UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
[_] 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
1523 SOUTH BOWMAN RD., SUITE A, LITTLE ROCK, AR 72211
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (501) 219-2111
--------------------------------------------------
Check wither 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 April 29, 2004: 16,175,810 shares of common stock, $.0001 par
value
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
CYTOMEDIX, INC.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) Page 3
Condensed Statements of Operations (Unaudited) Page 4
Condensed Statements of Cash Flows (Unaudited) Page 5
Notes to Condensed Financial Statements Page 6
Item 2. Management's Discussion and Analysis or Plan of Operations Page 12
Overview of Business Page 12
Results of Operations Page 14
Liquidity and Capital Resources as of March 31, 2004 Page 18
Risk Factors Page 19
Prospects for the Future Page 22
Item 3. Controls and Procedures. Page 22
PART II
Item 1. Legal Proceedings. Page 22
Item 2. Changes in Securities. Page 24
Outstanding Common Stock and Dividends Page 24
Issuance of Non-Registered Securities in First Quarter of 2004 Page 24
Item 3. Defaults Upon Senior Securities Page 27
Item 4. Submission of Matters to a Vote of Security Holders. Page 27
Item 5. Other Information. Page 27
Item 6. Exhibits and Reports on Forms 8-K. Page 27
Signatures Page 28
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Balance Sheets
ASSETS
March 31, December 31,
2004 2003
-------------------- ---------------------
(Unaudited)
Current assets
Cash $ 4,906,276 $ 811,385
Receivables, net 263,850 235,741
Prepaid expenses, other current assets and inventory 135,764 185,296
-------------------- ---------------------
Total current assets 5,305,890 1,232,422
Cash - restricted 20,933 20,775
Property and equipment, net 210,477 235,449
Intangibles, net 4,200,571 4,232,149
Other assets 23,485 20,125
-------------------- ---------------------
Total assets $ 9,761,356 $ 5,740,920
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,390,439 $ 629,806
Deferred revenue 81,448 81,448
Note payable 6,522 13,066
Dividends payable on Series A, Series B and Series C preferred stock 182,747 120,735
-------------------- ----------------------
Total current liabilities 1,661,156 845,055
-------------------- ----------------------
Long-term liabilities
Deferred revenue 417,421 437,783
-------------------- ----------------------
Total liabilities 2,078,577 1,282,838
-------------------- ----------------------
Commitments and contingencies
Stockholders' equity
Series A Convertible preferred stock; $.0001 par value, $1.00 liquidation
value, authorized 5,000,000 shares; at March 31, 2004 issued - 1,475,471
shares; at December 31, 2003 issued - 1,365,923 shares, issuable -
109,548 shares 147 147
Series B Convertible preferred stock; $.0001 par value, $1.00 liquidation
value, authorized 5,000,000 shares; at March 31, 2004 issued - 1,514,862
shares; at December 31, 2003 issued - 1,402,650 shares, issuable -
112,212 shares 151 151
Series C Convertible preferred stock: $.0001 par value, $10,000 liquidation
value, authorized 1,000 shares; at March 31, 2004 issued - 280 shares 280 -
Common stock; $.0001 par value, authorized 40,000,000 shares; at 1,784 1,323
March 31, 2004 issued - 13,328,753 shares, issuable - 4,500,000 shares; at
December 31, 2003 issued - 13,211,453 shares
Additional paid-in capital 23,176,799 12,378,878
Deferred compensation (1,381,538) (1,438,070)
Subscriptions Receivable (2,312,500) -
Deficit accumulated in the development stage (11,802,344) (6,484,347)
-------------------- ----------------------
Total stockholders' equity 7,682,779 4,458,082
-------------------- ----------------------
Total liabilities and stockholders' equity $ 9,761,356 $ 5,740,920
==================== ======================
The accompanying notes are an integral part of these
condensed financial statements.
3
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Statements of Operations - Unaudited
Three Months Ended July 1, 2002
March 31, (Inception)
------------------------------ Through
2004 2003 March 31, 2004
------------ ------------ ------------
Revenues
Sales $ 124,715 $ 43,975 $ 811,546
Royalties 181,635 200,808 1,247,910
------------ ------------ ------------
Total Revenues 306,350 244,783 2,059,456
------------ ------------ ------------
Cost of revenues
Cost of sales 56,777 26,560 278,389
Cost of royalties 148,867 165,712 1,013,469
------------ ------------ ------------
Total cost of revenues 205,644 192,272 1,291,858
------------ ------------ ------------
Gross profit 100,706 52,511 767,598
------------ ------------ ------------
Operating expenses
Salaries and wages 375,511 227,392 1,726,808
Consulting expense 1,156,795 52,835 2,517,667
Consulting expense - related party 300,451 42,000 1,022,734
Professional fees 168,589 180,105 1,522,887
Royalty expenses - related party 18,750 20,550 132,926
Clinical Trial related expenses 264,981 -- 472,346
General and administrative expenses and rent 267,693 206,243 1,974,464
------------ ------------ ------------
Total operating expenses 2,552,770 729,125 9,369,832
------------ ------------ ------------
Loss from operations (2,452,064) (676,614) (8,602,234)
Other (income) expense
Interest expense 25 19 23,800
Interest and other (income) expense 3,896 (1,368) (28,199)
------------ ------------ ------------
Total other (income) expense, net 3,921 (1,349) (4,399)
------------ ------------ ------------
Net loss from operations (2,455,985) (675,265) (8,597,835)
------------ ------------ ------------
Preferred dividend on Series A and B preferred stock 59,711 55,379 402,208
Preferred dividend on Series C preferred stock 2,802,301 -- 2,802,301
------------ ------------ ------------
Net loss to common stockholders $ (5,317,997) $ (730,644) $(11,802,344)
============ ============ ============
Basic and diluted loss per common share $ (0.40) $ (0.07) $ (1.03)
============ ============ ============
Weighted average shares outstanding 13,307,164 10,848,911 11,401,322
============ ============ ============
The accompanying notes are an integral part of
these condensed financial statements.
4
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Statements of Cash Flows - Unaudited
Three Months Ended July 1, 2002
March 31, (Inception)
------------------------------ Through
2004 2003 March 31, 2004
------------ ------------ ------------
Cash Flows from operating activities:
Net loss $ (2,455,985) $ (675,265) $ (8,597,835)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 53,938 53,081 352,831
Amortization - deferred consulting fees 1,429,119 27,585 2,459,487
Consulting/legal expense for issuance of securities -- -- 113,904
Stock issued for reorganization bonus -- -- 487,218
Loss on disposal of assets 4,655 -- 4,655
Other -- -- (11,506)
Change in assets 18,062 85,262 209,931
Change in liabilities 242,270 (55,701) (393,385)
------------ ------------ ------------
Cash flows used in operating activities (707,941) (565,038) (5,374,700)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment (2,042) -- (319,815)
Increase in restricted cash (158) -- (20,933)
------------ ------------ ------------
Net cash used in investing activities (2,200) -- (340,748)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of common and preferred stock, net 4,811,576 144,875 10,652,188
Repayment of note payable (6,544) (30,217) (134,319)
------------ ------------ ------------
Net cash provided by financing activities 4,805,032 114,658 10,517,869
------------ ------------ ------------
Net increase (decrease) in cash 4,094,891 (450,380) 4,802,421
Cash, beginning of period 811,385 965,298 103,855
------------ ------------ ------------
Cash, end of period 4,906,276 $ 514,918 $ 4,906,276
============ ============ ============
The accompanying notes are an integral part of
these condensed financial statements.
5
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 2003 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, 2004.
Cytomedix is a development stage enterprise, and accordingly, certain additional
financial information is required to be included in the condensed financial
statements from the adoption of fresh-start accounting to the date of this
balance sheet.
Basic and diluted net loss per share was calculated based upon the net loss
available to common shareholders divided by the weighted average number of
shares of common stock outstanding during the period. Basic and diluted net
losses per common share are presented in accordance with Statement of Financial
Accounting Standards ("FAS") No. 128, Earnings Per Share ("FAS 128"), for all
periods presented. In accordance with FAS 128, basic and diluted net losses per
common share have been computed using the weighted-average number of shares of
common stock outstanding during the period. Shares associated with stock
options, stock warrants, and convertible preferred stock are not included
because the inclusion would be anti-dilutive (i.e., reduce the net loss per
share). The total numbers of such shares excluded from diluted net loss per
common share are 18,338,551 and 3,829,746 at March 31, 2004 and 2003,
respectively.
The Company follows the provisions of FAS No. 123 "Accounting for Stock Based
Compensation ("FAS 123"). As permitted under FAS No. 123, the Company has
continued to utilize APB 25 "Accounting for Stock Issued to Employees" in
accounting for its stock-based compensation to employees. Had compensation
expense for the quarters ended March 31, 2004 and 2003 been determined under the
fair value provisions of SFAS No. 123, as amended by SFAS 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123", the Company's net loss and net loss per share would have
differed as follows:
Three Months Ended
March 31,
-------------------------------------------
2004 2003
-------------------- ------------------
Net loss to common stockholders, as reported $ (5,317,997) $ (730,644)
Add: Stock-based employee compensation expense included
in reported net loss determined under APB No. 25,
net of related tax effects - -
Total stock-based employee compensation expense adjustment
determined under fair-value-based method for all awards,
net of related tax effects 16,648 (42,461)
-------------------- ------------------
Pro forma net loss $ (5,301,349) $ (773,105)
-------------------- ------------------
Earnings per share:
Basic - as reported $ (0.40) $ (0.07)
Basic - pro forma $ (0.40) $ (0.07)
6
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
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.
Three Months Ended
March 31,
-------------------------------
2004 2003
------------- -------------
Risk free rate 3.78% 3.83%
Expected years until exercise 9.7 10
Expected stock volatility 100% 100%
Dividend yield - -
NOTE 2 - DESCRIPTION OF BUSINESS
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 - CAPITAL STOCK ACTIVITY
The following stock activity took place in the first quarter of 2004:
o We initiated two private placements of securities that provided immediate
cash net of accrued commissions and expenses to the Company of $4,661,888
and will provide additional funds of $2,312,500 throughout the remainder
of the year.
On March 26, 2004, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with several accredited investors
providing for the sale and issuance of $2.8 million of Series C
Convertible Preferred Stock representing 280 shares of preferred stock
which are convertible into 2.8 million shares of common stock. The Company
also issued Series C-1 and Series C-2 Warrants allowing the holders
thereof to purchase an aggregate of approximately 2.8 million shares of
common stock at an exercise price of $1.50 per share. In connection with
this purchase agreement, the Company entered into a registration rights
agreement, whereby the Company agreed to register the resale of the common
stock issuable upon conversion of the Series C Convertible Preferred Stock
and the common stock issuable upon exercise of the Series C-1 and Series
C-2 Warrants. Upon effectiveness of the Company's registration statement,
one half of the Series C convertible preferred stock will automatically
convert into common stock. Commencing one year following the effective
date of the registration statement the remaining outstanding shares of
Series C convertible preferred stock will automatically convert if (i)
commencing on the date the closing bid price of the common stock is equal
to or exceeds $3.00 for a period of 10 consecutive days, provided that
(ii) the registration statement is effective for a period of 60
consecutive calendar days. The Company received proceeds, net of
commissions and expenses of
7
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY (CONTINUED)
$325,612, from this placement of $2,474,388. In addition to the
commissions, the placement agent also received 5-year warrants to purchase
280,000 shares of the Company's common stock at an exercise price of $1.00
per share and was awarded a six month consulting agreement to provide
future financing services in return for $5,000 per month and additional
warrants to purchase 100,000 shares of common stock at an exercise price
of $1.00 per share.
The Company's stock price on March 26, 2004 was $2.06; consequently,
pursuant to the requirements of Emerging Issues Task Force ("EITF") 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios" ("EITF 98-5"), as amended by
EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments," the issuance of the Series C Preferred, with a conversion
price initially at $1.00 per share which was below the market price on the
date of issue, resulted in a beneficial conversion feature (the difference
between the market price and the conversion price) recorded as a preferred
stock dividend in the amount of $2,800,000.
The Series C preferred stock ranks junior to the Series A preferred stock
regarding distributions upon liquidation of the Company. Series C
preferred stock ranks junior to the Series B Preferred Stock solely with
respect to the priority security interest in the Company's intellectual
property. The shares accrue dividends at 6% of the stated liquidation
preference amount from the date of issuance and increase to 8% commencing
on September 25, 2005, are payable annually in cash or shares of stock at
the option of the Company. The Series C preferred stock ranks pari passu
with Series A preferred stock and Series B preferred stock with respect to
payment of dividends. The Series C preferred stock have no voting rights
except with respect to transactions upon which they are entitled to vote
as a class. The Series C preferred stock is convertible, and the Series
C-1 and Series C-2 warrants are exercisable by the holder at any time,
however a conversion by a warrant holder cannot result in the individual
owning in excess of 9.999% of the outstanding shares of the Company's
common stock. Each dollar of liquidation preference amount is initially
converted into one share of common stock (subject to certain anti-dilution
privileges).
The holders of Series C preferred stock can require the Company to redeem
the stock plus accrued dividends at 125% of the liquidation price upon the
(i) consolidation, merger or business combination of the Company, (ii)
sale of more than 50% of the Company's assets or (iii) a sale of more than
50% of the outstanding shares of the Company's outstanding shares of
common stock. However, the Company has the option to pay in cash or shares
of common stock.
The C-1 and C-2 warrants provide for a cashless exercise at the option of
the warrant holder commencing one year following issuance at the option of
the warrant holder provided that (i) the per share market price of one
share of common stock is greater than the warrant price and (ii) a
registration statement for the resale of warrant stock is not in effect.
The Company has the option to call up to 100% of the C-1 and C-2 warrants
commencing 12 months and 36 months, respectively, from the effective date
of a registration statement registering the common stock that would result
from the exercise of the warrant. However, in order to exercise the call
option, the Company's common stock must have been trading at a price
greater than $3.00 for 10 consecutive trading days prior to the call
notice and a registration statement is then in effect and has been
effective without lapse for a period of 60 consecutive days and trading in
the Company's stock shall not have been suspended. The Company, upon
calling the warrant, will remit to the holder of the warrant $.01 per
called warrant and issue a new warrant representing the number of warrants
not subject to the call.
8
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY (CONTINUED)
The Company commenced a separate private placement in which the Company
has offered for sale 4,500 units in return for an anticipated total of
$4,500,000, consisting of cash and negotiable subscription promissory
notes receivable. Each unit consists of 1,000 shares of common stock and a
five-year warrant to purchase an additional 1,000 shares of common stock
at $1.50 per share. As of March 31, 2004, the Company had received
subscriptions of $4,500,000 with cash commitments of $2,612,500 and notes
for the remaining $1,887,500 which were due in three equal payments in
June, September and December 2004. The Company has received $2,187,500 in
cash related to this transaction as of March 31, 2004. As compensation for
their services, certain broker-dealers received cash commissions in the
amount of 10% of the gross proceeds. At March 31, 2004, the Company has
accrued $450,000 representing the commission due in addition to legal
expenses incurred relating to this placement of in the amount of $38,375.
See discussion below at Note 8 - Subsequent Events.
The warrants provide for a cashless exercise price at the option of the
warrant holder. The warrants are exercisable by the holder at any time;
however, exercise by a warrant holder can not result in the individual
owning in excess of 9.999% of the outstanding shares Company's common
stock. This option commences one year following the original issue date if
(i) the per share market price of one share of common stock is greater
than the warrant price and (ii) a registration statement for the resale of
the common stock resulting from the exercise of the warrant is not in
effect.
The warrants provide an option for the Company to call up to fifty percent
of the outstanding warrants commencing twenty-four months following the
effective date of a registration statement registering the common stock
which would result from the exercise of the warrant. However, in order for
the Company to call the warrants the per share market price of the common
stock must be greater than $3.00 (as may be adjusted for any stock splits
or combinations of the common stock) for a period of 10 consecutive
trading days prior to the notice of the call. The Company upon calling the
warrant will remit to holder of the warrant $.01 per called warrant and
issue a new warrant representing the number of warrants not subject to the
call.
o On January 27 and January 28, 2004, 12,300 shares were issued to agents
relating to the commissions earned during the private placement undertaken
by the Company in the second and third quarters of 2003 representing
accrued commissions of $15,375.
o On February 27, 2004, 100,000 shares of the Company's common stock were
issued to a corporation upon exercise of 62,500 Class A and 37,500 Class B
warrants. On March 5, 2004, an additional 5,000 shares were issued to an
individual in exchange for 3,125 Class A and 1,875 Class B warrants. The
Company issued 105,000 shares of common stock and received cash proceeds
of $124,688 upon the exercise of the above warrants.
o In March 2004, the Company issued 109,548 shares of Series A Preferred
Stock and 112,212 shares of Series B Preferred Stock in payment of the
first year dividends due on such shares. For the quarter ended March 31,
2004, the Company accrued dividends in the amount of $30,214, $29,497 and
$2,301 for the Series A, B and C preferred stock.
o The Company issued 375,000 warrants to purchase the Company's common stock
to the former CEO of the Company and a related party consulting firm. On
January 2, 2004, the Company issued three-year warrants to purchase
175,000 shares of common stock at an exercise price of $1.50 to Mr. Kent
Smith in connection with a confidential release and settlement agreement.
As part of this agreement, Mr. Smith agreed to the nullification of all
options and other stock-based incentives awarded to him under the
Long-Term Incentive Plan amounting to 569,621 options of which 403,080
were fully exercisable. On February 25, 2004, the Company issued 10-year
warrants to purchase 200,000 shares of common stock at $1.50 to BDR
Consulting, Inc., a related party. These warrants were granted in
connection with the Consulting Agreement dated July 16, 2002.
9
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 4 - LONG-TERM INCENTIVE PLAN
In accordance with the Company's 2002 Long-Term Incentive Plan, the Company's
Board of Directors (the "Board") granted 210,000 ten-year options to purchase
common stock that vested immediately and had an exercise price on the date of
grant of $1.50 per share to the following individuals. On January 10, 2004, the
Company issued 10,000 options to Dr. Charles Baxter in accordance with an
agreement entered into by the Company in which Dr. Baxter would become Chairman
of the Company's Medical Advisory Board. On March 23, 2004, the Company issued
200,000 options to Mr. David Crews and to Mr. Robert Burkett, 100,000 options
each, as consideration for their services as Board members during 2003.
NOTE 5 - RELATED PARTY TRANSACTIONS
BDR CONSULTING, INC.
BDR Consulting, Inc. ("BDR") is a consulting firm owned solely by Jimmy D.
Swink, Jr. The Company entered into a consulting agreement with BDR, dated July
11, 2002 (the "Effective Date") continuing until June 30, 2005. Under this
agreement, BDR is to receive compensation of $108,000 per annum for services
rendered to the Company. In addition, the Company granted BDR stock options
representing the right to purchase 300,000 shares of the Company's common stock
at $1.50 per share (the fair market value on the date of grant). An option
representing the right to purchase 100,000 shares vested immediately on the date
of grant with the remaining 200,000 shares vesting annually over the next two
years. Additionally, on February 25, 2004, the Company issued 10-year warrants
to purchase an additional 200,000 shares of common stock at $1.50 to BDR, in
connection with the consulting agreement. For the three months ending March 31,
2004, the Company incurred expenses of $144,571 pertaining to this agreement of
which, $27,000 was paid in cash with the remaining $117,571 being non-cash
charges relating to the value of options granted to BDR, valued in accordance
with FAS 123.
THE CARMEN GROUP
The Carmen Group, Inc. was engaged during the second quarter of 2003 as a
business consultant to strategically position and represent the Company before
the federal government and the various federal agencies affecting the Company. A
director of the Company, Robert Burkett, is also a consultant with The Carmen
Group, Inc. Effective on October 1, 2003, a formal agreement was signed with The
Carmen Group, Inc. for a period of one year to provide services for the Company
for a flat fee of $15,000 per month plus expenses. Additionally, the agreement
stipulates that the Company would issue to The Carmen Group, Inc. an option to
purchase 100,000 shares of common stock immediately exercisable at $1.25 with an
additional option to purchase 100,000 shares of common stock being issuable one
year from the date of agreement at an exercise price of $2.00. For the three
months ending March 31, 2004, the Company incurred expenses of $155,880
pertaining to this agreement of which, $45,577 was paid in cash with the
remaining $110,303 being non-cash charges relating to the value of options
granted to The Carmen Group, Inc., in accordance with FAS 123.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The nature of the operations of the Company exposes it to risk of claims and
litigation in the normal course of its business and the Company has several
legal proceedings pending resolution. Although the outcome of such matters
cannot be determined, management believes the ultimate resolution of these
matters will not have a material adverse effect on the financial position or
operations of the Company.
The Company emerged from bankruptcy on July 11, 2002. Under the Bankruptcy (the
"Plan"), the predecessor Company's Existing Series A Preferred stock and the
dividends accrued on the Series A Preferred stock held as of the effective date
of the Plan may be exchanged into one share of the Company's common stock for
every five
10
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
shares of Existing Series A Preferred shares. This exchange is contingent on the
successor Company attaining aggregate gross revenues for four consecutive
quarters of at least $10,000,000.
We outsource the manufacturing of 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.
NOTE 7 - RECLASSIFICATION
For comparability purposes, certain figures for the 2003 and cumulative periods
have been reclassified where appropriate to conform with the financial statement
presentation used in 2004. These reclassifications had no effect on the reported
net loss.
NOTE 8 - SUBSEQUENT EVENTS
On April 1, 2004, the 2004 Unit Offering was oversubscribed, and the Company
announced that the offering was closed to new investors. Although issuable, the
common stock and warrants representing the purchase price paid for with
promissory notes are being held by the Company as security for the notes. As the
scheduled payments are made by the purchasers, the Company will deliver the
corresponding number of shares of common stock and warrants to the purchasers.
On April 2, 2004, FEQ Investments, LLC was granted an option to purchase 450,000
shares of common stock of the Company with an exercise price of $1.00 expiring
5-years from the grant date for consulting services related to the 2004 unit
offering.
On April 20, 2004, the Company entered into an employment agreement with Dr.
Kshitij Mohan to serve as the Company's Chief Executive Officer. An inducement
award was granted to Dr. Mohan in the form of options to acquire 1,000,000
shares of the Company's common stock at an exercise price of $1.50 per share.
One half of the options vested on the date of employment. Assuming continuing
employment, 250,000 options vest one year from the date of employment, and the
remaining 250,000 options vest two years from the date of employment.
11
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The terms "Cytomedix" and the "Company," as used in this quarterly
report, refer to Cytomedix, Inc. The following discussion and analysis should be
read in conjunction with the financial statements, including notes thereto,
filed under Item 1 of this report. The Company's financial condition and results
of operation are not intended to be indicative of future performance.
In addition to the historical information included in this report,
you are cautioned that this Form 10-QSB contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
the words "believes," "plans," "anticipates," "will likely result," "will
continue," "projects," "expects," and similar expressions are used in this Form
10-QSB, they are intended to identify "forward-looking statements," and such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Furthermore, our
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of management and the Board.
These forward-looking statements speak only as of the date this
report is filed. The Company does not intend to update the forward-looking
statements contained in this report, so as to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events,
except as may occur as part of our ongoing periodic reports filed with the SEC.
The following management's discussion and analysis of financial
condition and results of operations should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations included in our Form 10-KSB for the year ended December 31, 2003.
OVERVIEW OF BUSINESS
Cytomedix, Inc. is a biotechnology Company, incorporated in Delaware,
which employs ten full-time employees and one part-time employee. Its business
model is premised upon developing, producing, licensing, and distributing
autologous cellular therapies (i.e., therapies using the patient's own body
products), including Cytomedix's proprietary AutoloGel(TM) System ("the
AutoloGel(TM) System") to produce the platelet rich plasma gel (hereinafter,
"AutoloGel(TM)") for the treatment of chronic, non-healing wounds. To create
AutoloGel(TM), the patient's own platelets and other essential blood components,
which together constitute the multiple growth factors necessary for the healing
process, are separated through centrifugation and when combined with several
reagents are formed into a gel that is topically applied to a wound (under the
direction of a physician). Upon topical application, the Company believes that
AutoloGel(TM) initiates a reaction that closely mimics the body's natural
healing process.
Multiple growth factor therapies have not been widely used in the
traditional commercial setting because such therapies have generally not been
available or widely known by clinicians. Until recently, the autologous process
of securing multiple growth factors from a patient's blood products was,
substantially, an exclusive treatment available through outpatient wound care
centers affiliated with Curative Health Services ("Curative"). In January, 2001,
the Company purchased certain technology, assets and intellectual property
rights associated with autologous multiple growth factor therapies from Curative
and has since refined the product to a more marketable state. With these
refinements, Cytomedix can now offer autologous multiple growth factor therapies
in any health care setting where wound patients are located.
During 2002 and continuing through today, the Company has identified
several significant areas that it believes must be addressed before mass market
penetration of the AutoloGel(TM) System can be achieved. The first area involves
reimbursement from third-party payers. While the Company has made inroads with
Medicaid reimbursement in several states and within certain segments of the
commercial insurance market, the true market potential cannot be achieved
without broad third party reimbursement. The Company believes a necessary
predicate to securing this broad reimbursement is through obtaining a national
reimbursement code. The second area involves securing Food and Drug
Administration ("FDA") approval of the AutoloGel(TM) System for specific
clinical indications such as for the treatment of non-healing diabetic foot
ulcers. Finally, a third area involves reestablishing and enforcing the rights
under the Company's patents in order to establish AutoloGel(TM) as the leading
platelet gel product in the marketplace. The Company has identified numerous
competing companies that currently market products similar to AutoloGel(TM), and
we believe these competing companies are infringing or inducing infringement of
our intellectual property rights. If successful in our strategies, these
companies could be subject to damages, potential enjoinment from the market, or,
at our discretion, candidates for royalty and licensing arrangements.
12
During 2003, the Company developed and began execution of a strategic
plan to address both the securing of a national reimbursement code and FDA
approval for the AutoloGel(TM) System; areas that we have found have limited our
ability to establish broad market acceptance of our product. Currently, each of
the components utilized in the AutoloGel(TM) System have received a 510K or
other clearance or exemption from the FDA. Also, the AutoloGel(TM) System is an
"autologous" therapy performed under the practice of a licensed physician and
can be performed without FDA approval under the provisions commonly referred to
as the "Physicians Practice of Medicine". However, the current business model
nevertheless involves obtaining a national Medicare reimbursement code for the
AutoloGel(TM) System as a first step to broad, third party reimbursement. The
process to obtain a reimbursement code from the Center for Medicare and Medicaid
Services ("CMS"), while independent of the FDA approval process, is subject to
similar procedural and independent clinical testing as required by the FDA in
order to establish product safety and efficacy. Additionally, many clinicians
are reluctant to prescribe products that have not been approved by the FDA,
notwithstanding the provisions of the "Physicians Practice of Medicine".
Further, without FDA approval, the Company cannot make any claims when marketing
the AutoloGel(TM) System regarding its ability to treat or heal wounds which the
Company believes is a significant barrier to broad clinical and market
acceptance of the Company's product.
Consequently, during 2003, the Company elected to submit an
Investigational Device Exemption ("IDE") to the FDA as the first step in a
process to secure FDA approval for the AutoloGel(TM) System. This process is
multi-faceted, time and resource intensive, and very costly. The Company also
cannot predict whether its efforts will be successful. Considerable funds were
expended in 2003 and 2004, and the Company has achieved two milestones in its
pursuit of FDA approval to date. In the second quarter of 2003, the Company
received 510K clearance from the FDA for the AutoloGel(TM) System's centrifuge.
On March 5, 2004, the Company's IDE application was fully approved by the FDA,
which allowed the Company to conduct a prospective, randomized, blinded and
controlled clinical trial with human subjects being treated with the
AutoloGel(TM) System for purposes of demonstrating its safety and effectiveness
as part of our effort to secure FDA approval for the treatment of non-healing
diabetic foot ulcers as the first of several specific clinical indications for
which regulatory clearances would be sought in the future. During the second
quarter of 2004, the Company anticipates that patient enrollment into the FDA
trials will be initiated with an anticipated completion horizon of the patient
treatment phase of the trials during the first quarter of 2005.
Upon completion of the patient treatment phase of the trials, the
Company will evaluate the clinical trial data and if satisfactory submit the
data to the FDA for approval. We believe that even though this product is
regulated under the Medical Device Amendments of the Food, Drug and Cosmetic
Act, the Center for Biological Evaluation and Research ("CBER") has the
jurisdiction for reviewing such products. In parallel, we would also be making
the necessary submissions to the Center for Medicare and Medical Services
("CMS") and any other public or private professional groups for evaluation of
the data in connection with the granting of the reimbursement codes and further
strengthening the general clinical acceptance of this therapy. Should the
Company be successful in its efforts, the AutoloGel(TM) System can then be
positioned as an approved alternative treatment to capture a significant portion
of the estimated 5 million plus chronic wounds that are treated each year in the
United States.
13
Simultaneous with the reimbursement strategy, the Company has also
initiated a broad based licensing strategy intended to (i) assist the Company in
establishing a dominant market position for the AutoloGel(TM) System within the
market for autologous growth factor products used for the treatment of chronic
wounds, and (ii) maximize the value of the Company's intellectual property
associated with platelet releasates, the factors which activate multiple growth
factors. Utilizing the "Knighton Patent", the Company has initiated litigation
against several strategic targets believed to be infringing or inducing
infringement of this patent. If successful, we believe that this course of
action would position the Company to enforce our rights against companies with
substantial revenue that could become subject to royalties and damages. The
Company's patent enforcement strategy is being conducted on a full contingency
basis by the law firms Fitch, Even, Tabin & Flannery and Robert F. Coleman and
Associates, both based in Chicago, Illinois. Additionally, at least two key
rulings are anticipated in 2004. On March 26, 2004, the District Court for the
Northern District of Illinois ruled favorably regarding claims construction in
Cytomedix, Inc. v. The Little Rock Foot Clinic. The court affirmed Cytomedix's
position regarding the scope of the claims in U.S. Patent No. 5,165,938 (the
"Knighton Patent"), which relates to the use of platelet-derived therapies for
treating wounds and other damaged tissue. In his opinion, Judge James B. Zagel
concluded that the claims of the Knighton Patent should be broadly construed to
cover a treating composition that contains all of the components released by
platelets during the platelet release reaction and may have other components. In
so doing, the court rejected the defendant's assertion that the claims of the
Knighton Patent are limited in scope to platelet-releasate compositions that are
free of certain other cellular materials. The Company considers this ruling
significant and as a cornerstone of its licensing and royalty strategy.
In the past, the Company marketed the AutoloGel System(TM) through
in-house personnel. The Company during 2003 began to predominately distribute
its products through a network of commission based, independent sales
representatives. The Company currently is represented in 14 states and is
serviced by 13 representatives. The Company plans to expand this representation
and coverage substantially in 2004. Additionally, the Company has established a
distributor in Minnesota. All of our sales representatives have established
relationships in their respective territories with the clinical professionals
that specialize in wound care.
RESULTS OF OPERATION
We are a development stage Company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7 and have had only limited
operations through March 31, 2004. Our main activities during this start-up
phase have consisted of recruiting and hiring a new management team and
corresponding personnel, as well as the development of both a short and
long-range business plan that has included all aspects of the business.
Considerable resources were expended in previous years and continuing into 2004
on non-reoccurring activities relating to the legal defense of our patents,
researching and preparing the IDE for submission to the FDA, including
development of the protocol for our FDA clinical trials, the subsequent
initiation of clinical trials, and securing and diversifying our current and
anticipated capital requirements. During the three months ending March 31, 2004,
the Company incurred legal fees of $30,729 relating to the defense of and the
current litigation associated with our patents. Consulting, legal and other
expenses of $445,859 were expended on activities relating to FDA matters
associated with our clinical trials. Included in this amount is $155,880 (of
which $110,303 was non-cash equity-based compensation expenses) paid to an
organization associated with a related party. Additionally $1,130,008 (of which
$1,081,882 was non-cash equity-based compensation expenses) was expended on
general consulting/business advisory services associated with the strategic
planning, capitalization and organization of the Company.
During the three months ending March 31, 2004, the Company recorded
total non-cash equity-based compensation expenses of $1,429,119. During the 3
months ending March 31, 2003, the Company recorded non-cash equity-based
compensation expenses of $27,585. Additionally and as a result of the private
placement and issuance of the Series C convertible preferred stock, the Company
recorded a preferred dividend of $2,800,000; all of which is a non-cash charge.
This preferred divided was necessitated due to the beneficial conversion
features associated with the Series C convertible preferred stock being lower
than the market price on the date of issue and was required in accordance with
Emerging Issues Task Force ("EITF") 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" as amended by EITF 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments." Combining the impact of compliance with the
above-named accounting pronouncements, the total non-cash charges for the three
months ended March 31, 2004 totals $4,229,119 or 79.52% of the $5,317,997 in the
loss to common stockholders for the period.
14
COMPARATIVE RESULTS OF OPERATION FOR THE THREE MONTHS ENDING MARCH
31, 2004 AND 2003.
For the three months ending March 31, 2004, the Company had revenue
of $306,350 as compared to revenue of $244,783 for the three months ending March
31, 2003; an increase of $61,567 or 25.15%. Revenues are generated from two
sources: the sale of disposable kits and reagents and royalties received from
licensing activities. Comparing the three months in 2004 to 2003, revenues
increased in 2004 $80,740 or 183.60%, from the sale of kits and reagents
($124,715 as compared to $43,975). This increase is primarily attributable to
the increased diversification of our marketing program and the penetration into
the commercial insurance market. During 2003, the Company's business had focused
on two large long-term care providers which had limited activity in the first
quarter and had no commercial insurance business. Revenues from royalties and
licensing activities decreased in the first quarter of 2004 $19,173 or 9.54%,
($181,635 as compared to $200,808). This decrease is substantially attributable
to the DePuy licensing arrangement.
Gross profit for the 3 months ending March 31, 2004 was $100,706 or
32.87% of revenue as compared to gross profit of $52,511 or 21.45% of revenue
for the comparable period in 2003. The gross profit from the sale of disposable
kits and reagents increased 37.56% from a profit margin of 39.60% earned in 2003
to 54.47% in 2004. This increase is attributable to the fact that the Company
commenced an aggressive sales and marketing campaign during this period which
resulted in a large amount of cost that generated limited revenue. In 2004, the
Company has continued to aggressively market its products but the increased
margins recognized in the commercial insurance market has substantially
mitigated a large percentage of this cost. While revenues decreased from
royalties received from licensing activities, the gross profit margins increased
3.67% from a profit margin of 17.48% in 2003 to 18.04% in 2004. This increase is
primarily attributable the impact of recording the deferred revenue portion on
the initial deposit paid by DePuy. The Company records revenue of $81,448 per
year or $6,787 per month on the initial deposit of $750,000 paid by DePuy in
2001 for the licensing rights to the Knighton Patent. The current royalties
received quarterly reflect a gross profit of 7.7%.
Operating Expenses for the 3 months ending March 31, 2004 were
$2,552,770 (with non-cash equity-based compensation expenses of $1,446,119) as
compared to $ 729,125 (with non-cash equity-based compensation expenses of
$27,585). This results in a net increase, excluding non-cash equity-based
compensation expenses of $405,111 or 57.75%.
The Company relies heavily on the use of equity based compensation
for services by various consultants and other parties that provide services to
the Company. Due to the magnitude of this non-cash expense for the three months
ending March 31, 2004, the following exhibit highlights the impact of this
equity based compensation on the Company's operating expenses. The exhibit below
presents the Company's operating expenses in accordance with generally accepted
accounting principles ("GAAP") and presents the amount of equity based
compensation expense included in the respective expense accounts and then
reflects the operating expenses without the equity based compensation which is
not in accordance with GAAP ("NON-GAAP"). The following exhibit is presented to
provide a better comparison of expenditures between years.
- --------------------------------------------------------------------------------
15
CYTOMEDIX, INC.
OPERATING EXPENSE ANALYSIS
THREE MONTHS ENDING MARCH 31, 2004
NON-GAAP
OPERATING EXPENSES
ACCOUNT GAAP EQUITY BASED WITHOUT EQUITY
AS REPORTED COMPENSATION BASED COMPENSATION
- ------------------------------------------------------------------------------------------
Salaries and Wages $ 375,511 ($115,938) $ 259,573
Consulting 1,156,794 (1,082,644) 74,150
Related Party Consulting 300,451 (227,974) 72,477
Professional 168,589 (2,563) 166,026
Royalty Expense-Related Party 18,750 18,750
Clinical Trials 264,981 264,981
General and Administrative 267,694 (17,000)(1) 250,693
----------- ----------- -----------
Total Operating Expense $ 2,552,770 ($1,446,119) $ 1,106,650
- --------------------------------------------------------------------------------
(1) Consists of the amortization of prepaid expense attributable the Research
Works Agreement that was consummated through the issuance of common stock in
August, 2003.
- --------------------------------------------------------------------------------
SALARIES AND WAGES:
Salaries and wages expense for the three months ending March 31,
2004 was $375,511 as compared to $227,392 for the comparable period in
2003; an equity-based compensation increase of $148,119 or 65.41%.
Included in the current period are non-cash equity-based compensation
charges of $115,938 that represent the calculated value of the termination
agreement entered into on January 2, 2004 between the former CEO and the
Company. The remaining increase of $32,181 is attributable to increased
staffing levels.
CONSULTING AND RELATED PARTY CONSULTING:
Consulting and related party consulting expense for the three months
ending March 31, 2004, amounted to $1,457,246 of which $1,310,618 was
non-cash equity-based compensation; a net cash expense of $146,628. For
the comparable period ending in 2003, this expense was $94,835 of which
$27,585 was non-cash equity-based compensation; a net cash expense of
$67,250; a net cash increase of $79,378 between years. The change in the
expense recorded between years is attributable to the terms upon which the
Company is retaining consulting services (see table above). In 2004, the
Company has continued to rely upon the issuance of options to purchase
common stock to attract and retain senior level consultants to assist in
all phases of the operations. This includes strategic planning ($861,986
gross expense, $31,248 net after deducting equity-based compensation
attributable to Nadine Smith), financing related support ($268,022 gross
expense, $16,878 net after deducting equity-based compensation
attributable to consultants), governmental/support and lobbying ($155,880
gross expense, $45,577 net after deducting equity-based compensation
relating to a related party affiliation) and on-going managerial support
provided by BDR Consulting, Inc. ($144,571 gross expense, $27,000 net
after deducting equity-based compensation relating to a related party).
For the comparable period in 2003, the Company incurred gross expenses of
$58,287, net after deducting equity-based compensation of $30,702 relating
to financial related support and the on-going managerial support provided
by BDR Consulting, Inc. The Company did not incur any expense for
strategic planning and lobbying for the three months ending March 31,
2003.
16
PROFESSIONAL FEES:
Professional fees which substantially consist of legal and
accounting services for the three months ending March 31, 2004 amounted to
$168,589 of which $2,563 was non-cash equity-based compensation relating
to stock options issued to the Chairman of the Medical Advisory Board; a
net expense of $166,026 as compared to $180,105 for the comparable period
in 2003; a decline of $14,079 or 7.82%. The decrease between years is
primarily attributable to a decline in legal expenses of $53,908 offset by
an increase in accounting services of $35,194. During the first quarter of
2003, the Company incurred legal expenses of $156,546 primarily
attributable to bankruptcy related matters and for initiating litigation
in defense of our patent rights. During 2004, the Company incurred legal
expenses of $102,638 with $30,728 attributable to patent litigation,
$24,998 attributable to the FDA and clinical trials and the remaining
$46,912 relating to general securities and other matters. The decrease
between periods is substantially attributable to the contingency
arrangements negotiated during mid-2003 for the aggressive litigation of
our patent rights.
The increase in the accounting and audit fees is primarily
attributable to additional service required in connection with the two
private placements initiated during the first quarter of 2004.
CLINICAL TRIAL RELATED EXPENSE:
For the three months ending March 31, 2004, the Company incurred
expenses of $264,981 relating to the design, coordination and third party
administration of our current FDA clinical trials. No expenses were
incurred in the first quarter of 2003, yet during all of 2003, the Company
incurred expenses of $207,365 relating to the preparation and submission
of the Company's clinical trial protocol to the FDA for approval. On March
5, 2004, approval to commence testing was granted by the FDA.
GENERAL AND ADMINISTRATIVE:
For the three months ending March 31, 2004, the Company incurred
general and administrative expenses of $267,693 as compared to $206,243
for the comparable period of 2003; an increase of $61,450 or 29.79%. This
is substantially attributable across the board to the increase in activity
levels between comparable periods. For the three months ending March 31,
2003, all expenditures were delayed due to an anticipated cash shortfall.
During 2004, the Company incurred increased travel expense of $40,406; an
increase of $17,000 due primarily to the amortization of the Research
Works Agreement; and an increase of $4,899 for estimated uncollectible
accounts.
17
OTHER:
Related party royalty expenses of $18,750 and $20,550 were paid to
Mr. Charles E. Worden for the periods covering the three months ending
March 31, 2004 and 2003, respectively.
A preferred dividend on Series C convertible preferred stock in the
amount of $2,802,301 was recorded during the quarter ended March 31, 2004.
$2,800,000 of this amount relates to compliance with certain accounting
guidelines that require the Company to record the impact of issuing
convertible securities that are convertible at prices less than the
Company's stock price as of the day of closing of the financing. The
Series C, convertible preferred stock is convertible at $1.00 per share
and included Series C-1 and Series C-2 warrants to purchase one share of
the Company's common stock exercisable at $1.50 per share. The effective
closing date for this transaction was March 26, 2004 and the closing price
for the Company's common stock on that date was $2.06. The ability to
convert the Series C convertible preferred stock and exercise the Series
C-1 and Series C-2 warrants at prices below the prevailing market price
for the common stock triggered the requirement to record this one time
preferred dividend charge.
LIQUIDITY AND CAPITAL RESOURCES AS OF MARCH 31, 2004
The Company's cash balance, including the restricted cash on deposit to
secure the Company credit cards of $20,933 at March 31, 2004, was $4,927,209.
During March, 2004, the Company initiated two separate private equity
offerings to provide the Company with working capital and to fund the Company's
clinical trials. These two private placements of securities will provide
immediate cash net of accrued commissions and expenses to the Company of
$4,661,888 and additional funds of $2,312,500 throughout the remainder of the
year. As of March 31, 2004, the Company had received available cash net of
accrued commissions and expenses of $4,404,764. An additional $400,000 has been
received subsequent to March 31, 2004.
18
The Company does not plan to seek additional financing in the near future,
but instead expects to have sufficient cash to support its operations for the
next twelve months.
RISK FACTORS
Cytomedix cautions the readers not to place undue reliance on any
forward-looking statements, which are based on certain assumptions and
expectations which may or may not be valid or actually occur. The risk factors
which follow may cause actual results to differ materially from those expressed
or implied by any forward-looking statement. The risks described below are not
to be deemed an exhaustive list of all potential risks.
WE ARE A COMPANY WITH LIMITED WORKING 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 private
offerings of our equity securities and revenues generated by the Company. No
assurance can be given that we will have revenues sufficient to support and
sustain our operations through 2005.
If we do not have sufficient working capital and are unable to generate
revenues or raise additional funds, the following may occur: delaying the
completion of our current business plan or significantly reducing the scope of
the business plan; delaying our plans to initiate government regulatory and
reimbursement approval processes for our wound treatment technologies;
postponing the hiring of new personnel; or, in an extreme situation, ceasing
operations.
WE HAVE A HISTORY OF LOSSES.
The Company has a history of losses and expects to incur substantial
losses and negative operating cash flows for the foreseeable future. The Company
may never achieve or maintain profitability. The Company is not currently
profitable and expects to continue to incur net losses in the foreseeable
future. The Company also expects to experience negative cash flow for the
foreseeable future. The Company will need to generate significant revenues to
achieve and maintain profitability. The Company cannot guarantee that it will be
able to generate these revenues, and it may never achieve profitability in the
future.
WE HAVE A SHORT OPERATING HISTORY AND LIMITED OPERATING EXPERIENCE.
The Company must be evaluated in light of the uncertainties and
complexities affecting an early stage biotechnology Company. The Company is a
development stage Company and has only recently begun to implement its current
business plan. Thus, the Company has a very limited operating history. Continued
operating losses, together with the risks associated with the Company's ability
to gain new customers in the sale of disposable products for the AutoloGelTM
System 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.
Since emerging from bankruptcy and continuing through today, we have
developed and are currently executing a business model that includes protecting
our patent position through an aggressive program of litigating selected
infringement cases and addressing our third-party reimbursement issues through
an ambitious program of clinical trials approved by the FDA. These areas are
being addressed concurrent with an aggressive sales and marketing program that
is focusing on niche markets such as federally funded initiatives, state
Medicaid programs and selected commercial insurance pending approval from FDA
and a national reimbursement code from CMS. While the Company is seeing positive
signs and is optimistic regarding the outcomes of its efforts, there can be no
assurance that its business model in its current form can accomplish the
Company's stated goals.
19
THE AUTOLOGELTM 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 various regulatory agencies.
Specifically, the Company's therapies may be subject to regulation by the FDA
and state regulatory agencies. The FDA regulates drugs, medical devices and
biologics that move in interstate commerce and requires that such products
receive pre-marketing approval based on evidence of safety and efficacy. The
regulations of government health ministries in foreign countries are analogous
to those of the FDA in both application and scope. In addition, any change in
current regulatory interpretations by, or positions of, state regulatory
officials where the AutoloGelTM System is practiced, could materially and
adversely affect the Company's ability to sell products in those states.
Further, as the Company expands and offers additional products in the
United States and in foreign countries, the Company may require approval from
the FDA and comparable foreign regulatory authorities prior to introduction of
any such products into the market. The Company has no assurance that it will be
able to obtain all necessary approvals from the FDA or comparable regulatory
authorities in foreign countries for these products. Failure to obtain the
required approvals would have a material adverse impact on the Company's
business and financial condition.
OUR SUCCESS COULD BE ADVERSELY AFFECTED IF OUR CUSTOMERS CANNOT OBTAIN
REIMBURSEMENT.
AutoloGelTM is provided to healthcare providers. Some of these providers,
in turn, seek reimbursement from third party payers such as Medicare, Medicaid,
and other private insurers. Many foreign countries also have comprehensive
government managed healthcare programs that provide reimbursement for healthcare
products. Under such healthcare systems, reimbursement is often a determining
factor in predicting a product's success, with some physicians and patients
strongly favoring only those products for which they will be reimbursed.
In order to achieve a national reimbursement product code for the
AutoloGelTM System, the Company has chosen to undertake a prospective,
randomized, controlled, multi-site clinical trial as approved by the FDA so as
to provide the necessary data as required by CMS, formerly known as the
Healthcare Financing Agency. 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. If the
results of those clinical trials are favorable, this will positively affect the
Company's ability to obtain reimbursement approval from governmental agencies
and private insurers. If the results are not favorable, the Company cannot
guarantee that third-party payers will elect to reimburse treatments using the
Company's products or processes or, if such reimbursement is approved, that the
level of reimbursement granted will be sufficient to cover the cost of the
product or process to the physician or to the patient.
Healthcare providers' inability to obtain third-party reimbursement for
the treatment could have an adverse effect on the Company's success.
THE SUCCESS OF THE AUTOLOGELTM 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.
20
WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL.
The future success of the Company depends on the ability to attract,
retain and motivate highly-skilled management, including sales representatives.
The Company has retained a team of highly-qualified officers and consultants,
but the Company cannot assure you that it will be able to successfully integrate
these officers and consultants into its operations, retain all of them, or be
successful in recruiting additional personnel as needed. The Company's inability
to do so will materially and adversely affect the business prospects, operating
results and financial condition.
The Company's ability to maintain and provide additional services to its
existing customers depends upon its ability to hire and retain business
development and scientific and technical personnel with the skills necessary to
keep pace with continuing changes in cellular therapy technologies. Competition
for such personnel is intense, the Company competes with pharmaceutical,
biotechnology and healthcare companies. The Company's inability to hire
additional qualified personnel may lead to higher recruiting, relocation and
compensation costs for such personnel. These increased costs may reduce the
Company's profit margins or make hiring new personnel impractical.
LEGISLATIVE AND ADMINISTRATIVE ACTION MAY HAVE AN ADVERSE EFFECT ON THE
COMPANY.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company cannot
predict what other legislation relating to its business or to the health care
industry may be enacted, including legislation relating to third-party
reimbursement, or what effect such legislation may have on the Company's
business, prospects, operating results and financial condition. The Company
expects federal and state legislators to continue to review and assess
alternative health care delivery and payment systems and possibly adopt
legislation affecting fundamental changes in the health care delivery system.
Such laws may contain provisions which may change the operating environment for
our targeted customers including hospitals and managed care organizations.
Health care industry participants may react to such legislation by
curtailing or deferring expenditures and initiatives, including those relating
to our products. Future legislation could result in modifications to the
existing public and private health care insurance systems that would have a
material adverse effect on the reimbursement policies discussed above.
THE COMPANY COULD BE AFFECTED BY MALPRACTICE CLAIMS.
Providing medical care entails an inherent risk of professional
malpractice and other claims. The Company does not control or direct the
practice of medicine by physicians or health care providers who use the products
and does not assume responsibility for compliance with regulatory and other
requirements directly applicable to physicians. The Company cannot guarantee
that claims, suits or complaints relating to the use of the AutoloGelTM System
administered by physicians will not be asserted against the Company in the
future.
The production, marketing and sale and use of the AutoloGelTM System
entail risks that product liability claims will be asserted against the Company.
These risks cannot be eliminated, and the Company could be held liable for any
damages that result from adverse reactions or infectious disease transmission.
Such liability could materially and adversely affect the Company's business,
prospects, operating results and financial condition.
The Company currently maintains professional and product liability
insurance coverage, but the Company cannot assure you that the coverage limits
of this insurance would be adequate to protect us against all potential claims.
The Company cannot guarantee that it will be able to obtain or maintain
professional and product liability insurance in the future on acceptable terms
or with adequate coverage against potential liabilities.
21
PROSPECTS FOR THE FUTURE
Cytomedix's success is directly dependent on the success of AutoloGelTM,
and we believe that AutoloGelTM has a good chance for success in the marketplace
for several reasons. In the long-term care, long-term acute care, and home
healthcare markets where healthcare products and services are delivered in a
capitated environment, the weekly use of AutoloGelTM saves both the cost of
daily and multiple dressing changes as well as the labor needed to perform these
tasks. Combining this significant cost savings in this economically-driven
environment with a faster wound-healing rate as shown by the Company's
retrospective studies and current reports from clinicians, we expect that both
the facility/agency providing the care as well as the wound patient will see
added value through the use of AutoloGelTM. We believe that this model of
providing easy-to-access advanced therapy with increased healing in a shorter
period of time will be very attractive to all types of capitated health care
providers. We are actively pursuing these customers at both the group level and,
to a lesser degree, the individual facility.
In addition, based on the cost of current treatments and competitive
products for this market, the cost of the AutoloGelTM System provides an
economic benefit. With what we believe to be a strong patent position, we
believe we are positioned to successfully introduce the AutoloGelTM System while
rapidly gaining a significant market share position in the capitated care
market. Thereafter, upon the successful completion of a strategy to have the
AutoloGelTM System reimbursed and approved by the FDA, we believe the product
can be successfully positioned against the higher priced biological and device
alternatives, as well as more traditional wound therapies (such as wet to moist
dressings) based on its efficacy and ease of overall use in hospitals, wound
care centers, and physicians' offices.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's CEO, President, CFO and Controller have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934). Based on their evaluation, they have concluded that as of
March 31, 2004, 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 our reports filed with the SEC is recorded, processed,
summarized, and reported within the governing time periods. During 2003, the
Company developed and published formal policies and procedures manuals for all
employees. Additionally, with the creation of the Chief Financial Officer
position, all transactions undergo increased scrutiny and are reviewed and
approved at an additional level before entry into the Company's books and
records. The Chief Financial Officer also attends all Board meetings and has
access and complete visibility to all activities affecting Cytomedix. There has
been no change in internal control over financial reporting during the three
months ending March 31, 2004.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In order to establish precedent and to vigorously protect its rights under
its patents, 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 one or more of the Company's patents. 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 filed
July 3, 2002, was dismissed without prejudice.
22
On March 23, 2004, the District Court for the Northern District of
Illinois decided the claim construction in the Little Rock Foot Clinic lawsuit.
The court affirmed Cytomedix's position regarding the scope of the claims in
U.S. Patent No. 5,165,938 (the "Knighton Patent"), which relates to the use of
platelet-derived therapies for treating wounds and other damaged tissue. This
ruling also favorably impacts Cytomedix's position in its lawsuits against
Perfusion Partners and Associates, Inc, and Autologous Blood Technology, L.L.C.,
which had previously agreed to be bound by the claim construction ruling in the
Little Rock Foot Clinic case relating to the Knighton Patent. In his opinion,
Judge James B. Zagel concluded that the claims of the Knighton Patent should be
broadly construed to cover a treating composition that contains all of the
various components released by platelets during the platelet release reaction
and may have other components. In so doing, the court rejected the defendant's
assertion, echoed by all defendants in other pending cases, that the claims of
the Knighton Patent are limited in scope to platelet-releasate compositions that
are free of certain other cellular materials.
In September 2002, the Company restyled certain objections and
counterclaims relating to Dr. Keith Bennett into an adversary proceeding against
him and certain of his affiliates, captioned Cytomedix, Inc. v. Keith Bennett,
et al., Adv. No. 02 A 01292. In this action, the Company objected 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. In 2003,
the District Court for the Northern District of Illinois withdrew the reference
of this case from the Illinois Bankruptcy Court. The court subsequently ordered
bifurcation of the case and the patent infringement claims were transferred to
the District Court for the Western District of Arkansas, where it is presently
pending, and the Company's objections to Bennett's filed proofs of claim were
referred back to the Bankruptcy Court for further proceedings.
On October 23, 2002, Harvest Technologies Corp. ("Harvest") initiated an
action against the Company in the Federal District Court for the District of
Massachusetts, Case No. 02-12077. Plaintiff seeks a declaratory judgment that
its activities do not constitute the infringement of any patent rights claimed
by the Company, and it seeks damages for alleged false advertising, unfair
competition, intentional interference with contractual rights or a prospective
business relationship and unfair and deceptive trade acts or practices as
defined by Massachusetts law. The claim for damages is unliquidated. The Company
on March 27, 2003, filed its answer and counterclaims against Harvest 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. The parties completed cross-motions
for summary judgments in March 2004, and oral arguments on these motions were
heard by the court on April 1, 2004.
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
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 sought
damages against the Company. In March, 2004, a settlement was reached regarding
this action, and on March 11, 2004 a "Joint Motion For Dismissal Without
Prejudice" was filed in the Court of jurisdiction. The Court entered its Order
of Dismissal on March 23, 2004, dismissing all claims without prejudice.
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.
23
On April 2, 2004, James Gandy and his affiliated entities filed an action
against Cytomedix and one of its licensees in the state court of Louisiana, 24th
Judicial District Court, Parish of Jefferson, Case No. 606-022 M (the "Louisiana
Action"). In this action, Gandy asserts that Cytomedix's centrifugation
methodology, which he claims Cytomedix adopted during its bankruptcy case
starting in 2001, was a trade secret of Gandy that Cytomedix misappropriated and
is wrongfully licensing to third parties. Gandy seeks injunctive relief and
damages based upon claims of breach of contract, bad faith breach, tortuous
misappropriation, violation of Louisiana Unfair Trade Practices and Consumer
Protection Law, violation of the Louisiana Trade Secrets Act, and fraud.
Cytomedix denies the allegations and will oppose the action vigorously. On May
10, 2004, Cytomedix filed a notice of removal with the United States District
Court for the Eastern District of Louisiana, thereby moving the action from the
state court of Louisiana to the United States District Court for the Eastern
District of Louisiana for further proceedings.
Unfavorable resolutions of, settlements of, or costs related to these
lawsuits could have a material adverse effect on our business, results of
operations or financial condition.
ITEM 2. CHANGES IN SECURITIES.
OUTSTANDING COMMON STOCK AND DIVIDENDS.
There are approximately 682 shareholders and 16,175,810 shares of the
Company's common stock outstanding as of April 29, 2004. Of the outstanding
shares of common stock, 1,887,500 are issuable by the Company. These shares will
be issued by the Company at the time that payments pursuant to the promissory
notes issued in connection with the Company's recent private placement are
received.
Under the Company's First Amended Plan of Reorganization with All
Technical Amendments (the "Bankruptcy Plan"), the Company will 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 has not been satisfied for any quarter.
The Company does not anticipate issuing these shares in the near future.
We did not pay dividends to holders of our common stock during 2004, 2003
or 2002. We do not anticipate paying cash dividends on our common stock in the
foreseeable future, but instead will retain any earnings to fund our growth. In
fact, we are prohibited from declaring dividends on our common stock as long as
any shares of Series A convertible preferred, Series B convertible preferred or
Series C convertible preferred stock are outstanding unless all accrued
dividends on the Series A convertible preferred, Series B convertible preferred
or Series C convertible preferred stock have been paid. Once there are no shares
of Series A, Series B and Series C convertible preferred stock outstanding, any
decision to pay cash dividends on the common stock will depend on our ability to
generate earnings, our need for capital, our overall financial condition, and
other factors our Board deems relevant.
ISSUANCE OF NON-REGISTERED SECURITIES IN FIRST QUARTER OF 2004.
During the first quarter of 2004, we initiated two private placements of
securities that provided immediate cash net of accrued commissions and expenses
to the Company of $4,661,888 and will provide additional funds of $2,312,500
throughout the remainder of the year.
On March 26, 2004, the Company entered into a Series C Convertible
Preferred Stock Purchase Agreement with several accredited investors providing
for the sale and issuance of $2.8 million of Series C Convertible Preferred
Stock representing 280 shares of preferred stock which are convertible into 2.8
million shares of common stock. The Company also issued Series C-1 and Series
C-2 Warrants allowing the holders thereof to purchase an aggregate of
approximately 2.8 million shares of common stock at an exercise price of $1.50
per share. In connection with this Purchase Agreement, the Company entered into
a registration rights agreement, whereby the Company agreed to register the
resale of the common stock issuable upon conversion of the Series C Convertible
Preferred Stock and the common stock issuable upon exercise of the Series C-1
and Series C-2 Warrants. Upon effectiveness of the Company's registration
statement, one half of the Series C convertible preferred stock will
automatically convert into common stock. Commencing one year following the
effective date of the registration statement the remaining outstanding shares of
Series C convertible preferred stock will automatically convert if (i)
commencing on the date the closing bid price of the common stock is equal to or
exceeds $3.00 for a period of 10 consecutive days, provided that (ii) the
registration statement is effective for a period of 60 consecutive calendar
days. The Company received proceeds, net of commissions and expenses of
$325,612, from this placement of $2,474,388. In addition to the commissions, the
placement agent also received five-year warrants to purchase 280,000 shares of
the Company's common stock at an exercise price of $1.00 per share and was
awarded a six month consulting agreement for future financing services in return
for compensation of $5,000 per month and additional warrants to purchase 100,000
shares of common stock at an exercise price of $1.00 per share.
24
The Company's stock price on March 26, 2004 was $2.06; consequently,
pursuant to the requirements of EITF 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" ("EITF 98-5"), as amended by EITF 00-27 "Application of Issue 98-5 to
Certain Convertible Instruments", the issuance of the Series C Preferred, which
are convertible initially at $1.00 per share at any time, resulted in a
beneficial conversion feature (the difference between the market price and the
conversion price) recorded as a preferred stock dividend in the amount of
$2,800,000.
The Series C convertible preferred stock ranks junior to the Series A
preferred stock regarding distributions upon liquidation of the Company. Series
C convertible preferred stock ranks junior to the Series B preferred stock
solely with respect to the priority security interest in the Company's
intellectual property. The shares accrue dividends at 6% of the stated
liquidation preference amount from the date of issuance and increase to 8%
commencing on September 25, 2005, are payable annually in cash or shares of
stock at the option of the Company. The Series C preferred stock ranks pari
passu with Series A preferred stock and Series B preferred stock with respect to
payment of dividends. The Series C preferred stock has no voting rights except
with respect to transactions upon which they are entitled to vote as a class.
The Series C preferred stock is convertible, and the Series C-1 and Series C-2
warrants are exercisable by the holder at any time, however an exercise or
conversion by a holder cannot result in the holder owning in excess of 9.999% of
the outstanding shares of the Company's common stock. Each dollar of liquidation
preference amount is initially converted in one share of common stock (subject
to certain anti-dilution privileges).
The holders of Series C preferred stock can require the Company to redeem
the stock plus accrued dividends at 125% of the liquidation price upon the (i)
consolidation, merger or business combination of the Company, (ii) sale of more
than 50% of the Company's assets or (iii) a sale of more than 50% of the
outstanding shares of the Company's outstanding shares of common stock. However,
the Company has the option to pay in cash or shares of common stock.
The C-1 and C-2 warrants provide for a cashless exercise at the option of
the warrant holder commencing one year following issuance at the option of the
warrant holder provided that (i) the per share market price of one share of
common stock is greater than the warrant price and (ii) a registration statement
for the resale of warrant stock is not in effect. The Company has the option to
call up to 100% of the C-1 and C-2 warrants commencing 12 months and 36 months,
respectively, from the effective date of a registration statement registering
the common stock that would result from the exercise of the warrant. However, in
order to exercise the call option, the Company's common stock must have been
trading at a price greater than $3.00 for 10 consecutive trading days prior to
the call notice and a registration statement is then in effect and has been
effective without lapse for a period of 60 consecutive days and trading in the
Company's stock shall not have been suspended. The Company, upon calling the
warrant, will remit to the holder of the warrant $.01 per called warrant and
issue a new warrant representing the number of warrants not subject to the call.
The Company commenced a separate private placement in which the Company
has offered for sale 4,500 units in return for an anticipated total of
$4,500,000, consisting of cash and negotiable subscription promissory notes
receivable. Each unit consists of 1,000 shares of common stock and a five-year
warrant to purchase an additional 1,000 shares at $1.50 per share. As of March
31, 2004, the Company had received subscriptions of $4,500,000 with cash
commitments of $2,612,500 and notes of $1,887,500 due in three equal payments in
June, September, and December, 2004. The Company has $2,187,500 in cash relating
to this transaction as of March 31, 2004. As compensation for their services,
certain broker-dealers received cash commissions in the amount of 10% of the
gross proceeds. At March 31, 2004, the Company has accrued $450,000
representing the commissions due on the cash proceeds collected at the close of
the quarter in addition to legal expenses incurred relating to this placement of
$38,375.
25
The warrants provide for a cashless exercise alternative at the option of
the warrant holder. The warrants are exercisable by the holder at any time;
however, exercise by a warrant holder can not result in the individual owning in
excess of 9.999% of the outstanding shares Company's common stock. This option
commences one year following the original issue date if (i) the per share market
price of one share of common stock is greater than the warrant price and (ii) a
registration statement for the resale of the common stock resulting from the
exercise of the warrant is not in effect.
The warrants provide an option by the Company to call up to fifty percent
of the outstanding warrants commencing twenty-four months following the
effective date of a registration statement registering the common stock which
would result from the exercise of the warrant. However, in order for the Company
to call the warrants the per share market price of the common stock must be
greater than $3.00 (as may be adjusted for any stock splits or combinations of
the common stock) for a period of 10 consecutive trading days prior to the
notice of the call. The Company upon calling the warrant will remit to holder of
the warrant $.01 per called warrant and issue a new warrant representing the
number of warrants not subject to the call.
During the first quarter of 2004, 12,300 shares were issued to agents
relating to the commissions earned during the private placement undertaken by
the Company in the second and third quarters of 2003 representing accrued
commissions of $15,375. On February 27, 2004, 100,000 shares of the Company's
common stock were issued to a corporation upon exercise of 62,500 Class A and
37,500 Class B warrants. On March 5, 2004, an additional 5,000 shares were
issued to an individual in exchange for 3,125 Class A and 1,875 Class B
warrants. The Company issued 105,000 shares of common stock and received cash
proceeds of $124,688 upon the exercise of the above warrants.
During the first quarter of 2004, in accordance with the Company's 2002
Long-Term Incentive Plan, the Company's Board of Directors (the "Board") granted
210,000 options to purchase common stock that vested immediately and had
exercise prices greater than the fair market value on the date of grant of $1.50
per share to the following persons. On January 10, 2004, the Company issued
10,000 options to Dr. Charles Baxter in accordance with an agreement entered
into by the Company in which Dr. Baxter would become Chairman of the Company's
Medical Advisory Board. On March 23, 2004, the Company issued 200,000 options to
Mr. David Crews and to Mr. Robert Burkett, 100,000 options each, as
consideration for their services as Board members during 2003.
During the first quarter of 2004, the Company issued 375,000 warrants to
purchase the Company's common stock to the former President/CEO of the Company
and a related-party consulting firm. On January 2, 2004, the Company issued
three year warrants to purchase 175,000 shares of common stock at an exercise
price of $1.50 to Mr. Kent Smith in connection with a Confidential Release and
Settlement Agreement. As part of this agreement, Mr. Smith agreed to the
nullification of all options and other stock-based incentives awarded to him
under the Long-Term Incentive Plan amounting to 569,621 options of which 403,080
were fully exercisable. On February 25, 2004, the Company issued 10 year
warrants to purchase 200,000 shares of common stock at $1.50 to BDR Consulting,
Inc., a related party. These warrants were granted in connection with the
Consulting Agreement dated July 16, 2002.
In March 2004, the Company issued 109,548 shares of Series A Preferred
Stock and 112,212 shares of Series B Preferred Stock in payment of the first
year dividends due on such shares. For the quarter ended March 31, 2004, the
Company accrued dividends in the amount of $30,214, $29,497 and $2,301 for the
Series A, B and C preferred stock, respectively.
26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders during the first
quarter of 2004. Because of the Company's bankruptcy and reorganization, we were
unable to hold annual meetings in 2002 and 2003. We plan on holding an annual
meeting during the second quarter of 2004.
ITEM 5. OTHER INFORMATION.
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K.
The exhibits listed in the accompanying Exhibit Index are filed as part of
this report.
On March 29, 2004, the Company filed and reported on Form 8-K the
completion of a $2,800,000 private placement of Series C convertible preferred
stock with warrants.
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.
By: /s/Mark E. Cline
Mark E. Cline, President
Date: May 7, 2004
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/Mark E. Cline
Mark E. Cline, President
Date: May 7, 2004
/s/William L. Allender
William L. Allender, Chief Financial Officer
Date: May 7, 2004
/s/Lance Jones
Lance Jones, Controller
Date: May 7, 2004
/s/ Kshitij Mohan
Kshitij Mohan, Chief Executive Officer
Date: May 7, 2004
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).
2.2 Amended and Restated Official Exhibits to the First Amended Plan of
Reogranization of Cytomedix, Inc. with All Technical Amendments.
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 March 31. 2004,
on Form 10-KSB for year ended December 31, 2003, 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).
4.4 Form of Series C-1 Warrant to Purchase Shares of common stock of
Cytomedix, Inc. (Previously filed on March 29, 2004 on Form 8-K,
File No. 000-28443.)
4.5 Form of Series C-2 Warrant to Purchase Shares of common stock of
Cytomedix, Inc. (Previously filed on March 29, 2004 on Form 8-K,
File No. 000-28443).
4.6 Certificate of Designation of the Relative Rights and Preferences of
the Series C Convertible Stock of Cytomedix, Inc. as filed with the
Delaware Secretary of State on March 25, 2004 (Previously filed on
March 29, 2004 on Form 8-K, File No. 000-28443).
4.7 Form of Registration Rights Agreement, dated as of March 25, 2004,
between Cytomedix, Inc., and the purchasers named therein
(Previously filed on March 29, 2004 on Form 8-K, 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 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 Form of Series C Convertible Stock Purchase Agreement, dated as of
March 25, 2004, between Cytomedix, Inc., and the purchasers named
therein (Previously filed on March 29, 2004 on Form 8-K, File No.
000-28443).
10.11 Employment Agreement with Mr. Mark E. Cline (Previously filed on
March 31, 2004, on Form 10-KSB for year ended December 31, 2003,
File No. 000-28443).
10.12 Employment Agreement with Mr. William L. Allender (Previously filed
on March 31, 2004, on Form 10-KSB for year ended December 31, 2003,
File No. 000-28443).
10.13 The Carmen Group/Cytomedix Consulting Agreement dated October 1,
2003
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 President of Cytomedix, Inc., pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer 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.
31.4 Certification of Chief Executive Officer of Cytomedix, Inc.,
pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1 Certificate of President of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
32.2 Certificate of Chief Financial Officer of Cytomedix, Inc., pursuant
to 18 U.S.C.ss.1350.
32.3 Certificate of Controller of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
32.4 Certificate of Chief Executive Officer of Cytomedix, Inc., pursuant
to 18 U.S.C. ss. 1350.