellectual Property Assets and parties it believes are inducing end-users to infringe its Intellectual Property Assets. In connection with this effort, the Company has executed an agreement with Fitch, Even, Tabin, and Flannery, Attorneys ("Fitch"), of Chicago. Fitch will provide litigation and licensing legal representation on straight contingency basis with respect to certain litigation and licensing matters relating to the Company's intellectual property utilized in connection with The AutoloGel(TM) System. The Company has the following litigation pending in the District Court for the Northern District of Illinois, Eastern Division: (i) Cytomedix, Inc. v. Perfusion Partners & Associates, Inc., Case No. 02 C 4776, filed July 3, 2002; (ii) Cytomedix, Inc. v. James Gandy, et al., Case No. 02 C 4779, filed July 3, 2002; (iii) Cytomedix, Inc. v. Little Rock Foot Clinic, P.A., et al., Case No. 02 C 4782, filed July 3, 2002; and (iv) Cytomedix, Inc. v. Autologous Blood Technology, L.L.C., et al., Case No. 02 C 4863, filed July 10, 2002. In each of these lawsuits, 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. A fifth case in the same court, Cytomedix, Inc. v. LB Hyperbarics, Inc., et al., Case No. 02 C 4774, filed July 3, 2002, was dismissed on procedural grounds in May 2003. 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. Management intends to vigorously pursue the litigation. The Illinois federal district court withdrew the reference of this case from the Illinois Bankruptcy Court, and recently ordered bifurcation of the case such that the patent infringement claims would be transferred to the District Court for the Western District of Arkansas for further proceedings and the Company's objections to Bennett's filed proofs of claim would be referred back to the Bankruptcy Court for further proceedings. 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 permanent injunctive relief against Harvest Technologies Corp. On May 23, 2003, the Company initiated an action against Landmark Healthcare, LLC, ("Landmark") in the United States District Court for the Eastern District of Arkansas, Civil Action No. 4:03CV00387GTE. In this case, the Company alleges patent infringement, breach of both a referral agreement and supply agreement, and misappropriation of trade secrets. The Company has sought 24 damages, declaratory judgment, and injunctive relief. On July 16, 2003, Landmark filed its answer and counterclaim denying the Company's claims. Landmark's counterclaim asserts that the Company breached its supply contract with Landmark, interfered with prospective business advantage, and breached its obligation of good faith and fair dealing in performance. Landmark seeks damages against the Company. On June 6, 2003, the Company commenced a lawsuit against Safeblood Technologies, Inc., Jim Limbird, and Charles Worden, Jr. (collectively, "Safeblood Defendants") in the United States District Court for the Eastern District of Arkansas, Civil Action No. 4-03-CV-00422JMM. In this complaint, the Company has sought damages and injunctive relief for its patent infringement claim. The Safeblood Defendants filed their answer and counterclaim on June 27, 2003. In their answer, the Safeblood Defendants deny any infringement. Their counterclaim alleges that the Company has violated the Lanham Act, has tortiously interfered with contractual relations and prospective economic advantage, and has engaged in unfair competition. The Safeblood Defendants seek damages and a declaratory judgment. 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 13,211,839 shares of Common Stock outstanding as of November 13, 2003. All shares immediately issuable under the Plan have been issued as of the date of this report. 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 2001, 2002, or any quarter in 2003. 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, Cytomedix 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, its need for capital, its overall financial condition, and other factors the Board deems relevant. SALES OF NON-REGISTERED SECURITIES IN THE THIRD QUARTER OF 2003 In June 2003, the Company commenced the Second Offering. The Second Offering was a private offering of Cytomedix Common Stock to accredited investors only (as said term is defined by Rule 501(a) of Regulation D). The Second 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. During the second quarter of 2003, Cytomedix sold 840,000 shares of Common Stock in this private offering for an aggregate price of $1,050,000 in securities in this private offering. These 840,000 shares of Common Stock were issuable at June 30, 2003, but were not issued until July 24, 2003. During the third quarter of 2003, Cytomedix sold 1,159,200 shares of Common Stock in this private offering for an aggregate price of $1,499,000. The Company agreed to pay commissions to certain selling agents for their services in connection with the Second Offering. The Company has agreed to pay commissions equal to 6% of the securities sold by such selling agent, with up to 50% of the commission amount to be paid in cash and the remaining amount to be paid in shares of Common Stock. All of the shares offered have not been sold by 25 commissioned selling agents. Commissions earned during the quarter ended September 30, 2003 totaled $41,565. The Company also issued 10,200 shares of Common Stock for commissions payable in connection with the Second Offering during the three months ended September 30, 2003. These shares were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On August 27, 2003, the Company entered into an agreement with The Research Works, Inc. ("Research Works"), whereby Research Works shall prepare an equity research report on Cytomedix. This research report will be published on the Research Works website and periodically updated. Cytomedix authorized and issued 40,000 shares of Common Stock to Research Works as consideration under the agreement. These shares were issued to Research Works on October 14, 2003, in a transaction exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933. SALES OF NON-REGISTERED SECURITIES SUBSEQUENT TO THE THIRD QUARTER OF 2003 On October 21, 2003, the Company's Board of Directors approved a Services Agreement with IVC Group ("IVC"). Pursuant to the Services Agreement, IVC Group received options to purchase 400,000 shares of Common Stock at an exercise price of $1.00 per share. The options vest immediately and expire three years from the date of issue. The transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On October 21, 2003, the Company's Board of Directors approved a Services Agreement with Stern & Co. ("Stern"). Pursuant to the Services Agreement, Stern received options to purchase 100,000 shares of Common Stock at an exercise price of $1.25 per share. The options vest immediately and expire three years from the date of issue. The transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Item 3. Defaults Upon Senior Securities. As stated in the Plan, holders of the Company's Series A Convertible Preferred Stock and the Company's Series B Convertible Preferred Stock are entitled to dividends at the rate of eight percent per annum, payable quarterly in arrears. The first year dividend is to be paid in additional shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock. As of September 30, 2003, there were 254,155 shares of Series A Convertible Preferred Stock issuable, but not yet issued, to holders of the Series A Convertible Preferred Stock, as dividends on the Series A Convertible Preferred Stock. As of September 30, 2003, there were 260,989 shares of Series B Convertible Preferred Stock issuable, but not yet issued, to holders of the Series B Convertible Preferred Stock, as dividends on the Series B Convertible Preferred Stock. The Company is currently in the process of issuing these additional shares of Preferred Stock to its holders of Preferred Stock. 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, second or third quarter of 2003. Because of the Company's bankruptcy, it was unable to hold an annual meeting in 2002 or 2003. The Company plans to hold an annual meeting in the first half of 2004. Item 5. Other Information. On October 2, 2003, the Company received a notice of resignation from Mr. Stephen Holden. Mr. Holden served as a Director of Cytomedix from August 16, 2002, until his resignation. On November 7, 2003, the Company received a notice of intent to resign from the Company's Chief Executive Officer and President, Mr. Kent T. Smith. Mr. Smith served in these positions from August 22, 2002, and will continue to serve as the Company's President until his successor is named. 26 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 third quarter of 2003. 27 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: November 14, 2003 /s/Carelyn P. Fylling - ----------------------------------- Carelyn P. Fylling, Vice President of Professional Services Date: November 14, 2003 /s/Lance Jones - ----------------------------------- Lance Jones, Controller Date: November 14, 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. 28 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). 29 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). 31.1 Certification of Chief Executive Officer of Cytomedix, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Vice President of Professional Services of Cytomedix, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.3 Certification of Controller of Cytomedix, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer of Cytomedix, Inc., pursuant to 18 U.S.C.ss.1350. 32.2 Certification of Controller of Cytomedix, Inc., pursuant to 18 U.S.C.ss.1350. 30