UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 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 August 11, 2004,: 18,810,269 shares of common stock, $.0001 par
value
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CYTOMEDIX, INC.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) Page 1
Condensed Statements of Operations (Unaudited) Page 2
Condensed Statements of Cash Flows (Unaudited) Page 3
Notes to Condensed Financial Statements (Unaudited) Page 4
Item 2. Management's Discussion and Analysis or Plan of Operations Page 11
Overview of Business Page 11
Results of Operations Page 14
Liquidity and Capital Resources as of June 30, 2004 Page 20
Risk Factors Page 21
Prospects for the Future Page 23
Item 3. Controls and Procedures. Page 24
PART II
Item 1. Legal Proceedings. Page 25
Item 2. Changes in Securities. Page 26
Outstanding Common Stock and Dividends Page 26
Issuance of Non-Registered Securities in First Quarter of 2004 Page 26
Issuance of Non-Registered Securities in the Second Quarter of 2004 Page 26
Item 3. Defaults Upon Senior Securities Page 29
Item 4. Submission of Matters to a Vote of Security Holders. Page 29
Item 5. Other Information. Page 29
Item 6. Exhibits and Reports on Forms 8-K. Page 29
Signatures Page 30
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Balance Sheets
ASSETS
------
June 30, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
Current assets
Cash $ 3,666,033 $ 811,385
Accounts Receivable 256,048 235,741
Prepaid expenses, other current assets and inventory 272,725 185,296
------------ ------------
Total current assets 4,194,806 1,232,422
Cash - restricted 21,093 20,775
Property and equipment, net 194,962 235,449
Intangibles, net 4,168,991 4,232,149
Other assets -- 20,125
------------ ------------
Total assets $ 8,579,852 $ 5,740,920
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 804,015 $ 629,806
Deferred revenue 81,448 81,448
Note payable -- 13,066
Dividends payable on Series A, Series B and Series C preferred stock 43,896 120,735
------------ ------------
Total current liabilities 929,359 845,055
Long-term liabilities
Deferred revenue 397,059 437,783
------------ ------------
Total liabilities 1,326,418 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 2004 issued -
1,475,471 shares, issuable - 118,636 shares;- at 2003 issued -
1,365,923 shares, issuable - 109,548 shares 160 147
Series B Convertible preferred stock; $.0001 par value, $1.00
liquidation value, authorized 5,000,000 shares; at 2004 issued -
1,380,419 shares, issuable - 120,343, at 2003 issued - 1,402,650 shares, 150 151
issuable - 112,212 shares
Series C Convertible preferred stock: $.0001 par value,
$10,000 liquidation value, authorized 1,000 shares; at June 30, 2004
issued - 276 shares 276 --
Common stock; $.0001 par value, authorized 40,000,000 shares;
at 2004 issued - 16,531,849 shares, issuable - 1,707,005
shares; at 2003 issued - 13,211,453 shares 1,824 1,323
Additional paid-in capital 24,317,600 12,378,878
Deferred compensation (1,543,304) (1,438,070)
Subscriptions Receivable (1,608,805) --
Deficit accumulated in the development stage (13,914,467) (6,484,347)
------------ ------------
Total stockholders' equity 7,253,434 4,458,082
------------ ------------
$ 8,579,852 $ 5,740,920
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
1
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Statements of Operations - Unaudited
Three Months Ended Six Months Ended July 1, 2002
June 30, June 30, (Inception)
------------------------------- ------------------------------- Through
2004 2003 2004 2003 June 30, 2004
-------------- -------------- -------------- -------------- --------------
Revenues
Sales $ 98,633 $ 80,540 $ 223,348 $ 124,515 $ 910,179
Royalties 162,582 180,357 344,217 381,165 1,410,492
-------------- -------------- -------------- -------------- --------------
Total Revenues 261,215 260,897 567,565 505,680 2,320,671
-------------- -------------- -------------- -------------- --------------
Cost of revenues
Cost of sales 13,949 46,039 70,726 72,599 292,338
Cost of royalties 131,280 147,687 280,147 313,399 1,144,749
-------------- -------------- -------------- -------------- --------------
Total cost of revenues 145,229 193,726 350,873 385,998 1,437,087
-------------- -------------- -------------- -------------- --------------
Gross profit 115,986 67,171 216,692 119,682 883,584
-------------- -------------- -------------- -------------- --------------
Operating expenses
Salaries and wages 604,882 230,066 980,393 457,458 2,331,690
Consulting expense 451,476 288,740 1,608,271 341,575 2,969,143
Consulting expense - related party 173,217 94,664 473,668 136,664 1,195,951
Professional fees 198,360 231,839 366,949 411,944 1,721,247
Royalty expenses - related party 18,750 18,626 37,500 39,176 151,676
Clinical Trial related expenses 338,099 93,578 603,080 93,578 810,445
General and administrative 361,258 216,368 628,951 422,611 2,335,722
-------------- -------------- -------------- -------------- --------------
Total operating expenses 2,146,042 1,173,881 4,698,812 1,903,006 11,515,874
-------------- -------------- -------------- -------------- --------------
Loss from operations (2,030,056) (1,106,710) (4,482,120) (1,783,324) (10,632,290)
-------------- -------------- -------------- -------------- --------------
Other (income) expense
Interest expense 19 144 44 163 23,819
Interest and other (income), net (18,081) (2,984) (14,185) (4,352) (46,280)
-------------- -------------- -------------- -------------- --------------
Total other (income) expense, net (18,062) (2,840) (14,141) (4,189) (22,461)
-------------- -------------- -------------- -------------- --------------
Net loss from continuing operations (2,011,994) (1,103,870) (4,467,979) (1,779,135) (10,609,829)
-------------- -------------- -------------- -------------- --------------
Preferred dividend on Series A and B
preferred stock 58,534 55,375 118,245 110,754 460,742
Preferred dividend on Series C preferred stock 41,595 -- 2,843,896 -- 2,843,896
-------------- -------------- -------------- -------------- --------------
Net loss to common stockholders $ (2,112,123) (1,159,245) $ (7,430,120) $ (1,889,889) $ (13,914,467)
============== ============== ============== ============== ==============
Basic and diluted loss per
common share $ (0.12) $ (0.10) $ (0.47) $ (0.17) $ (1.22)
============== ============== ============== ============== ==============
Weighted average shares outstanding 18,024,009 11,198,869 15,665,587 11,026,280 11,425,660
============== ============== ============== ============== ==============
The accompanying notes are an integral part of these condensed financial
statements.
2
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Statements of Cash Flows - Unaudited
Three Months Ended Six Months Ended July 1, 2002
June 30, June 30, (Inception)
------------------------------- ------------------------------- Through
2004 2003 2004 2003 March 31, 2004
-------------- -------------- -------------- -------------- --------------
Cash Flows from operating activities:
Net loss $ (2,011,994) $ (1,103,870) $ (4,467,979) $ (1,779,135) $ (10,609,829)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 53,852 48,716 107,790 101,797 406,683
Amortization - deferred consulting fees 696,622 298,252 2,142,741 325,837 3,139,109
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 (122,673) 43,442 (121,611) 128,704 (143,127)
Change in liabilities (622,185) 195,231 133,460 139,530 (254,810)
-------------- -------------- -------------- -------------- --------------
Cash flows used in operating activities (2,006,378) (518,229) (2,200,944) (1,083,267) (6,867,703)
-------------- -------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment (6,758) (1,250) (8,800) (1,250) (326,573)
Increase in restricted cash (160) -- (318) -- (21,093)
-------------- -------------- -------------- -------------- --------------
Net cash used in investing activities (6,918) (1,250) (9,118) (1,250) (347,666)
-------------- -------------- -------------- -------------- --------------
Cash flows from financing activities:
Proceeds from sale of common and preferred
stock, net 658,486 1,048,442 4,832,010 1,193,317 10,672,622
Repayment of note payable (6,522) (3,158) (13,066) (33,375) (140,841)
Proceeds from warrant conversions 121,089 -- 245,766 -- 245,766
-------------- -------------- -------------- -------------- --------------
Net cash provided by financing activities 773,053 1,045,284 5,064,710 1,159,942 10,777,547
-------------- -------------- -------------- -------------- --------------
Net increase (decrease) in cash (1,240,243) 525,805 2,854,648 75,425 3,562,178
Cash, beginning of period 4,906,276 514,918 811,385 965,298 103,855
-------------- -------------- -------------- -------------- --------------
Cash, end of period $ 3,666,033 $ 1,040,723 $ 3,666,033 $ 1,040,723 3,666,033
============== ============== ============== ============== ==============
The accompanying notes are an integral part of these condensed financial
statements.
3
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to 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 losses per common share are presented in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("SFAS 128"), for all periods presented. In accordance with SFAS 128, basic and
diluted net loss per share was calculated based upon the net loss available to
common shareholders divided by the weighted average number of shares of common
stock outstanding during the period. Shares associated with stock options, stock
warrants, and convertible preferred stock are not included because the inclusion
would be anti-dilutive (i.e., reduce the net loss per share). The total numbers
of such shares excluded from diluted net loss per common share are 17,675,836
and 13,149,965 at June 30, 2004 and 2003, respectively.
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 six months ending June 30, 2004 and 2003 and for
the quarters ended June 30, 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:
4
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Financial Statements
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss to common stockholders,
as reported $ (2,112,123) $ (1,159,245) $ (7,430,120) $ (1,889,889)
Add: Stock based employee compensation
expense included in reported net
loss determined under APB No. 25, net
of related tax effects 71,973 -- 71,973 --
Deduct: Total stock-based employee
compensation expense determined
under fair-value-based method for all
awards, net of related tax effects 181,099 -- 164,451 42,499
------------- ------------- ------------- -------------
Pro forma net loss $ (2,221,249) $ (1,159,245) $ (7,522,598) $ (1,932,388)
------------- ------------- ------------- -------------
Earnings per share:
Basic and diluted - as reported $ (0.12) $ (0.10) $ (0.47) $ (0.17)
Basic and diluted - pro forma $ (0.12) $ (0.10) $ (0.48) $ (0.18)
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.
Six Months Ended
June 30,
------------------------------
2004 2003
-------------- -------------
Risk free rate 3.78% 3.96%
Expected years until exercise 9.9 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:
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. As
of June 30, 2004, $1,608,805 of subscriptions receivable remains outstanding.
5
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY (CONTINUED)
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 automatically
converted 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
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.
6
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY (CONTINUED)
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 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 sold
4,500 units in return for a 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. The Company has received $2,900,000
in cash related to this transaction as of June 30, 2004 with the remaining
balance of subscriptions receivable due prior to December 31, 2004. The Company
has incurred $450,000 representing the commissions in addition to legal expenses
in the amount of $38,375 incurred relating to this placement.
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.
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.
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.
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.
7
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY (CONTINUED)
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, a former
CEO 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.
The following stock activity took place in the second quarter of 2004.
During this quarter, 175,499 common shares were issued to 11 entities resulting
from the exercise of 222,095 Class A warrants and 7,648 Class B warrants. The
Company received $122,673 in cash proceeds as a result of these exercises.
During April and May 2004, 84,814 common shares were issued to 4 entities
resulting from the conversion of 134,443 Series B convertible, preferred shares
and 40,000 Series C convertible, preferred shares.
In May 2004, 149,788 common shares were issued to Burnham Hill Holdings and to
an associate in exchange for 270,000 placement agent warrants earned at the
completion of the Series C convertible, preferred placement in March of 2004.
These transactions were executed on a "cashless" basis.
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 form 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.
On June 30, 2004, in accordance with the terms contained in the Series A
convertible preferred and Series B convertible preferred certificates, a stock
dividend was declared representing accrued dividends due of $238,979. This
amount represents additional issuable shares of Series A convertible, preferred
stock of 118,636 shares and Series B convertible, preferred stock of 120,343
shares.
On May 10, 2004, the Company filed with the Securities and Exchange Commission
("SEC") form SB-2, "Registration Statement Under the Securities Act of 1933." On
July 13, 2004, the registration statement went effective. This process
registered an aggregate of 25,606,551 common shares including 9,273,725 shares
and 665,563 and 477,263 common shares underlying the Series A and B warrants,
respectively. Also registered were 6,680,000 common shares underlying 280 shares
of Series C convertible preferred stock plus C-1 and C-2 warrants, including a
reserve of 20%. Finally, 8,510,000 shares were registered which consisted of the
potentially issuable shares supporting other warrants to purchase common stock
that were outstanding.
8
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to 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 certain 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.
On June 29, 2004, as part of his separation agreement between the Company and
Mark Cline, the award granted to Mr. Cline on November 15, 2003 was adjusted
from the original award of 175,000 shares to 150,000 shares with an accelerated
vesting term and a reduced term compared to the original grant.
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 six months ending June 30,
2004, the Company recorded expenses of $226,323 pertaining to this agreement of
which, $54,000 was paid in cash with the remaining $172,323 being non-cash
charges relating to the value of options granted to BDR, valued in accordance
with FAS 123. For the three months ending June 30, 2004, the Company recorded
expenses of $81,752 representing cash payments of $27,000 with the remaining
$54,752 being non-cash charges.
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 six
months ending June 30, 2004, the Company recorded expenses of $247,325
pertaining to this agreement of which, $90,779 was paid in cash with the
remaining $156,546 being non-cash charges relating to the value of options
granted to The Carmen Group, Inc., in accordance with FAS 123. For the three
months ending June 30, 2004, the Company recorded expenses of $91,465
representing cash payments of $45,222 with the remaining $46,243 being non-cash
charges.
9
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Financial Statements
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 shares of existing Series A Preferred Shares. This exchange is
contingent on the Company attaining aggregate gross revenues for four
consecutive quarters of at least $10,000,000.
The Company outsources 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.
The Company is prohibited from granting a security interest in the Company's
patents and/or future royalty streams under the terms of the Series A and B
preferred stock.
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
In July 2004, the Company issued 501,377 common shares upon the exercise of
622,206 Class A Warrants. The Company received $465,760 as a result of these
exercises.
As discussed in Note 3, 1,360,000 shares of Series C convertible, preferred
stock automatically converted into common stock on July 13 upon the registration
becoming effective. An additional 173,000 shares of Series C convertible,
preferred stock was converted to 173,000 shares of common stock at the direction
of certain stockholders.
On August 12, 2004, the Board of Directors authorized the Company to grant to
Mark T. McLoughlin and Dave F. Drohan, stock options of 30,000 each in
consideration for accepting an appointment to the Board of Directors of the
Company. These options were granted pursuant to the Company's Long-Term
Incentive plan, vest immediately, and allow for purchase of the Company's common
stock at $1.50 per share. The options expire 10 years from the grant date. The
Board of Directors also authorized the Company to grant to Maier and Company
12,000 stock warrants in consideration for past and future services to the
Company for corporate communications and investor relations. These warrants vest
fully over a six month period, commencing in May 2004, in equal installments,
and allow for purchase of the Company's common stock at $1.24 per share (the
closing price of the stock on the date of approval of the grant by the Board of
Directors). These warrants expire 5 years from the grant date.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The terms "Cytomedix," the "Company," "we", or "our" as used in this quarterly
report, refer to Cytomedix, Inc. The following discussion and analysis should be
read in conjunction with the condensed 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, and with management's
discussion and analysis of financial condition and results of operation included
in our Form 10-QSB for quarter ended March 31, 2004.
OVERVIEW OF BUSINESS
The Company: Cytomedix is a biotechnology company, incorporated in Delaware,
which employs ten full-time employees. 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. While the current focus of the Company is the
treatment of chronic, non-healing wounds, the Company believes that its patent
portfolio also covers the use of Autologel(TM) in any form of tissue healing
that involves the use of growth factors and other releasates from platelets. 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.
Strategy: 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 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, in order to increase the clinical acceptance and marketing of this
technology. 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, both small and large, 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 or
potential enjoinment from the market. At our discretion, certain companies may
be candidates for royalty and licensing arrangements.
11
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 has 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
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. The
Company believes this is a significant barrier to broad clinical and market
acceptance of the Company's product.
Clinical Trial: During 2003, the Company elected to submit both a 510K for it's
centrifuge and an Investigational Device Exemption ("IDE") to the FDA as the
initial steps in a process to secure formal 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.
Failure to secure FDA approval whether resulting from negative clinical trial
results or otherwise, could have a material adverse effect on the Company's
business and financial condition. 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 approved by the FDA, which allowed the Company to launch a
prospective, randomized, blinded and controlled clinical trial involving human
subjects being treated with the AutoloGel(TM) System for purposes of
demonstrating its safety and effectiveness for the treatment of non-healing
diabetic foot ulcers. This is the first of several specific clinical indications
for which regulatory clearances may be sought in the future. Patients are being
enrolled in the clinical trial with an anticipated completion horizon of the
patient treatment phase of the trials during the first quarter of 2005.
The trial is being conducted in up to 15 centers on 72 patients. The conduct of
the clinical trial includes several stages. In the first stage, patients are
pre-screened to eliminate those patients who are unacceptable under the patient
exclusion criteria in the clinical trial protocol. Such exclusion criteria
include, for example, patients with active infection in their wound, inadequate
perfusion, or wounds too small so their wound would heal without intervention.
The patients who are found acceptable after the pre-screening process are then
provided traditional therapy during a one week "lead in period" to again screen
out patients that would heal without treatment from an advanced therapy such as
AutoloGel(TM). Those wounds that respond appropriately to traditional treatment
are not included in the study. This insures the researchers, the scientific
community, and the Company that the wounds being treated in the study are truly
the challenging, non-healing diabetic foot ulcers. At that point, the patients
are randomized into the treatment and control arm.
All participants including the patient, family, investigator, nursing staff
(except one nurse who maintains confidentiality, applies the treatments, and
does not participate in any other part of the trial), the contract research
organization (Constella Clinical Informatics, Inc.), and the Company are
blinded. This means that it is not known which treatment is being applied to the
person that has been screened and selected for the clinical trial. This type of
prospective, randomized, controlled and blinded clinical trial is very rigorous
and meets the highest standards of research in the scientific, clinical,
regulatory, and reimbursement communities.
The treatment phase of the trial will occur for 12 weeks or until the wound is
healed. At that time the trial data will be unblinded and the data analyzed. The
primary endpoint of the study is complete healing. Once the wound is healed, the
patient is followed for another 12 weeks to confirm the wound remains healed. As
the trial proceeds and as is the case with many clinical trials, if necessary,
the Company may make modifications or changes in the trial protocol.
The Company has budgeted $2,800,000 for completion of the clinical trial and has
spent in excess of $500,000 through June 30, 2004, against this budgeted amount.
While these trials are at an early stage, the Company believes this budgeted
amount is adequate for completion yet unforeseen events could occur that could
materially increase the cost to complete, or, in the extreme case, render the
Company unable to complete the clinical trial. Either could have a material
adverse effect on the Company's business and financial condition.
12
Reimbursement: 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 to seek approval for specific labeling. 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. FDA designated CBER as the primary
center that reviewed and approved the IDE under which this clinical trial is
being conducted. In parallel, we would also be making the necessary submissions
to 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 the Autologel (TM) System. In
order to facilitate the reimbursement process, the Company has already initiated
a `pharmaco-economic' study to evaluate the cost effectiveness of its
Autologel(TM) technology. Such studies are performed primarily in the drugs area
but now increasingly in the medical device area to present scientific,
demographic and economic information to justify to CMS and other payor
organizations that a particular product and therapy is clinically safe and
effective and cost effective with respect to its alternatives. 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.
Patents and Licensing: 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 U.S. Patent No. 5,165,938 (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 could position the Company to
enforce our rights against companies with substantial revenue, and these
companies could become subject to damages or be a candidate for a licensing or
royality agreement. 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. 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 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.
There have been two additional rulings in two cases that the Company had
initiated supporting the Company's intellectual property position. On June 8,
2004, the United States District Court for the Northern District of Illinois
entered a consent judgment against 21st Century Wound Care and Advanced Therapy,
L.L.C., and its owner, James Gandy. In that consent judgment, 21st Century Wound
Care and Mr. Gandy admitted that Cytomedix's Knighton Patent, which covers the
use of compositions containing platelet releasates for wound healing purposes,
is valid and enforceable. The Court declared that 21st Century Wound Care and
Gandy had infringed the Knighton Patent and enjoined them, effective immediately
and continuing through expiration of the Knighton Patent in November 2009, from
making, using, offering, or selling within the United States autologous cellular
therapies, platelet gel products, or any other processes or products-such as
their "P-Gel" formulation-that infringe the claims of the Knighton Patent. On
July 26, 2004, Judge James B. Zagel of the Northern District of Illinois entered
a summary judgment ruling of patent infringement against The Little Rock Foot
Clinic, finding the defendants' use of a process supplied by SafeBlood
Technologies, Inc., known as the SafeBlood Graft(tm) procedure, literally
infringes Cytomedix's Knighton Patent. In finding infringement, Judge Zagel
applied his earlier ruling regarding the scope of the Knighton Patent and
rejected all of the defendants' attempts to argue that their use of the
SafeBlood Graft(tm) procedure did not infringe.
The Company intends to press forward aggressively in other instances of
infringement with aggressive legal and business actions to defend its
intellectual property.
Sales and Marketing: In the past, the Company marketed the AutoloGel System(TM)
through in-house personnel. During 2003 the Company began to predominately
distribute its products through a network of commission based, independent sales
representatives. The Company 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 and our distributor have
established relationships in their respective territories with the clinical
professionals that specialize in wound care. In addition, there are a number of
regions and populations where there are specific federal and local public health
initiatives to address the significant public health issue of diabetes, chronic
wounds and amputations and the Company is actively exploring and establishing
programs in those areas.
13
RESULTS OF OPERATION
We are a development stage Company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7 and had only limited operations through June
30, 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 developmental 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 six
months ending June 30, 2004, the Company incurred legal fees of $91,885 relating
to the defense of and the current litigation associated with our patents.
Consulting, legal and other expenses of $603,080 were expended on activities
relating to FDA matters associated with our clinical trials. Additionally
$2,081,939 (of which $1,710,283 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. Included
in this amount is $473,668 (of which $328,869 was non cash equity-based
compensation expense) paid to the related parties BDR Consulting Inc., and to
The Carmen Group.
During the six months and quarter ending June 30, 2004, the Company recorded
total non-cash equity-based compensation expenses of $2,142,653 and $696,653
respectively. During the 6 months and quarter ending June 30, 2003, the Company
recorded non-cash equity-based compensation expenses of $325,837 and $298,252
respectively. Additionally and as a result of the private placement and issuance
of the Series C convertible preferred stock, the Company recorded a preferred
dividend charge of $2,800,000 as of March 31, 2004; all of which is a non-cash
charge. This preferred dividend charge was required 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." The total non-cash charges for the
six months ended June 30, 2004 totals $4,942,741 or 66.52% of the $7,430,120 in
the recorded loss to common stockholders for the period.
FINANCIAL INFORMATION NOT IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Throughout this report, we have presented income statement items in conformity
with generally accepted accounting principles (GAAP). Yet, given the magnitude
of the non-cash expenses, the Company utilizes EBITDA (earnings before income
taxes, depreciation and amortization) to evaluate and monitor the results of
operations. Although EBITDA is a non-GAAP financial measure, we believe that the
information presented below when reviewed in conjunction with the Condensed
Statements of Cash Flows will allow for an additional clarification of the
Company's performance and will allow the readers of our financial statements an
additional tool to evaluate the comparative performance of the Company.
Following, is a reconciliation of the comparative net loss to common
shareholders to EBITDA utilized by the Company.
Three Months Ended Six Months Ended
June 30, June 30,
----------- ----------- ----------- -----------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss to common
Stockholders as stated $(2,112,123) $(1,159,245) $(7,430,120) $(1,889,889)
Adjustments to Reconcile net loss to common
stockholders to EBITDA:
Preferred Dividends accrued 100,129 55,375 162,141 110,754
Series C Preferred stock dividend attributable to
below market beneficial conversion features -- -- 2,800,000 --
Depreciation and amortization of patents 53,852 48,716 107,790 101,797
Amortization of Research Works Report(1) 17,000 -- 34,000 --
Amortization - Deferred Consulting Fees(2) 403,588 298,252 1,716,769 325,837
Amortization of the value of stock options
recorded as compensation(3) 276,034 -- 391,972 --
----------- ----------- ----------- -----------
EBITDA $(1,261,520) $ (756,902) $(2,217,448) $(1,351,501)
=========== =========== =========== ===========
(1) Consists of the amortization of stock valued at $68,000 issued in August,
2003 to Research Works as compensation for analyst report.
(2) Consists of the amortization attributable to the value of stock rights
issued to various consultants as compensation in lieu of cash.
(3) Consists of the full value as determined for the options and rights
granted upon termination of Kent Smith and Mark Cline plus the period cost
of the unqualified options granted to Kshitij Mohan as an inducement
award.
14
COMPARATIVE RESULTS OF OPERATION FOR THE SIX MONTHS ENDING
JUNE 30, 2004 AND 2003
For the six months ending June 30, 2004, the Company had revenue of $567,565 as
compared to revenue of $505,680 for the six months ending June 30, 2003; an
increase of $61,885 or 12.24%. Revenues are generated from two sources: the sale
of Autologel(TM) disposable kits and reagents and royalties received from
licensing activities. Comparing the six months in 2004 to 2003, revenues
increased in 2004 $98,833 or 79.37%, from the sale of kits and reagents
($223,348 as compared to $124,515). 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, whose activity has declined significantly
in 2004, and had no commercial insurance business. Revenues from royalties and
licensing activities decreased in the first six months of 2004 $36,948 or 9.69%,
($344,217 as compared to $381,165). This decrease is substantially attributable
to the DePuy licensing arrangement.
Gross profit for the six months ending June 30, 2004 was $216,692 or 38.18% of
revenue as compared to gross profit of $119,682 or 23.67% of revenue for the
comparable period in 2003. The gross profit from the sale of disposable kits and
reagents increased 63.90% from a profit margin of 41.69% earned in 2003 to
68.33% in 2004. This increase is attributable to the fact that the Company
commenced a sales and marketing campaign with aggresive pricing during the six
months period ended June 30, 2003 which resulted in a lower margin. 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. Additionally, the decline in business
from two large long term care providers whose pricing is below normal has
contributed to this increase in margin. While revenues decreased from royalties
received from licensing activities, the gross profit margins increased 4.72%
from a profit margin of 17.77% in 2003 to 18.61% 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 six months ending June 30, 2004 were $4,698,812 (with
non-cash equity-based compensation expenses of $2,142,741) as compared to
$1,903,006 (with non-cash equity-based compensation expenses of $325,837). This
results in a net increase of $2,795,806 (or excluding non-cash equity-based
compensation expenses an increase of $978,902 or 62.07%).
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 six months ending June 30,
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 an additional
tool to evaluate the performance of the Company.
15
CYTOMEDIX, INC.
OPERATING EXPENSE ANALYSIS
SIX MONTHS ENDING JUNE 30, 2004
NON-GAAP
OPERATING EXPENSES
ACCOUNT GAAP EQUITY BASED WITHOUT EQUITY
AS REPORTED COMPENSATION BASED COMPENSATION
- ------------------------------------------------------------------------------------------
Salaries and Wages $ 980,393 ($391,972) $ 588,421
Consulting 1,608,271 (1,382,776) 225,495
Related Party Consulting 473,668 (328,869) 144,799
Professional 366,949 (5,124) 361,825
Royalty Expense-Related Party 37,500 37,500
Clinical Trials 603,080 603,080
General and Administrative 628,951 (34,000)(1) 594,951
----------- ----------- -----------
Total Operating Expense $ 4,698,812 ($2,142,741) $ 2,556,071
(1) Consists of the amortization of prepaid expense attributable to 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 six months ending June 30, 2004 increased
$552,935 to $980,393 compared to $ 457, 458 for the comparable period in 2003.
Excluding the equity-based compensation recorded, salaries and wages expense for
the six months ending June 30, 2004 was $588,421 as compared to $457,458 for the
comparable period in 2003, an increase of $130,963 or 28.63%. $106,114 of this
increase is attributable to the addition of a net three employees with the
remaining $24,849 being attributable to increased commission expense and expense
subsidies provided to certain sales representatives plus increased salary levels
due to annual reviews performed on all personnel conducted in April which became
effective on May 1.
CONSULTING AND RELATED PARTY CONSULTING:
Consulting and related party consulting expense for the six months ending June
30, 2004, amounted to $2,081,939 (of which $1,711,645 was non-cash equity-based
compensation). For the comparable period ending in 2003, this expense was
$478,239 (of which $325,837 was non-cash equity-based compensation). The change
in the expense recorded between years is substantially 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 ($893,234 gross
expense, $62,496 net after deducting equity-based compensation attributable to
Nadine Smith), financing related support ($607,204 gross expense, $56,528 net
after deducting equity-based compensation attributable to consultants),
governmental/support and lobbying ($247,346 gross expense, $90,800 net after
deducting equity-based compensation relating to a related party affiliation) and
on-going managerial support provided by BDR Consulting, Inc. ($226,323 gross
expense, $54,000 net after deducting equity-based compensation relating to a
related party). For the comparable period in 2003, the Company incurred gross
expenses of $478,239, with a net expense of 152,402 after deducting equity-based
compensation of $325,837 relating to financial related support, strategic
planning and the on-going managerial support provided by BDR Consulting, Inc and
other consultants. For the six months period ending June 30, 2003, the Company
incurred $5,160 in governmental/support and lobbying and $31,249 in strategic
planning attributable to Nadine Smith. During 2004, the Company also incurred
$52,500 in additional financing related support and $10,500 in public relations
support as compared to the six months period in 2003.
16
PROFESSIONAL FEES:
Professional fees which substantially consist of legal and accounting services
for the six months ending June 30, 2004 amounted to $366,949 as compared to
$411,944 for the comparable period in 2003; a decline of $44,995 or 10.92%. The
decrease between years is primarily attributable to a decline in legal expenses
of $61,430 offset by an increase in accounting services of $26,383. During the
first six months of 2003, the Company incurred legal expenses of $294,131
primarily attributable to bankruptcy related matters and for initiating
litigation in defense of our patent rights. During 2004, the Company incurred
legal expenses of $233,631 with $91,884 attributable to patent litigation,
$28,181 attributable to the FDA and clinical trials and the remaining $113,566
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. For 2004, the
Company incurred additional legal expenses associated with the private
placements and the subsequent registration of our stock of $74,356 which was
recorded to additional paid in capital and netted against the private placements
proceeds as a cost of the offering.
The increase in the accounting and audit fees is primarily attributable to
additional service required in connection with the two private placements and
the filings with the Securities Exchange Commission, the resulting registration
statement initiated during the first quarter of 2004 and substantially completed
in the second quarter.
CLINICAL TRIAL RELATED EXPENSE:
For the six months ending June 30, 2004, the Company incurred expenses of
$603,080 relating to the design, coordination and third party administration of
our current clinical trials as compared to $93,578 for the comparable period in
2003. The expenses incurred in 2003 related to consulting fees paid to a
consulting group for assistance in preparing the initial protocol.
GENERAL AND ADMINISTRATIVE:
For the six months ending June 30, 2004, the Company incurred general and
administrative expenses of $628,951 as compared to $422,611 for the comparable
period of 2003; an increase of $206,340 or 48.82%. This is substantially
attributable across the board to the increase in activity levels between
comparable periods. Comparing periods between 2004 and 2003, the Company
incurred increased travel expense of $49,219; an increase of $23,506 in
insurance costs; an increase in sales and promotional material of $20,701 and
amortization charges of $34,000 attributable to the amortization of the Research
Works Agreement. Additionally, during 2003, the Company made adjustments to
several accounts amounting to $42,345 during this period relating to contingency
items anticipated during 2002 that never materialized and were accordingly
reversed.
OTHER:
Related party royalty expenses of $37,500 and $39,176 were paid to Mr. Charles
E. Worden for the periods covering the six months ending June 30, 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.
COMPARATIVE RESULTS OF OPERATION FOR THE THREE MONTHS ENDING
JUNE 30, 2004 AND 2003
For the three months ending June 30, 2004, the Company had revenue of $261,215
as compared to revenue of $260,897 for the three months ending June 30, 2003; an
increase of $318 or .01%. Revenues are generated from two sources: the sale of
Autologel(TM) disposable kits and reagents and royalties received from licensing
activities. Comparing the three months in 2004 to 2003, revenues increased in
2004 $18,093 or 22.46%, from the sale of kits and reagents ($98,633 as compared
to $80,540). 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, whose activity has declined significantly in 2004, and
had no commercial insurance business. Revenues from royalties and licensing
activities decreased in the three months ending June 30, 2004 $17,775 or 9.85%,
($162,582 as compared to $180,357). This decrease is substantially attributable
to the DePuy licensing arrangement.
17
Gross profit for the three months ending June 30, 2004 was $115,986 or 44.40% of
revenue as compared to gross profit of $67,171 or 25.74% of revenue for the
comparable period in 2003. The gross profit from the sale of disposable kits and
reagents increased 100.46% from a profit margin of 42.83% earned in 2003 to
85.86% in 2004. This increase is attributable to the fact that the Company
continued a sales and marketing campaign with aggressive pricing that began
during the first quarter of 2003, which resulted in lower margin. 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. Additionally, two additional factors
contributed to the increase in the gross profit percentages. First, the decline
in business from two large long term care providers whose pricing is below
normal has contributed to this increase in margin. Secondly, an adjustment to
inventory resulting from a physical inventory favorably impacted the gross
profit percentage. While revenues decreased from royalties received from
licensing activities, the gross profit margins increased 6.29% from a profit
margin of 18.11% in 2003 to 19.25% 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 three months ending June 30, 2004 were $2,146,042
(with non-cash equity-based compensation expenses of $696,622) as compared to
$1,173,881 (with non-cash equity-based compensation expenses of $298,252). This
results in a net increase, excluding non-cash equity-based compensation expenses
of $573,791 or 65.52%.
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 June
30, 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 an additional
tool to evaluate the performance of the Company.
CYTOMEDIX, INC.
OPERATING EXPENSE ANALYSIS
THREE MONTHS ENDING JUNE 30, 2004
NON-GAAP
OPERATING EXPENSES
ACCOUNT GAAP EQUITY BASED WITHOUT EQUITY
AS REPORTED COMPENSATION BASED COMPENSATION
- ------------------------------------------------------------------------------------------
Salaries and Wages $ 604,882 ($276,032) $ 328,850
Consulting 451,476 ( 300,033) 151,443
Related Party Consulting 173,217 ( 100,995) 72,222
Professional 198,360 ( 2,562) 195,798
Royalty Expense-Related Party 18,750 18,750
Clinical Trials 338,099 338,099
General and Administrative 361,258 ( 17,000)(1) 344,258
----------- ----------- -----------
Total Operating Expense $ 2,146,042 ($696,622) $ 1,449,420
(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.
18
SALARIES AND WAGES:
Salaries and wage expense for the three months ending June 30, 2004 increased
$374,816 to $604,882 compared to $230,066 for the comparable period in 2003.
Excluding the equity based compensation recorded of $276,032, salaries and wages
expense for the three months ending June 30, 2004 was $328,850 as compared to
$230,066 for the comparable period in 2003; an increase of $98,784 or 42.94%.
$88,994 of this increase is attributable to the addition of three net employees
as compared to the 2003 levels with the remaining $9,790 being primarily
attributable to increase commission expense and expense subsidies provided to
certain sales representatives plus increased salary levels due to annual reviews
performed on all personnel conducted in April which became effective on May 1.
CONSULTING AND RELATED PARTY CONSULTING:
Consulting and related party consulting expense for the three months ending June
30, 2004, amounted to $624,693 (of which $401,028 was non-cash equity-based
compensation). For the comparable period ending in 2003, this expense was
$383,404 (of which $298,252 was non-cash equity-based compensation). The change
in the expense recorded between years is substantially 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 ($31,248 gross and
net expense attributable to Nadine Smith), financing related support ($353,317
gross expense, $53,284 net after deducting equity-based compensation
attributable to consultants), governmental/support and lobbying ($91,465 gross
expense, $45,222 net after deducting equity-based compensation relating to a
related party affiliation) and on-going managerial support provided by BDR
Consulting, Inc. ($81,752 gross expense, $27,000 net after deducting
equity-based compensation relating to a related party). For the three months
period ending June 30, 2003, the Company incurred $5,160 in governmental/support
and lobbying. In addition, $30,000 in financing related support and $10,500 in
public relations support was incurred in 2004 above the levels incurred for the
comparable period in 2003.
PROFESSIONAL FEES:
Professional fees which substantially consist of legal and accounting services
for the three months ending June 30, 2004 amounted to $198,360 as compared to
$231,839 for the comparable period in 2003; a decline of $33,479 or 14.44%. The
decrease between years is primarily attributable to a decline in legal expenses
of $14,641 and accounting fees of $8,810. During the quarter ending June 30,
2003, the Company incurred legal expenses of $148,496 primarily attributable to
bankruptcy related matters and for initiating litigation in defense of our
patent rights. During the comparable period in 2004, the Company incurred legal
expenses of $130,993 with $61,156 attributable to patent litigation, $3,183
attributable to the FDA and clinical trials and the remaining $66,653 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. During this period
for 2004, the company incurred additional legal expenses associated with the
private placements and subsequent registration of our stock of $35,982 which was
charged to additional paid in capital and netted against the private placement
proceeds as a cost of the offering.
CLINICAL TRIAL RELATED EXPENSE:
For the three months ending June 30, 2004, the Company incurred expenses of
$338,099 relating to the execution of our current clinical trials as compared to
$93,578 incurred in the comparable period of 2003. The expenses incurred in 2003
related to consulting fees paid to a consulting group for assistance in
preparing the initial trial protocol. On March 5, 2004, approval to commence
testing was granted by the FDA.
GENERAL AND ADMINISTRATIVE:
For the three months ending June 30, 2004, the Company incurred general and
administrative expenses of $361,258 as compared to $216,368 for the comparable
period of 2003; an increase of $144,890 or 66.96%. This is substantially
attributable across the board to the increase in activity levels between
comparable periods. Comparing comparable periods between 2004 and 2003, the
Company incurred increased travel expense of $7,219; an increase of $23,954 in
insurance costs; an increase is sales and promotional material of $15,391,
amortization charges of $17,000 attributable to the amortization of the Research
Works Agreement and an increase in bad debt expense of $12,755. Additionally,
during 2003, the Company made adjustments to several accounts amounting to
$42,345 during this period relating to contingency items anticipated during 2002
that never materialized and were accordingly reversed.
19
OTHER:
Related party royalty expenses of $18,750 and $18,626 were paid to Mr. Charles
E. Worden for the periods covering the three months ending June 30, 2004 and
2003, respectively.
Interest income for the 3 months ending June 30, 2004 and 2003 amounted to
$17,606 and $1,408 respectively.
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 2004
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 provided 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. During the three months ending June 30, 2004, an additional
$712,500 was received from these offerings. As of June 30, 2004, $1,600,000 plus
interest of $8,805 remained due subject to promissory notes securing
subscription agreements. Included in this amount is $350,000 plus interest of
$8,805 which was in arrears. $308,000 was subsequently received in early August
2004.
The Company does not plan to seek additional financing in the near future. The
Company expects to have sufficient cash to support it for the next twelve
months.
The Company's current cash position is as follows:
Cash on hand as of June 30, 2004 : $3,687,126
Amounts outstanding as of June 30, 2004
due from promissory notes securing subscriptions and interest 1,608,805
----------
Total cash on hand and contractually secured 5,295,931
----------
Less cash budgeted for clinical trials less expenditures to date 2,300,000
----------
Cash available for operations less cash committed to clinical
trials as of June 30, 2004 $2,995,931
==========
The Company has several other sources for securing additional cash over the next
twelve months. In July 2004, the Company received $465,760 through the exercise
by warrant holders of 602,206 Class A warrants for 507,377 shares of the
Company's common stock.
Additional funds could become available through exercises of remaining warrants
including 63,750 Class A warrants to purchase the Company's common stock at
$1.00 per share that will expire at various dates between December 2004 and May
2005 and 587,655 Class B warrants to purchase the Company's common stock at
$1.50 per share that will expire on July 29, 2005. Additionally, as part of the
Series C convertible preferred stock offering completed March 26, 2004,
1,400,000 Series C-1 warrants were issued that contained an automatic call
provision by the Company that specifies that after the completion of one year
from the date that the registration statement became effective, July 13, 2004,
if the stock has closed at $3.00 or above for a 10-day consecutive period, the
warrant can be called and exercises may be made at $1.50 per share. Upon
expiration of a 20-day period without exercise, the Company may repurchase the
warrant at $.01 per warrant. Due to the availability of a "cashless exercise"
provision contained in the warrant certificates and other contingencies
including the share price, the Company can give no assurance that any funds can
be raised from these potential exercises.
Our average operating cost per month for the last six months has been higher
than normal attributable to the costs associated with our recent financings,
subsequent resale registration, plus the engagement of several consultants for
short term assignments. We believe that the impact of these higher than normal
costs are isolated. While the Company has taken aggressive steps to curtail
unnecessary expenditures, certain uncertainties prevalent in our business make
forecasting future expenditures based on recent history very difficult. Given
these uncertainties, future expenses could deviate substantially from those
expenditures incurred in previous periods. Additionally, the clinical trials are
in the early stages and while we believe that our initial budget of $2,800,000
($2,300,000 remaining after considering expenditures through June 30, 2004) for
completion is adequate, unforeseen events could occur that could materially
impact this budget and our future cash position. Finally, while the Company in
the normal business process continually forecasts anticipated expenses and
revenues, any material increase or decrease in expenses or revenues from those
incurred during the first six months of 2004 could have a material and
unforeseen effect on the Company's business and financial condition.
20
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 the exercise
of warrants and options 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 AutoloGel(TM)
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 companies. 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.
THE AUTOLOGEL(TM) SYSTEM IS SUBJECT TO GOVERNMENTAL REGULATION.
The Company's success is also impacted by factors outside of the Company's
control. The Company's current therapies may be subject to extensive regulation
by numerous governmental authorities in the United States, both federal and
state, and in foreign countries by 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 AutoloGel(TM) System is practiced, could materially and
adversely affect the Company's ability to sell products in those states.
21
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. While the Company is currently conducting clinical
trials under the protocol accepted by the FDA, the Company has no assurance that
the clinical trials will be successful or that it will be able to obtain all
necessary approvals from the FDA or comparable regulatory authorities in foreign
countries for these products. Failure to obtain the required approvals would
have a material adverse impact on the Company's business and financial
condition.
OUR SUCCESS COULD BE ADVERSELY AFFECTED IF OUR CUSTOMERS CANNOT OBTAIN
REIMBURSEMENT.
AutoloGel(TM) 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 AutoloGel(TM)
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 marketability of the AutoloGel(TM)
System and thus the Company's success.
THE SUCCESS OF THE AUTOLOGEL(TM) SYSTEM IS DEPENDENT ON ACCEPTANCE BY THE
MEDICAL COMMUNITY.
The commercial success of the Company's products and processes will depend upon
the medical community and patients accepting the therapies as safe and
effective. If the medical community and patients do not ultimately accept the
therapies as safe and effective, the Company's ability to sell the products and
processes will be materially and adversely affected.
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.
22
LEGISLATIVE AND ADMINISTRATIVE ACTION MAY HAVE AN ADVERSE EFFECT ON THE
COMPANY.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. The Company cannot predict
what other legislation relating to its business or to the health care industry
may be enacted, including legislation relating to third-party reimbursement, or
what effect such legislation may have on the Company's business, prospects,
operating results and financial condition. The Company expects federal and state
legislators to continue to review and assess alternative health care delivery
and payment systems and possibly adopt legislation affecting fundamental changes
in the health care delivery system. Such laws may contain provisions which may
change the operating environment for our targeted customers including hospitals
and managed care organizations.
Health care industry participants may react to such legislation by curtailing or
deferring expenditures and initiatives, including those relating to our
products. Future legislation could result in modifications to the existing
public and private health care insurance systems that would have a material
adverse effect on the reimbursement policies discussed above.
THE COMPANY COULD BE AFFECTED BY MALPRACTICE CLAIMS.
Providing medical care entails an inherent risk of professional malpractice and
other claims. The Company does not control or direct the practice of medicine by
physicians or health care providers who use the products and does not assume
responsibility for compliance with regulatory and other requirements directly
applicable to physicians. The Company cannot guarantee that claims, suits or
complaints relating to the use of the AutoloGel(TM) System administered by
physicians will not be asserted against the Company in the future.
The production, marketing and sale and use of the AutoloGel(TM) 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.
PROSPECTS FOR THE FUTURE
Cytomedix's success is directly dependents on the success of the AutoloGel(TM)
System, and we believe that AutoloGel(TM) System 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 the AutoloGel(TM) System
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 AutoloGel(TM). 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 and continually educating prospective customers
and are 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 AutoloGel(TM) System provides an economic
benefit. With what we believe to be a strong patent position, we believe we are
positioned to successfully introduce the AutoloGel(TM) System while gaining a
market share position in the capitated care market. Additionally, we believe
that the cost/benefit of the Autologel(TM) System is uniquely suited for
particular, non-Medicare related government programs and facilities such as the
Veterans Administration system of hospitals and through the Indian Health
Services network of facilities. We believe that a substantial patient base
suffering from chronic, non-healing wounds exist in these sectors that are
currently receiving less effective treatments at a substantially higher cost to
the patient and to the taxpayer.
Thereafter, upon the successful completion of a strategy to have the
AutoloGel(TM) System approved by the FDA and subsequently reimbursed through
CMS, 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 and that a
substantial and dominant market position can be established.
23
ITEM 3. CONTROLS AND PROCEDURES.
The Company's CEO, 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 June 30, 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 June 30, 2004.
24
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We have 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
and subsequently renumbered 03 C 1824; (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, we have asserted that the
defendants have infringed upon one or more of our patents. In all of these
actions, we seek unspecified damages and injunctive relief.
On March 24, 2004, the District Court for the Northern District of Illinois in
the Cytomedix v. Little Rock Foot Clinic, P.A., et al., case issued an opinion
in which it affirmed Cytomedix's position regarding the scope of the claim 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 rulings in the
Little Rock Foot Clinic case relating to the Knighton Patent. In his opinion,
Judge James B. Zagel concluded that the claims of 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 defendants in other pending cases, that the clams of
Knighton Patent are limited in scope to platelet-releasate compositions that are
free of other cellular materials. On July 26, 2004, Judge Zagel ruled in favor
of Cytomedix on its motion for summary judgement against the Little Rock Foot
Clinic defendents. The Court specifically held that the Safeblood Graft
procedure for treating wounds and other damaged tissue infringes upon the claims
of the Knighton Patent. The Company considers the rulings in the Little Rock
Foot Clinic case to be significant to its licensing and royalty strategies.
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 asserted
affirmative claims of patent infringement, breach of contract, and unfair
competition. 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. On July 19, 2004, the parties stipulated to voluntary dismissal of the
district court action, without prejudice, and the district court ordered
dismissal of the action without prejudice. The Company's objections to Bennett's
filed proofs of claim were referred back to the Bankruptcy Court for futher
proceedings and remain pending in that court.
On October 23, 2002, Harvest Technologies Corp. initiated an action against us
in the Federal District Court for the District of Massachusetts, Case No.
02-12077. Harvest seeks a declaratory judgment that its activities do not
constitute the infringement of our patent rights, 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. On March 27, 2003, we filed our answer and
counterclaims against Harvest for patent infringement, tortious interference
with prospective business relationships, unfair competition and deceptive trade
practices. We seek 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. No ruling
has yet been issued on the parties' respective cross-motions for summary
judgement.
On May 23, 2003, we initiated an action against Landmark Healthcare, LLC, in the
United States District Court for the Eastern District of Arkansas, Civil Action
No. 4:03CV00387GTE. In this case, we alleged patent infringement, breach of both
a referral agreement and supply agreement, and misappropriation of trade
secrets. We sought damages, declaratory judgment, and injunctive relief. On July
16, 2003, Landmark filed its answer and counterclaim denying our claims and
asserting that we breached a supply contract with Landmark, interfered with
prospective business advantage, and breached an obligation of good faith and
fair dealing in performance. In March, 2004, a settlement was reached regarding
this action that terminated the cause for litigation, and on March 11, 2004 a
"Joint Motion For Dismissal Without Prejudice" was filed. The court entered its
Order of Dismissal on March 23, 2004, dismissing all claims without prejudice.
25
On June 6, 2003, we filed a lawsuit against Safeblood Technologies, Inc., Jim
Limbird, and Charles Worden, Jr. in the United States District Court for the
Eastern District of Arkansas, Civil Action No. 4-03-CV-00422JMM. In this
complaint, we seek damages and injunctive relief for a patent infringement
claim. The defendants filed their answer and counterclaim on June 27, 2003. In
their answer the defendants deny any infringement. Their counterclaim alleges
that we have violated the Lanham Act, have tortiously interfered with
contractual relations and prospective economic advantage and have engaged in
unfair competition. The defendants seek damages and a declaratory judgment.
On April 2, 2004, 21st Century Wound Care and Advanced Therapy, L.L.C., and its
owner, James Gandy, filed an action in the state court of Louisiana, 24th
Judicial District Court, Parish of Jefferson, Case No. 606-022 M, against
Cytomedix and one of our leading licensees of AutoloGel(TM) in Louisiana (CPP
Wound Care LLC, d/b/a Louisiana Wound Care Specialists). In this action, Mr.
Gandy asserted that our centrifugation methodology, which he claims we adopted
during our bankruptcy reorganization starting in 2001, was a trade secret of Mr.
Gandy's that we misappropriated and are wrongfully licensing to third parties.
Gandy sought 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. 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 for
further proceedings. On June 8, 2004, that court entered a judgment in favor of
Cytomedix and CPP Wound Care. The Court entered the judgment against 21st
Century Wound Care and Mr. Gandy "with prejudice." Separately, also on June 8,
2004, the United States District Court for the Northern District of Illinois
entered a consent judgment against 21st Century Wound Care and Advanced Therapy,
L.L.C., and Mr. Gandy in Case No. 03 C 1824, referenced above. In that consent
judgment, 21st Century Wound Care and Mr. Gandy admitted that Cytomedix's
Knighton patent, which covers the use of certain compositions containing
platelet releasates for wound healing purposes, is valid and enforceable. The
Court declared that 21st Century Wound Care and Mr. Gandy had infringed certain
claims of the Knighton Patent and enjoined them, effective immediately and
continuing through expiration of the Knighton patent in November 2009, from
making, using, offering, or selling within the United States autologous cellular
therapies, platelet gel products, or any other processes or products-such as
their "P-Gel" formulation-that infringe the claims of the Knighton Patent. The
Court's injunction is binding on 21st Century Wound Care and Mr. Gandy, and on
those acting in concert or participation with them. The Court retained
jurisdiction to enforce its order of judgment.
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 739 shareholders of record and 18,810,269 shares of the
Company's common stock outstanding as of August 11, 2004. In addition, 1,608,000
shares of common stock 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.
26
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 automatically
converted 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.
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. The 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 Series C convertible preferred 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 common 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.
27
The Company commenced a separate private placement in which the Company 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 consisted 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 had $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 had 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.
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.
ISSUANCE OF NON-REGISTERED SECURITIES IN THE SECOND QUARTER OF 2004.
During the second quarter of 2004, the Company issued 410,101 common shares as a
result of shareholders exercising Class A and Class B warrants, preferred stock
shareholders converting to common stock and placement agents exercising warrants
earned during the private placement completed on March 26, 2004, to receive
common stock.
During this quarter, 175,499 common shares were issued to eleven entities as a
result of the exercise of 222,095 Class A warrants and 7,648 Class B warrants.
The Company received $122,673 in cash proceeds as a result of these exercises.
28
During April and May 2004, 84,814 common shares were issued to four entities
resulting from the conversion of 134,443 Series B convertible preferred shares
and 40,000 Series C convertible preferred shares.
In May 2004, 149,788 common shares were issued to Burnham Hill Holdings and to
an associate in exchange for 270,000 placement agent warrants earned at the
completion of the Series C convertible preferred stock offering in March 2004.
These warrants were exercised on a "cashless" basis.
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.
On June 30, 2004, in accordance with the terms contained in the Amended and
Restated Certificate of Designation of the Relative Rights and Preferences of
Series A Preferred, Series B Preferred and common stock of Cytomedix, Series A
preferred and Series B preferred stock dividends were declared representing
accrued dividends due of $238,979. This amount represents additional issuable
shares of Series A convertible preferred stock of 118,636 shares and Series B
convertible preferred stock of 120,343 shares.
On May 10, 2004, the Company filed with the Securities and Exchange Commission
Form SB-2, "Registration Statement Under the Securities Act of 1933". On July
13, 2004, the registration was declared effective. This process registered the
resale of 25,606,551 common shares encompassing the restricted stock currently
outstanding of 9,273,725 shares and the common stock potentially issuable upon
exchange of Series A Warrants amounting to 665,563 shares and Series B Warrants
amounting to 477,263 shares. Also included in this registration were 6,680,000
common shares potentially issuable pursuant to the private placement of 280
shares of Series C convertible preferred stock plus C-1 and C-2 warrants . Per
the terms of the Series C preferred stock offering, the Company was responsible
for registering the outstanding share total plus reserve of 20%. Finally,
8,510,000 shares were registered which consisted of the potentially issuable
shares supporting other warrants to purchase common stock that were outstanding.
Subsequent to the end of the quarter on June 30, 2004, two events occurred that
resulted in the issuance of additional shares of the Company's common stock.
On July 13, 2004, upon the Company's registration statement becoming effective
and in accordance with the terms contained in the Series C convertible preferred
stock certificate, 50% of the outstanding shares converted automatically to
common stock. In addition to this automatic conversion, some shareholders
converted 100% of their holdings. This resulted in an increase of issued and
issuable common shares of 1,560,500.
In July 2004, the Company issued 501,377 common shares upon the exercise of
622,206 Class A warrants. The Company received $465,760 as a result of these
exercises.
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 fourth quarter of 2004.
ITEM 5. OTHER INFORMATION.
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
The exhibits listed in the accompanying Exhibit Index are filed as part of this
report.
REPORTS ON FORM 8-K
On April 20, 2004, the Company filed and reported on Form 8-K the appointment of
Dr. Kshitij Mohan as the Company's chief executive officer.
On May 7, 2004, the Company filed and reported on Form 8-K the appointment of
Dr. Kshitij Mohan to fill a vacancy on the Company's Board. The Company also
reported the termination of a previous Consulting Agreement between the Company
and Dr. Mohan.
On June 7, 2004, the Company filed and reported on Form 8-K the appointment of
Mr. Mark T. McLoughlin to fill a vacancy on the Company's Board.
On June 29, 2004, the Company filed and reported on Form 8-K the resignation of
Mr. Mark Cline as the Company's President and as a member of its Board.
On July 13, 2004, the Company filed and reported on Form 8-K the appointment of
Mr. Dave Drohan to fill a vacancy on the Company's Board.
29
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/ Kshitij Mohan
Kshitij Mohan, Chief Executive
Officer
Date: August 13, 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/ Kshitij Mohan
Kshitij Mohan, Chief Executive Officer
Date: August 13, 2004
/s/William L. Allender
William L. Allender, Chief Financial Officer
Date: August 13, 2004
/s/Lance Jones
Lance Jones, Controller
Date: August 13, 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.
30
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
Reorganization of Cytomedix, Inc. with All Technical Amendments (Previously
filed on May 10, 2004, on Form 10-QSB for the quarter ended March 31, 2004, File
No. 000-28443).
3.1 Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed
on November 7, 2002, on Form 10-QSB for quarter ended June 30, 2001, File No.
000-28443).
3.2 Restated Bylaws of Cytomedix, Inc. (Previously filed on November 7, 2002, on
Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
4.1 Amended and Restated Certificate of Designation of the Relative Rights and
Preferences of Series A Preferred, Series B Preferred and common stock of
Cytomedix, Inc. (Previously filed on 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 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).
4.8 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).
4.9 Form of Registration Rights Agreement, dated June 4, 2003, between
Cytomedix, Inc. and the investors in the 2003 offering (Previously filed on May
11, 2004, on Form SB-2, File No. 333-115364).
4.10 Form of placement agent warrant dated March 25, 2004, issued to Burnham
Hill Partners or its designees in connection with the 2004 Series C Offering
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.11 Form of Registration Rights Agreement dated March 31, 2004, between
Cytomedix, Inc. and the investors in the 2004 Unit Offering (Previously filed on
May 11, 2004, on Form SB-2, File No. 333-115364).
4.12 Form of Investment Rights Agreement dated March 31, 2004 between Cytomedix,
Inc. and investors in the 2004 Unit Offering (Previously filed on May 11, 2004,
on Form SB-2, File No. 333-115364).
4.13 Form of warrant issued to investors in the 2004 Unit Offering (Previously
filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.14 Form of consulting warrant issued to Burnham Hill Partners or its designees
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.15 Form of warrant issued to FEQ Investments, Inc., dated October 1, 2003
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.16 Form of Registration Rights Agreement between Cytomedix, Inc., and FEQ
Investments (Previously filed on May 11, 2004, on Form SB-2, File No.
333-115364).
4.17 Form of warrant issued to FEQ Investments, Inc., dated April 1, 2004
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.18 Form of warrant issued to BDR Consulting, Inc., dated February 24,
2004(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364) .
4.19 Form of warrant issued to Mr. Kent Smith, dated January 2, 2004 (Previously
filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.20 Form of warrant issued to The Carmen Group, Inc., dated October 1, 2003
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.21 Form of warrant issued to IVC Group, dated October 1, 2003 (Previously
filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.22 Form of Registration Rights Agreement between Cytomedix, Inc. and IVC Group
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.23 Form of warrant issued to Stern & Co., dated October 1, 2003 (Previously
filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.24 Form of Registration Rights Agreement between Cytomedix, Inc. and Stern &
Co. (Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.25 Form of warrant issued to Ms. Nadine Smith, dated April 1, 2003 (Previously
filed on May 11, 2004, on Form SB-2, File No. 333-115364).
4.26 Form of Registration Rights Agreement between Cytomedix, Inc. and Ms.
Nadine Smith, dated April 1, 2003 (Previously filed on May 11, 2004, on Form
SB-2, File No. 333-115364).
4.27 Form of warrant issued to HMA Advisors, dated July 29, 2002 (Previously
filed on May 11, 2004, on Form SB-2, File No. 333-115364).
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 BDR/Cytomedix Consulting Arrangement (Previously filed on December 5, 2002,
on Form 10-QSB for quarter ended September 30, 2001, File No. 000-28443).
10.9 Consulting Agreement between Cytomedix, Inc. and Ms. Nadine C. Smith, dated
April 1, 2003 (Previously filed on May 11, 2004, on Form SB-2, File No.
333-115364).
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
(Previously filed on May 10, 2004, on Form 10-QSB for the quarter ended March
31, 2004).
10.14 Employment Agreement with Kshitij Mohan, Ph.D., dated April 20, 2004
(previously filed on May 7, 2004, on Form 8-K, File No. 00028443).
10.15 Termination Agreement between Cytomedix, Inc., and Kshitij Mohan, dated
April 20, 2004 (previously filed on May 7, 2004, on Form 8-K, File No.
000-28443).
10.16 Amended and Restated Agreement between Cytomedix, Inc. and Burnham Hill
Partners dated March 19, 2004 (Previously filed on May 11, 2004, on Form SB-2,
File No. 333-115364).
10.17 Form of Services Agreement between Cytomedix, Inc. and Stern & Co.
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
10.18 Form of Services Agreement between Cytomedix, Inc. and IVC Group
(Previously filed on May 11, 2004, on Form SB-2, File No. 333-115364).
10.19 Form of Services Agreement between Cytomedix, Inc. and FEQ Investments,
Inc., dated October 1, 2003 (Previously filed on May 11, 2004, on Form SB-2,
File No. 333-115364).
10.20 Confidential Release and Settlement Agreement between Cytomedix, Inc. and
Mr. Kent Smith, dated January 2, 2004 (Previously filed on May 11, 2004, on Form
SB-2, File No. 333-115364).
10.21 Financial Services Agreement between Cytomedix, Inc. and HMA Advisors,
Inc., dated July 29, 2002(Previously filed on May 11, 2004, on Form SB-2, File
No. 333-115364).
10.22 Letter Agreement between Cytomedix, Inc. and The Research Works, Inc.,
dated August 20, 2003 (Previously filed on May 11, 2004, on Form SB-2, File No.
333-115364).
10.23 Form of Selling Agent Agreement between Cytomedix, Inc. and selling agents
in the 2002 Offering (Previously filed on May 11, 2004, on Form SB-2, File No.
333-115364).
10.24 Form of Selling Agent Agreement between Cytomedix, Inc. and selling agents
in the 2003 Offering (Previously filed on May 11, 2004, on Form SB-2, File No.
333-115364).
10.25 Form of Selling Agent Agreement between Cytomedix, Inc. and selling agents
in the 2004 Unit Offering (Previously filed on May 11, 2004, on Form SB-2, File
No. 333-115364).
10.26 Confidential Separation Agreement and Release Agreement between Cytomedix,
Inc., and Mr. Mark E. Cline, dated June 28, 2004 (Previously filed on July 6,
2004, on Form SB-2A, File No. 333-115364).
16.1 Letter from KPMG dated August 22, 2002 (Previously filed on August 26,
2002, on Form 8-K, File No. 000-28443).
20.1 Notice to Shareholders of Cytomedix, Inc. dated October 17, 2001
(Previously filed on November 12, 2002, on Form 10-QSB, File No. 000-28443).
31.1 Certification of Chief Executive Officer of Cytomedix, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of 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.
32.1 Certification of Chief Executive Officer of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
32.2 Certification of Chief Financial Officer of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
32.3 Certification of Controller of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.