UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
416 HUNGERFORD DR., SUITE 330, ROCKVILLE, MD. 20850
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (240) 499-2680
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 November 8, 2004: 19,533,173 shares of common stock, $.0001 par
value (plus 1,300,500 shares of common stock issuable)
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
CYTOMEDIX, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited) 3
Condensed Statements of Operations (Unaudited) 4
Condensed Statements of Cash Flows (Unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Plan of Operations 14
Overview of Business 14
Results of Operations 17
Liquidity and Capital Resources as of September 30, 2004 22
Risk Factors 23
Prospects for the Future 26
Item 3. Controls and Procedures 26
PART II
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Forms 8-K 32
Signatures 32
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
CONDENSED BALANCE SHEETS
September 30, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash $ 3,196,766 $ 811,385
Accounts receivable 233,200 235,741
Prepaid expenses, other current assets and inventory 324,727 185,296
------------ ------------
Total Current Assets 3,754,693 1,232,422
Cash - restricted 21,255 20,775
Property and equipment, net 194,417 235,449
Intangibles 4,137,412 4,232,149
Other assets -- 20,125
------------ ------------
Total Assets $ 8,107,777 $ 5,740,920
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 778,664 $ 629,806
Deferred revenue 81,448 81,448
Note payable -- 13,066
Dividend payable on Series A, Series B, and Series C preferred stock 127,832 120,735
------------ ------------
Total Current Liabilities 987,944 845,055
------------ ------------
Long-Term Liabilities
Deferred revenue 376,697 437,783
------------ ------------
Total long-term liabilities 376,697 437,783
------------ ------------
Total Liabilities 1,364,641 1,282,838
------------ ------------
Commitment and Contingencies -- --
Stockholders' Equity
Series A Convertible preferred stock; $.0001 par value; $1.00 liquidation
value, authorized 5,000,000 shares; at 2004 issued - 1,593,783 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 - 1,387,042 shares; at 2003
issued - 1,402,650 shares, issuable - 112,212 shares 138 151
Series C Convertible preferred stock; $.0001 par value, $10,000 liquidation
value, authorized 1,000 shares; at June 30, 2004 issued - 98 shares 98 --
Common stock; $.0001 par value; authorized - 40,000,000 shares; at 2004
issued - 19,189,133 shares, issuable - 1,387,500 shares; at 2003 issued -
13,211,453 shares 2,056 1,323
Additional paid-in capital 24,722,232 12,378,878
Deferred compensation (980,658) (1,438,070)
Subscriptions receivable (1,157,907) --
Deficit accumulated in the development stage (15,842,983) (6,484,347)
------------ ------------
Total Stockholders' Equity 6,743,136 4,458,082
------------ ------------
$ 8,107,777 $ 5,740,920
============ ============
The accompanying notes are an integral part of these
condensed financial statements.
3
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
July 1, 2002
Three Months Ended Nine Months Ended (inception)
September 30, September 30, through
----------------------------- ----------------------------- September 30,
2004 2003 2004 2003 2004
------------ ------------ ------------ ------------ -------------
Revenues
Sales $ 78,584 $ 104,892 $ 301,932 $ 229,407 $ 988,763
Royalties 161,335 166,431 505,552 547,596 1,571,827
------------ ------------ ------------ ------------ ------------
Total Revenue 239,919 271,323 807,484 777,003 2,560,590
------------ ------------ ------------ ------------ ------------
Cost of revenue
Cost of sales 22,505 43,025 93,231 115,624 314,843
Cost of royalties 130,129 134,834 410,276 448,233 1,274,878
------------ ------------ ------------ ------------ ------------
Total cost of revenue 152,634 177,859 503,507 563,857 1,589,721
------------ ------------ ------------ ------------ ------------
Gross Profit 87,285 93,464 303,977 213,146 970,869
------------ ------------ ------------ ------------ ------------
Operating Expenses
Salaries and wages 398,834 239,098 1,379,227 696,556 2,730,524
Consulting expense 446,006 332,899 2,054,277 674,474 3,415,149
Consulting expense - related party 206,804 65,971 680,472 202,635 1,402,755
Professional fees 202,783 157,595 569,732 569,539 1,924,030
Royalty expense - related party 18,750 18,750 56,250 57,926 170,426
Clinical trial related expense 350,406 37,764 953,486 131,342 1,160,851
General and administrative expenses 322,714 234,440 951,665 657,052 2,658,436
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,946,297 1,086,517 6,645,109 2,989,524 13,462,171
Loss from Operations (1,859,012) (993,053) (6,341,132) (2,776,378) (12,491,302)
------------ ------------ ------------ ------------ ------------
Other (Income) Expense
Interest expense 115 491 159 654 23,936
Interest and other income (16,272) (8,330) (30,457) (12,682) (62,552)
------------ ------------ ------------ ------------ ------------
Total other (income) expense, net (16,157) (7,839) (30,298) (12,028) (38,616)
------------ ------------ ------------ ------------ ------------
Net loss from continuing operations (1,842,855) (985,214) (6,310,834) (2,764,350) (12,452,686)
------------ ------------ ------------ ------------ ------------
Preferred dividend on Series A and B
preferred stock 63,656 65,674 181,901 176,428 524,398
Preferred dividend on Series C
preferred stock 22,003 -- 2,865,899 -- 2,865,899
------------ ------------ ------------ ------------ ------------
Net loss to common stockholders $ (1,928,514) $ (1,050,888) $ (9,358,634) $ (2,940,778) $(15,842,983)
============ ============ ============ ============ ============
Basic and diluted loss per common share $ (0.10) $ (0.09) $ (0.54) $ (0.25) $ (0.98)
============ ============ ============ ============ ============
Weighted average shares outstanding 20,174,455 12,214,767 17,179,508 11,575,484 16,202,441
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
condensed financial statements.
4
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
July 1, 2002
Three Months Ended Nine Months Ended (inception)
September 30, September 30, through
----------------------------- ----------------------------- September 30,
2004 2003 2004 2003 2004
------------ ------------ ------------ ------------ ------------
Cash Flows from Operating Activities
Net loss $ (1,842,855) $ (985,214) $ (6,310,834) $ (2,764,350) $(12,452,686)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 54,469 66,650 162,259 168,448 461,154
Amortization - deferred consulting fees 517,249 231,739 2,659,990 557,576 3,690,358
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)
Changes in assets (39,915) (89,067) (161,526) 39,637 (217,042)
Changes in liabilities (45,689) (54,938) 87,771 84,592 (300,499)
------------ ------------ ------------ ------------ ------------
Cash flows used in operating activities (1,356,741) (830,830) (3,557,685) (1,914,097) (8,224,444)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities
Purchase of equipment (22,345) (11,653) (31,145) (12,903) (348,918)
Increase in restricted cash (162) -- (480) -- (21,255)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (22,507) (11,653) (31,625) (12,903) (370,173)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from sale of common and preferred
stock, net 451,335 1,473,158 5,292,150 2,666,475 11,132,762
Repayment of note payable -- (32,691) (13,066) (66,066) (140,841)
Proceeds from warrant conversions 465,748 -- 711,514 -- 711,514
Interest on subscriptions receivable (7,102) -- (15,907) -- (15,907)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 909,981 1,440,467 5,974,691 2,600,409 11,687,528
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash (469,267) 597,984 2,385,381 673,409 3,092,911
Cash, beginning of period 3,666,033 1,040,723 811,385 965,298 103,855
------------ ------------ ------------ ------------ ------------
Cash, end of period $ 3,196,766 $ 1,638,707 $ 3,196,766 $ 1,638,707 $ 3,196,766
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
condensed financial statements.
5
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Cytomedix. Inc. (the "Company" and "Cytomedix"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments that are, in the opinion of
management, necessary to fairly present such information. All such adjustments
are of a normal recurring nature. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including a description of
significant accounting policies normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to such rules
and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2003 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2004.
Cytomedix is a development stage enterprise, and accordingly, certain additional
financial information is required to be included in the condensed financial
statements from the adoption of fresh-start accounting to the date of this
balance sheet.
Basic and diluted net loss per share was calculated based upon the net loss
available to common shareholders divided by the weighted average number of
shares of common stock outstanding during the period. Basic and diluted net
losses per common share are presented in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share ("SFAS 128"), for all
periods presented. In accordance with SFAS 128, basic and diluted net losses per
common share have been computed using the weighted-average number of shares of
common stock outstanding during the period. Shares associated with stock
options, stock warrants, and convertible preferred stock are not included
because the inclusion would be anti-dilutive (i.e., reduce the net loss per
share). The total numbers of such shares excluded from diluted net loss per
common share are 16,457,769 and 5,916,188 at September 30, 2004 and 2003,
respectively.
The Company has continued to utilize Accounting Principles Board ("APB") 25
"Accounting for Stock Issued to Employees" in accounting for its stock-based
compensation to employees. Had compensation expense for the nine months ending
September 30, 2004 and 2003 and for the quarters ended September 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:
6
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss to common stockholders, as reported $(1,928,514) $(1,050,888) $(9,358,634) $(2,940,778)
Add: Stock-based employee compensation
expense included in reported net loss
determined under APB No. 25, net of
related tax effects 93,260 -- 165,204 --
Deduct: Total stock-based employee
compensation expense determined
under fair-value-based method for all
awards, net of related tax effects 314,117 -- 478,568 70,832
----------- ----------- ----------- -----------
Pro forma net loss $(2,149,371) $(1,050,888) $(9,671,998) $(3,011,610)
----------- ----------- ----------- -----------
Earnings per share:
Basic and diluted - as reported $ (0.10) $ (0.09) $ (0.54) $ (0.25)
Basic and diluted - pro forma $ (0.11) $ (0.09) $ (0.56) $ (0.26)
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.
Nine Months Ended
September 30,
-----------------------------
2004 2003
--------- ----------
Risk free rate 3.93% 3.96%
Expected years until exercise 9.6 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 Rockville, Maryland.
7
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
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 September 30, 2004, $1,157,907 of subscriptions receivable remains
outstanding. Included in this amount is $475,000 plus interest of $7,907, which
was in arrears on September 30, 2004. Subsequent to September 30, 2004, $175,000
plus interest of $6,252 has been received.
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.
8
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed 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 the holder of the warrant $.01 per called warrant and
issue a new warrant representing the number of warrants not subject to the call.
The Company commenced a separate private placement in which the Company has
offered for sale 4,500 units in return for an anticipated total of $4,500,000,
consisting of cash and negotiable subscription promissory notes receivable. Each
unit consists of 1,000 shares of common stock and a five-year warrant to
purchase an additional 1,000 shares of common stock at $1.50 per share. The
Company has received $3,358,000 in cash related to this transaction as of
September 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 professional and filing fees in the amount of $95,233
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 of the 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.
9
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY - (Continued)
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 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.
The following stock activity took place in the second quarter of 2004:
During the second 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 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 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 118,312 shares and Series B convertible, preferred stock of 122,392
shares.
During the third quarter of 2004, the following stock activity took place:
During July, the Company issued 500,167 common shares as a result of warrant
holders exercising 619,393 class A warrants and 1,875 class B warrants. The
Company received $465,761 as a result of these exercises. An additional 90,058
class A warrants expired on July 29, 2004.
10
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 3 - CAPITAL STOCK ACTIVITY - (Continued)
On July 13, 2004, the effective date for the registration of certain securities,
138 shares of series C convertible stock automatically converted to 1,380,000
common shares in accordance with the terms of the series C convertible stock
offering which required conversion of one half of the outstanding shares of
series C convertible preferred to common stock upon the effective date of the
registration statement. During the remainder of the quarter ending September 30,
2004, an additional 403,500 shares of common stock were issued from conversions
of additional shares of Series C Convertible Preferred. As of September 30,
2004, an aggregate 1,783,500 shares of common stock have been issued from
conversions of Series C Convertible Preferred.
In July, 43,922 common shares were issued to a shareholder upon conversion of
71,847 shares of Series B Convertible Preferred shares resulting in an
overissuance of 5,332 common shares. This exercise was executed on a "cashless"
basis. The Company is currently determining the options available to recover the
remaining overissuance of 5,332 shares.
On July 26, 2004, a placement agent from the Series C Convertible Preferred
offering exercised all of its 22,397 warrants earned as commission for placement
agent activities for 10,290 shares of common stock. This transaction was
executed on a "cashless" basis.
On August 12, 2004, in accordance with the letter agreement between Maier and
Company and the Company, 12,000 warrants were issued to Maier and Company with
an exercise price of $1.24, which represented the closing price of the Company's
common stock on the date of the award.
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". In
July, the Company filed an amended form SB-2 and on July 13, 2004, the
registration was accepted and made effective by the SEC. This process registered
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 2,800,000 shares of
Series C convertible, preferred stock plus C-1 and C-2 warrants totaling an
additional 2,800,000 shares. Per the agreement the company was responsible for
registering the outstanding share total plus 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 was outstanding.
NOTE 4 - LONG-TERM INCENTIVE PLAN
In accordance with the Company's 2002 Long-Term Incentive Plan, the Company's
Board of Directors (the "Board") granted 210,000 ten-year options to purchase
common stock that vested immediately and had an exercise price on the date of
grant of $1.50 per share to the following individuals. On January 10, 2004, the
Company issued 10,000 options to Dr. Charles Baxter in accordance with an
agreement entered into by the Company in which Dr. Baxter would become Chairman
of the Company's Medical Advisory Board. On March 23, 2004, the Company issued
200,000 options to Mr. David Crews and to Mr. Robert Burkett, 100,000 options
each, as consideration for their services as Board members during 2003.
On June 29, 2004, as part of his termination 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 the same
vesting terms as the original grant.
On August 18, 2004, the Company awarded 60,000 ten-year stock options to Mark T.
McLoughlin and David F. Drohan, 30,000 each, as consideration for their services
as Board members. The options vested immediately and have an exercise price of
$1.50.
11
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
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 nine months ending September
30, 2004, the Company recorded expenses of $303,310 pertaining to this agreement
of which, $96,000 was paid in cash with the remaining $207,310 being non-cash
charges relating to the value of options granted to BDR, valued in accordance
with SFAS 123. For the three months ending September 30, 2004, the company
recorded expenses of $76,987 representing cash payments of $42,000 with the
remaining $34,987 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 nine
months ending September 30, 2004, the Company recorded expenses of $377,162
pertaining to this agreement of which, $137,104 was paid in cash with the
remaining $239,978 being non-cash charges relating to the value of options
granted to The Carmen Group, Inc., in accordance with SFAS 123. For the three
months ending September 30, 2004, the company recorded expenses of $129,816
representing cash payments of $46,304 with the remaining $83,512 being non-cash
charges.
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 Series A Preferred shares held if the Company has revenues exceeding
$10,000,000 in four consecutive quarters.
We outsource the manufacturing of AutoloGel(TM) system kits to Tri-State
Hospital Supply Corporation. Under a purchase agreement dated August 1, 2002,
Cytomedix agreed to purchase kits in pre-established usage levels. Should the
Company terminate the 36-month agreement, it is required to purchase unique
components and finished goods inventory up to a maximum amount of approximately
$50,000.
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.
12
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 7 - RECLASSIFICATION
For comparability purposes, certain figures for the 2003 and cumulative periods
have been reclassified where appropriate to conform with the financial statement
presentation used in 2004. These reclassifications had no effect on the reported
net loss.
NOTE 8 - SUBSEQUENT EVENTS
On October 19, 2004, the Company elected Robert Burkett, David P. Crews, David
F. Drohan, Mark T. McLoughlin and Kshitij Mohan as directors to hold office
until the next annual meeting of shareholders and until their successors are
duly elected. The shareholders approved an amendment to the Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock, par value $.0001, from 40,000,000 shares to 65,000,000 shares and
to increase the total number of shares allocated to the Company's Long-Term
Incentive Plan from 2,336,523 to 4,000,000 shares.
On November 1, 2004, the Company approved James S. Benson to its Board of
Directors, filling a Board vacancy.
13
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 operations 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 operations
included in our Forms 10-QSB for the quarters ended March 31, 2004, and June 30,
2004.
OVERVIEW OF BUSINESS
The Company: Cytomedix is a biotechnology company incorporated in Delaware,
which currently employs eight 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 many of 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, or, at our discretion,
candidates for royalty and licensing arrangements.
During 2003, the Company developed and began a strategic plan to address both
the securing of a national reimbursement code and FDA approval for the
AutoloGel(TM) System. Currently, each of the components utilized in the
AutoloGel(TM) System have received a 510K or other clearance or exemption from
the FDA. Also, the AutoloGel(TM) System is an "autologous" therapy performed
under the practice of a licensed physician and can be performed without FDA
approval under the provisions commonly referred to as the "Physicians Practice
of Medicine". However, the current business model nevertheless involves
obtaining a national Medicare reimbursement code for the AutoloGel(TM) System as
a first step to broad, third-party reimbursement. The process to obtain a
reimbursement code from the Center for Medicare and Medicaid Services ("CMS"),
while independent of the FDA approval process, is subject to similar procedural
and independent clinical testing as required by the FDA in order to establish
product safety and efficacy. Additionally, many clinicians are reluctant to
prescribe products that have not been approved by the FDA, notwithstanding the
provisions of the "Physicians Practice of Medicine". Further, without FDA
approval, the Company cannot make any claims when marketing the AutoloGel(TM)
System regarding its ability to treat or heal wounds which the Company believes
is a significant barrier to broad clinical and market acceptance of the
Company's product.
14
Clinical Trial: During 2003, the Company elected to submit both a 510K for its
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 cannot predict whether its efforts will be successful.
Considerable funds were expended in 2003 and 2004, and the Company has achieved
two milestones in its pursuit of FDA approval to date. In the second quarter of
2003, the Company received 510K clearance from the FDA for the AutoloGel(TM)
System's centrifuge. On March 5, 2004, the Company's IDE application was fully
approved by the FDA, which allowed the Company to launch a prospective,
randomized, blinded and controlled clinical trial with human subjects being
treated with the AutoloGel(TM) System for purposes of demonstrating its safety
and effectiveness for the treatment of non-healing diabetic foot ulcers. This is
the first of several specific clinical indications for which regulatory
clearances will be sought in the future. Patients are being enrolled in this FDA
trial with an anticipated completion horizon of the patient treatment phase of
the trials during the middle of 2005.
The trial is being conducted in up to 15 centers on 72 patients and 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 trial
protocol. Such exclusion criteria include, for example, patients with active
infection in their wound, inadequate perfusion, or wounds so small they 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 this traditional treatment are not included in the study. This
insures the researchers, 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 arms of the trial.
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. As such, it is not known which treatment is being applied to the
patient 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 twelve 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 twelve 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.
While it is difficult to predict the completion of any clinical trial, the
Company expects that the trial should be completed during the latter half of
2005. Once the treatment phase of the trial is completed (currently expected by
mid-2005) and the data unblinded (i.e. disclosure of patients in the treatment
arm versus the control arm of the study), the Company will have more precise
estimates of healing rates and other information that will be useful in its
submissions to the FDA and for decisions on reimbursements for patients covered
by Medicare, Medicaid and commercial insurance companies.
The Company has budgeted $2,800,000 for completion of the clinical trial and has
spent approximately $950,000 through September 30, 2004 against this budgeted
amount. While these trials are at an early stage, the Company believes this
budgeted amount is adequate for completion. However, a number of unforeseen
events and situations could occur that could materially increase the costs,
delay the trials, affect the quality or yield unanticipated results.
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
AutoloGel(TM) is regulated under the Medical Device Amendments of the Food, Drug
and Cosmetic Act, the Center for Biological Evaluation and Research ("CBER") has
jurisdiction for reviewing AutoloGel(TM). FDA assigned CBER as the primary
center under which the clinical trial is being conducted; CBER also reviewed and
approved the Investigational Device Exemption (IDE). In parallel, we would also
be making the necessary submissions to the Center for Medicare and Medical
Services ("CMS") and any other public or private professional groups for
evaluation of the data in connection with the granting of the reimbursement
codes and further strengthening the general clinical acceptance of this therapy.
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) System. Such studies are performed primarily in the drug industry
but now are increasingly used 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, we believe that the AutoloGel(TM) System
can then be positioned as an approved alternative treatment to capture a
significant portion of the estimated five million plus chronic wounds that are
treated each year in the United States. Obtaining a coverage decision from CMS
is not a routine and predictable process. There is no guarantee that the Company
will be able to obtain this decision at all or if able to do so, will obtain it
in a timely manner
15
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 the "Knighton Patent", the Company has
initiated litigation against several strategic targets believed to be infringing
or inducing infringement of this patent. If successful, we believe that this
course of action would position the Company to enforce our rights against
companies with substantial revenue that could become subject to royalties and
damages. The Company's patent enforcement strategy is being conducted on a full
contingency basis by the law firms Fitch, Even, Tabin & Flannery and Robert F.
Coleman and Associates, both based in Chicago, Illinois, and Fish & Richardson,
based in Boston, Massachusetts. On March 26, 2004, the District Court for the
Northern District of Illinois ruled favorably regarding claims construction in
Cytomedix, Inc. v. The Little Rock Foot Clinic. The court affirmed Cytomedix's
position regarding the scope of the claims in U.S. Patent No. 5,165,938 (the
"Knighton Patent"), which relates to the use of platelet-derived therapies for
treating wounds and other damaged tissue. In his opinion, Judge James B. Zagel
concluded that the claims of the Knighton Patent should be broadly construed to
cover a treating composition that contains all of the components released by
platelets during the platelet release reaction and may have other components. In
so doing, the court rejected the defendant's assertion that the claims of the
Knighton Patent are limited in scope to platelet-releasate compositions that are
free of certain other cellular materials. The Company considers this ruling
significant and as a cornerstone of its licensing and royalty strategy.
In the second and third quarters of 2004 and to date, there were three
additional court rulings that supported the Company's 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 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 procedure, literally infringes
Cytomedix's U.S. Patent No. 5,165,938 (the 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 procedure did not infringe. On September 9, 2004, the
Company received an additional favorable ruling from the U.S. District Court for
Massachusetts which entered a summary judgment against Harvest Technologies
finding that Harvest's SmartPreP(TM) System literally infringes the Company's
Knighton Patent. The court also denied Harvest's summary judgment motion seeking
a declaration that the SmartPreP(TM) System does not infringe the Knighton
Patent and denied Harvest's motion for summary judgment of invalidity. A trial
on invalidity and other issues is expected to occur in the first half of 2005.
The Company intends to press forward aggressively in other instances of
infringement with aggressive legal and business actions to defend its
intellectual property and, where possible, arrive at equitable settlements with
known and suspected infringers. Given the number of infringing companies, their
size, and the resources available to them, the outcome of the Company's efforts
is uncertain notwithstanding the Company's past successes in its legal
proceedings against infringers.
Sales and Marketing: In the past, the Company marketed the AutoloGel(TM) System
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 currently is represented in 13 states and is
serviced by 13 representatives. The Company plans to continue to expand this
representation and coverage to enable the Company to position itself for a major
sales and distribution effort after it obtains FDA approval and subsequent
reimbursement for healing specific types of chronic wounds. 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 issues of diabetes, chronic wounds and amputations, and the
Company is actively exploring and establishing programs in those areas.
The Company is also attempting to identify specific entities that encompass
certain defined attributes for licensing agreements. In October 2004, the
Company entered into a licensing agreement with Health Systems, Incorporated for
the use of the Company's key patents relating to its AutoloGel(TM). Based in
Sikestown, Missouri, Health Systems, Incorporated oversees a sizable network of
nursing care facilities in the midwest region of the United States.
16
RESULTS OF OPERATION
We are a development stage company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7 and have had only limited operations through
September 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 continue 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 nine
months ending September 30, 2004, the Company incurred legal fees of $105,798
relating to the defense of and the current litigation associated with our
patents. Consulting, legal and other expenses of $953,486 were expended on
activities relating to FDA matters associated with our clinical trials.
Additionally $2,734,749 (of which $2,122,311 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 $680,472 (of which $447,368 was
non-cash equity-based compensation expense) paid to the related parties BDR
Consulting, Inc. and The Carmen Group.
During the nine months and three months ending September 30, 2004, the Company
recorded total non-cash equity-based compensation expenses of $2,659,990 and
$517,249 respectively. During the nine months and three months ending September
30, 2003, the Company recorded non-cash equity-based compensation expenses of
$551,337 and $225,500 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
nine months ended September 30, 2004 totals $5,870,049 or 62.72% of the
$9,358,634 in 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss to common
Stockholders as stated $(1,928,524) $(1,050,888) $(9,358,634) $(2,940,778)
Adjustments to Reconcile net loss to common stockholders
to EBITDA:
Preferred Dividends accrued 85,659 65,674 247,800 176,428
Series C Preferred stock dividend attributable to
below market beneficial conversion features -- -- 2,800,000 --
Depreciation and amortization of patents 54,469 66,650 162,259 168,448
Amortization of Research Works Report (1) 10,761 6,239 44,761 6,239
Amortization - Deferred Consulting Fees (2) 413,228 225,500 2,129,997 551,337
Amortization of the value of stock options
recorded as compensation (3) 93,260 -- 485,232 --
----------- ----------- ----------- -----------
EBITDA $(1,271,147) $ (686,825) $(3,488,585) $(2,038,326)
=========== =========== =========== ===========
(1) Consists of the amortization of common 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 common 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.
17
COMPARATIVE RESULTS OF OPERATION FOR THE NINE MONTHS ENDING
SEPTEMBER 30, 2004 AND 2003
For the nine months ending September 30, 2004, the Company had revenue of
$807,484 as compared to revenue of $777,003 for the nine months ending September
30, 2003; an increase of $30,481 or 3.92%. Revenues are generated from two
sources: the sale of disposable kits and reagents and royalties received from
licensing activities. Comparing the nine months in 2004 to 2003, revenues
increased in 2004 by $72,525 or 31.61%, from the sale of kits and reagents
($301,932 as compared to $229,407). This increase is primarily attributable to
the increased diversification of our marketing program during the nine month
period. During 2003, the Company's business had focused on two large long-term
care providers whose activity had declined significantly and which had no
commercial insurance business. Revenues from royalties and licensing activities
decreased in the first nine months of 2004 by $42,044 or 7.67%, ($505,552 as
compared to $547,596). This decrease is substantially attributable to decreased
revenues from the DePuy licensing arrangement.
Gross profit for the nine months ending September 30, 2004 was $303,907 or
37.64% of revenue as compared to gross profit of $213,146 or 27.43% of revenue
for the comparable period in 2003. The gross profit from the sale of disposable
kits and reagents increased 39.38% from a profit margin of 49.59% earned in 2003
to 69.12% in 2004. This increase is attributable to the commencement of an
aggressive sales and marketing campaign during the first six months of 2003
resulting in increased costs that generated limited revenue. In 2004, the
Company has continued to aggressively market its products but the increased
margins recognized in the commercial insurance market has substantially
mitigated a large percentage of this cost. 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 3.85%
from a profit margin of 18.14% in 2003 to 18.85% in 2004. This increase is
primarily attributable to 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. This deposit is classified
as deferred revenue on the balance sheet and as of September 30, 2004, $81,448
is classified as a current liability and $376,697 is classified as a long-term
liability representing cash received in previous periods but unearned. The
current royalties received quarterly reflect a gross profit of 7.7%.
Operating Expenses for the nine months ending September 30, 2004 were $6,645,109
(with non-cash equity-based compensation expenses of $2,659,990) as compared to
$2,989,524 (with non-cash equity-based compensation expenses of $557,576). This
results in a net increase, excluding non-cash equity-based compensation expenses
of $1,553,171 or 63.87%.
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 nine months ending
September 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
NINE MONTHS ENDING SEPTEMBER 30, 2004
NON-GAAP
OPERATING EXPENSES
ACCOUNT GAAP EQUITY-BASED WITHOUT EQUITY-
AS REPORTED COMPENSATION BASED COMPENSATION
- ------------------------------------------------------------------------------------------
Salaries and Wages $ 1,379,227 ($485,232) $ 893,995
Consulting 2,054,277 (1,674,943) 379,334
Related Party Consulting 680,472 (447,368) 233,104
Professional 569,732 (7,686) 562,046
Royalty Expense-Related Party 56,250 -- 56,250
Clinical Trials 953,486 -- 953,486
General and Administrative 951,665 (44,761)(1) 906,904
----------- ----------- -----------
Total Operating Expense $ 6,645,109 ($2,659,990) $ 3,985,119
(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:
Excluding the equity-based compensation recorded, salaries and wages expense for
the nine months ending September 30, 2004 was $893,995 as compared to $696,556
for the comparable period in 2003, an increase of $197,439 or 28.34%. $162,916
of this increase is attributable to the net addition of two full-time employees
and one part-time employee during this period. $9,624 is attributable to
severance payments made to terminated employees in September 2004. The remaining
$24,899 is 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, 2004. During September 2004, the Company terminated three
employees whose salaries and wages totaled $124,318 (plus benefits) during the
nine months ending September 30, 2004.
CONSULTING AND RELATED PARTY CONSULTING:
Consulting and related party consulting expense for the nine months ending
September 30, 2004, amounted to $2,734,749 of which $2,122,311 was non-cash
equity-based compensation, a net cash expense of $612,438. For the comparable
period ending in 2003, this expense was $877,109 of which $551,337 was non-cash
equity-based compensation, a net cash expense of $325,772 and a net cash
increase of $286,666 between years. The change in the expense recorded between
years is substantially attributable to the terms upon which the Company is
retaining consulting services. 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 operations. This includes strategic
planning ($924,482 gross expense, $93,746 net after deducting equity-based
compensation attributable to Nadine Smith), financing related support ($963,593
gross expense, $120,712 net after deducting equity-based compensation
attributable to consultants), governmental/support and lobbying ($377,162 gross
expense, $137,104 net after deducting equity-based compensation relating to a
related party affiliation) and on-going managerial support provided by BDR
Consulting, Inc. ($303,310 gross expense, $96,000 net after deducting
equity-based compensation relating to a related party). For the comparable
period in 2003, the Company incurred gross expenses of $877,109, with a net
expense of 325,772 after deducting equity-based compensation of $551,337
relating to financial related support, strategic planning and the on-going
managerial support provided by BDR Consulting, Inc. For the nine months period
ending September 30, 2003, the Company incurred $38,332 in governmental/support
and lobbying representing a net cash increase of $98,772 between years and
$79,645 in strategic planning representing a net cash increase of $14,101
attributable to Nadine Smith. Additionally, during 2004, the Company incurred an
additional $109,649 in financing related support and $22,535 in public relations
support when compared to the nine month period in 2003.
Effective on September 30, 2004, two contractual arrangements expired that
accounted for $488,592 in gross expense and $164,104 in net cash expenditures
for the nine months ending September 30, 2004. This includes contracts for
governmental support and lobbying and financing related support.
PROFESSIONAL FEES:
Professional fees which substantially consist of legal and accounting services
for the nine months ending September 30, 2004 amounted to $569,732 of which
$7,686 was non-cash equity-based compensation relating to stock options issued
to the Chairman of the Medical Advisory Board, a net expense of $562,046 as
compared to $569,539 for the comparable period in 2003 which is a decline of
$7,493 or 1.31%. The decrease between years is primarily attributable to a
decline in legal expenses of $36,572 offset by an increase in accounting
services of $4,738. During the first nine 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 $383,852 with $105,797 attributable to patent
litigation, $39,189 attributable to the FDA and clinical trials and the
remaining $238,866 relating to general securities and other matters including
stock issuance, registration and conversion activities plus general corporate
governance activities. The decrease between periods is substantially
attributable to the contingency arrangements negotiated during mid-2003 for the
aggressive litigation of our patent rights. Additionally, in 2004 the Company
incurred legal expenses associated with the private placements and the
subsequent resale registration of our common stock of $74,356 which was recorded
to additional paid in capital and netted against the private placement 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 preparation and filing of the resale registration statement with the
Securities and Exchange Commission during the first two quarters of 2004.
Additionally, $6,740 was recorded to additional paid in capital and netted
against the private placement proceeds as a cost of the offering for services
rendered in connection with the registration statement filed in July 2004.
19
CLINICAL TRIAL RELATED EXPENSE:
For the nine months ending September 30, 2004, the Company incurred expenses of
$953,486 relating to the design, coordination and third-party administration of
our current FDA clinical trials as compared to $131,342 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 clinical trial
protocol.
GENERAL AND ADMINISTRATIVE:
For the nine months ending September 30, 2004, the Company incurred general and
administrative expenses of $951,665 as compared to $657,052 for the comparable
period of 2003, an increase of $294,613 or 44.83%. This is substantially
attributable to the Company's increased business activity and the relocation of
the Company's principal executive offices. Comparing periods between 2004 and
2003, the Company incurred increased travel expense of $91,680 with $17,346
attributable to temporary living expenses incurred due to the relocation; an
increase of $23,649 due to increased insurance costs; an increase in office
expense and supplies of $24,136 with $11,942 attributable to the costs of
relocating offices; an increase of sales and promotional material of $14,267;
and amortization charges of $38,522 attributable to the amortization of the
Research Works Agreement. Additionally, during 2003, the Company made
adjustments to several accounts relating to contingency items anticipated during
2002 that never materialized and were accordingly reversed.
OTHER:
Related party royalty expenses of $56,250 and $57,926 were paid to Mr. Charles
E. Worden for the periods covering the nine months ending September 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 three months ending March 31, 2004.
$2,800,000 of this amount relates to compliance with certain accounting
guidelines requiring the recordation of the impact of issuing securities
convertible at prices less than the Company's stock price. 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 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
SEPTEMBER 30, 2004 AND 2003
For the three months ending September 30, 2004, the Company had revenue of
$239,919 as compared to revenue of $271,323 for the three months ending
September 30, 2003, a decrease of $31,403 or 11.57%. Revenues are generated from
two sources: the sale of disposable kits and reagents and royalties received
from licensing activities. Comparing the three months in 2004 to 2003, revenues
decreased in 2004 by $26,308 or 25.08% from the sale of kits and reagents
($78,584 as compared to $104,892). This decrease is primarily attributable to
three factors. First, revenues from two large long-term care providers decreased
$33,523 or 58.46% as compared to the comparable period in 2003. Throughout 2004,
the Company has experienced a decline in revenues from this source. Secondly,
the commercial insurance revenues decreased significantly due to an increased
percentage of insurance company denials. Although the Company has been able to
increase revenues in the state Medicaid programs to minimize the dependence on
the commercial insurance industry, revenues from state Medicaid programs only
increased $10,635 during this period. The Company has undertaken aggressive
actions which include personnel changes and retaining the services of a
professional reimbursement specialist to address this issue. Thirdly, revenues
from royalties and licensing activities decreased in the three months ending
September 30, 2004, $5,096 or 3.06%, ($161,335 as compared to $166,431). This
decrease is substantially attributable to decreased revenues from the DePuy
licensing arrangement.
In September 2003, the Company received its first order of $24,000 from a
governmental-funded entity to conduct a preliminary healthcare initiative. This
educational initiative reflected positive outcomes and in July 2004, the Company
signed a formal agreement to expand this initiative. While no revenue from this
source was generated for the three months ending September 30, 2004, $60,000 in
revenue was received in early October 2004.
Gross profit for the three months ending September 30, 2004, was $87,285 or
36.38% of revenue as compared to gross profit of $93,464 or 34.44% of revenue
for the comparable period in 2003. The gross profit from the sale of disposable
kits and reagents increased 20.99% from a profit margin of 58.98% earned in 2003
to 71.36% in 2004. In 2004, the Company has continued to aggressively market its
products and the increased margins recognized in the state Medicaid programs
have contributed to the increased margin percentage. Additionally, the decline
in business from two large long term care providers whose pricing is below
normal has also contributed to this increase in margin. While revenues decreased
from royalties received from licensing activities, the gross profit margins
increased 1.89% from a profit margin of 18.98% in 2003 to 19.34% 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%.
20
Operating Expenses for the three months ending September 30, 2004, were
$1,946,297 (with non-cash equity-based compensation expenses of $517,249) as
compared to $1,086,517 (with non-cash equity-based compensation expenses of
$231,739). This results in a net increase, excluding non-cash equity-based
compensation expenses of $574,270 or 67.18%.
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
September 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 SEPTEMBER 30, 2004
NON-GAAP
OPERATING EXPENSES
ACCOUNT GAAP EQUITY BASED WITHOUT EQUITY
AS REPORTED COMPENSATION BASED COMPENSATION
- ------------------------------------------------------------------------------------------
Salaries and Wages $ 398,834 ($ 93,260) $ 305,574
Consulting 446,006 ( 292,117) 153,889
Related Party Consulting 206,804 ( 118,499) 88,305
Professional 202,783 ( 2,562) 200,221
Royalty Expense-Related Party 18,750 -- 18,750
Clinical Trials 350,406 -- 350,406
General and Administrative 322,714 ( 10,811)(1) 311,903
----------- ----------- -----------
Total Operating Expense $ 1,946,297 ($517,249) $ 1,429,048
(1) Consists of the amortization of prepaid expense attributable the Research
Works Agreement that was consummated through the issuance of common stock in
August 2003.
SALARIES AND WAGES:
Excluding the equity-based compensation recorded of $93,260, salaries and wages
expense for the three months ending September 30, 2004, was $305,574 as compared
to $239,098 for the comparable period in 2003, an increase of $66,476 or 27.80%.
$51,251 of this increase is attributable to employment changes and varying
compensation arrangements during the periods. $9,624 is attributable to
severance payments to terminated employees, and the remaining $5,601 is
primarily 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 2004which became
effective on May 1, 2004. During September 2004, the Company terminated three
employees whose salaries and wages for the three months ending September 30,
2004, totaled $39,076 plus benefits.
CONSULTING AND RELATED PARTY CONSULTING:
Consulting and related party consulting expense for the three months ending
September 30, 2004, amounted to $652,810 of which $410,616 was non-cash
equity-based compensation, a net cash expense of $242,194. For the comparable
period ending in 2003, this expense was $398,870 of which $225,500 was non-cash
equity-based compensation, a net cash expense of $173,370 and a net cash
increase of $68,824 between years. 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
operations. This includes strategic planning ($31,248 expense attributable to
Nadine Smith), financing related support ($361,389 gross expense, $69,184 net
after deducting equity-based compensation attributable to consultants),
governmental/support and lobbying ($129,816 gross expense, $46,304 net after
deducting equity-based compensation relating to a related party affiliation) and
on-going managerial support provided by BDR Consulting, Inc. ($76,987 gross
expense, $42,000 net after deducting equity-based compensation relating to a
related party). For the three months period ending September 30, 2003, the
Company incurred $33,172 in governmental/support and lobbying representing a net
cash increase of $13,132 between years. In addition, $30,000 in financing
related support, $12,035 in public relations support and $15,000 in additional
consulting fees to BDR Consulting were incurred in 2004 as compared to the
comparable period in 2003.
21
Effective on September 30, 2004, two contractual arrangements expired that have
accounted for $144,816 in gross expense and $61,304 in net cash expenditures for
the three months ending September 30, 2004. This includes contracts for
governmental support and lobbying and financing related support.
PROFESSIONAL FEES:
Professional fees which substantially consist of legal and accounting services
for the three months ending September 30, 2004 amounted to $202,783 of which
$2,562 was non-cash equity-based compensation relating to stock options issued
to the Chairman of the Medical Advisory Board, a net expense of $200,221 as
compared to $157,595 for the comparable period in 2003 and an increase of
$42,626 or 27.04%. The increase between years is primarily attributable to an
increase in legal expenses of $58,602 offset by a decrease in accounting fees of
$10,264. During the quarter ending September 30, 2003, the Company incurred
legal expenses of $91,525 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 $150,127 with
$13,913 attributable to patent litigation, $10,091 attributable to the FDA and
clinical trials, $35,044 for domestic and foreign patent registration and the
remaining $91,079 relating to general securities and other matters. During the
three months ending September 30, 2004, considerable expenditures were incurred
to prepare and file the registration statement, prepare the proxy statement and
annual report for the annual shareholder meeting plus drafting charters for
Board committees and other corporate governance related matters.
CLINICAL TRIAL RELATED EXPENSE:
For the three months ending September 30, 2004, the Company incurred expenses of
$350,406 relating to the clinical trials as compared to $37,764 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
protocol. On March 5, 2004, the FDA granted approval to commence testing.
GENERAL AND ADMINISTRATIVE:
For the three months ending September 30, 2004, the Company incurred net general
and administrative expenses of $322,714 as compared to $234,440 for the
comparable period of 2003, an increase of $88,274 or 37.65%. This is
substantially attributable to the Company's increased business activity and the
relocation of the Company's principal executive offices. Comparing comparable
periods in 2004 and 2003, the Company incurred increased travel expense of
$42,460 with $17,346 being attributable to the relocation of the principal
executive offices, an increase of $13,142 in general office expenses with
$11,942 attributable to the cost of relocation, increased amortization charges
of $4,522 attributable to the amortization of the Research Works Agreement and
an increase in bad debt expense of $2,571.
OTHER:
Related party royalty expenses of $18,750 and $18,750 were paid to Mr. Charles
E. Worden for the periods covering the three months ending September 30, 2004
and 2003, respectively.
Interest income for the three months ending September 30, 2004 and 2003 amounted
to $16,272 and $3,215 respectively.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2004
At September 30, 2004, the Company's cash balance, including the restricted cash
on deposit to secure the Company credit cards of $21,255 was $3,218,021.
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 have 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 (plus interest at 2%) throughout the
remainder of the year. During the nine months ending September 30, 2004, an
additional $1,162,500 plus interest of $8,687 was received from these offerings.
As of September 30, 2004 $1,150,000 plus interest of $7,907 remains due on
promissory notes executed in connection with subscription agreements. Included
in this amount is $475,000 plus interest of $7,907, which was in arrears on
September 30, 2004, and of which $175,000 plus interest of $6,252 was
subsequently received in October and November 2004.
22
The Company expects to have sufficient cash to support operations for the next
twelve months. However, the Company may seek additional financing during the
latter part of 2005.
The Company's current cash position is as follows:
Cash on hand as of September 30, 2004 : $3,218,021
Amounts outstanding as of September 30, 2004
Due from promissory notes securing subscriptions and interest 1,157,907
----------
Total cash on hand and contractually secured 4,375,928
----------
Less cash budgeted for clinical trials less expenditures to date 1,975,000
----------
Cash available for operations less cash committed to clinical trials as of Sept. 30, 2004 $2,400,928
==========
The Company has several other sources for securing additional cash over the next
twelve months. 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 offering completed
March 26, 2004, 1,400,000 Series C-1 warrants were issued. The Series C-1
Warrants contain an automatic call provision by the Company providing that after
July 13, 2005, upon the stock closing at $3.00 or above for a 10-day consecutive
period, the warrants may be called and the holder may exercise at $1.50 per
share. Upon expiration of a 20-day period without exercise, the Company may
repurchase the warrants 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 nine months ending September 30,
2004, has been higher than normal attributable to the costs associated with our
recent financing, subsequent resale registration statement, plus the engagement
of several consultants for short-term assignments. We believe that the impact of
these higher than normal costs are isolated. Between the current staff reduction
and consolidation plus the expiration of certain contracts as of September 30,
2004,which will not be renewed, the Company has eliminated approximately $32,000
per month in fixed overhead. 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 stage and while we believe
that our initial budget of $2,800,000 ($1,975,000 remaining after expenditures
through September 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 nine months of 2004 could have
a material and unforeseen effect on the Company's business and financial
condition.
RISK FACTORS
Cytomedix cautions the readers not to place undue reliance on any
forward-looking statements, which are based on certain assumptions and
expectations which may or may not be valid or actually occur. The risk factors
which follow may cause actual results to differ materially from those expressed
or implied by any forward-looking statement. The risks described below are not
to be deemed an exhaustive list of all potential risks.
WE ARE A COMPANY WITH LIMITED WORKING CAPITAL.
Because the Company has been in bankruptcy, the Company will not be obtaining
extensive debt financing. All working capital required to implement the
Company's business plan will be provided by funds obtained through private
offerings of our equity securities and revenues generated by the Company. No
assurance can be given that we will have revenues sufficient to support and
sustain our operations through 2005.
If we do not have sufficient working capital and are unable to generate revenues
or raise additional funds, the following may occur: delaying the completion of
our current business plan or significantly reducing the scope of the business
plan; delaying our plans to initiate government regulatory and reimbursement
approval processes for our wound treatment technologies; postponing the hiring
of new personnel; or, in an extreme situation, ceasing operations.
23
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.
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
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.
24
Healthcare providers' inability to obtain third-party reimbursement for the
treatment could have an adverse effect on the Company's success.
THE SUCCESS OF THE 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.
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.
25
PROSPECTS FOR THE FUTURE
Cytomedix's success is directly dependent 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 theAutoloGel(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 are currently
receiving less effective treatments at a substantially higher cost to the
patient and to the taxpayer.
If the Company can successfully complete its 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.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's CEO and CFO 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 September 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 in
November 2003, 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 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 September 30, 2004.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, Cytomedix's annual
report for the fiscal year ending December 31, 2005, will include management's
report on the Company's internal control over financial reporting. As part of
this requirement, the Company's auditor must issue an attestation report on
management's assessment of the internal controls. The Company is preparing for
these requirements. Given the size of the Company, the control environment is
not conducive for classical segregation of responsibility in processing
transactions. The Company has retained Roche and Roche, Certified Public
Accountants, to assist it in documenting and evaluating the control procedures
currently in place. In addition to performing part-time Controller functions,
the Company intends to introduce Roche and Roche, where feasible, into the
Company's control structure to assure that no single employee has the ability to
transact business or record transactions without secondary attestation or
subsequent review. Roche and Roche will be acting on behalf of the Company. As
such, Roche and Roche will not provide any attestation or certification
services, will not act as the Company's independent auditor, and should not be
considered independent of the Company.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In order to establish precedent and to vigorously protect its rights under its
patents, the Company initiated the following litigation 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, the Company asserted that
the Defendants infringed upon the Company's patents and engaged in unfair
competition. In all of these actions, the Company sought unspecified damages and
injunctive relief. A fifth case in the same court, Cytomedix, Inc. v. LB
Hyperbarics, Inc., et al., Case No. 02 C filed July 3, 2002, was dismissed
without prejudice.
26
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 all 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 judgment against the Little Rock Foot
Clinic defendants. 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. On
August 16, 2004, Perfusion Partners and Associates filed for bankruptcy in the
United States Bankruptcy Court for the Middle District of Florida, In re
Perfusion Partners, Case No. 9-04-bk-16220. As a result, Cytomedix's suit
against Perfusion Partners has been stayed pending the bankruptcy hearing.
In September 2002, the Company restyled certain objections and counterclaims
relating to Dr. Keith Bennett into an adversary proceeding against him and
certain of his affiliates, captioned Cytomedix, Inc. v. Keith Bennett, et al.,
Adv. No. 02 A 01292. In this action, the Company objected to Bennett's $1.1
million claim asserted as a Class 3 general unsecured claim under Option 3A
(under which Bennett would receive a 12% cash recovery on his Allowed Claim, if
any) in the Company's bankruptcy case. In addition, the Company asserts
affirmative claims of patent infringement, breach of contract, and unfair
competition. The Company had successfully defended against Bennett's motions to
dismiss or, alternatively, to compel arbitration or transfer venue of the case
to a federal court in Arkansas. The reference of this case was subsequently
withdrawn to the United States District Court for the Northern District of
Illinois, and the case was assigned to Judge Bucklo, who later ordered
bifurcation of the cases. As a result, the patent related claims in the
Company's complaint were transferred to the Western District of Arkansas and the
bankruptcy claims of Bennett defendants were transferred to the Bankruptcy Court
for further proceedings. The patent case in the Western District of Arkansas was
dismissed without prejudice by consent of the parties and order of the District
Court. The bankruptcy claim remains pending.
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, the Company filed its answer and
counterclaims against Harvest for patent infringement, tortious interference
with prospective business relationships, unfair competition and deceptive trade
practices. It seeks damages and permanent injunctive relief against Harvest. The
parties completed cross-motions for summary judgments in March 2004, and oral
arguments on these motions were heard by the court on April 1, 2004. On
September 9, 2004, Judge Patti B. Saris of the District of Massachusetts entered
a summary judgment ruling of patent infringement against Harvest, finding that
its SmartPReP(TM) System literally infringes the Knighton Patent. Concurrently,
Judge Saris denied Harvest's summary judgment motion seeking a declaration that
the SmartPReP(TM) System does not infringe the Knighton patent. Additionally,
Judge Saris denied Harvest's motion for summary judgment of invalidity. A trial
on invalidity and other issues is expected to occur during the first half of
2005.
On May 23, 2003, the Company 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, the Company alleged patent
infringement, breach of both a referral agreement and supply agreement, and
misappropriation of trade secrets. The Company sought damages, declaratory
judgment, and injunctive relief. On July 16, 2003, Landmark filed its answer and
counterclaim denying the claims and asserting that the Company 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.
On June 6, 2003, the Company 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, the Company seeks 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 the Company has violated the Lanham Act, has
tortiously interfered with contractual relations and prospective economic
advantage and has engaged in unfair competition. The defendants seek damages and
a declaratory judgment. On September 13, 2004, Cytomedix filed a motion for
partial summary judgment of infringement. Discovery is ongoing and the parties
are in the process of exchanging interrogatory answers and documents.
27
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 the Company's 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 the centrifugation methodology, which he claims
the Company adopted during the 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.
On September 15, 2004, the Company filed a complaint in the United States
District Court for the Eastern District of Arkansas, Civil Action No.
4-04-CV-966 against Medtronic, Inc. The Company withdrew the complaint, and the
case was dismissed without prejudice. On November 10, 2004, the Company refiled
the complaint in the United States District Court for the District of Maryland,
Civil Action No. 04-CV-3593 against Medtronic, Inc. The case was moved mainly
because the Company's principal executive offices moved to Maryland. In this
complaint, the Company has sought damages and injunctive relief from Medtronic
for patent infringement.
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There are approximately 702 shareholders of record and 20,833,673 shares of the
Company's common stock outstanding as of November 8, 2004. Of this amount,
1,300,500 are issuable by the Company. These shares will be issued by the
Company at the time that payments pursuant to the promissory notes issued in
connection with the Company's recent private placement are received.
Under the Company's First Amended Plan of Reorganization with All Technical
Amendments (the "Bankruptcy Plan"), the Company will have an obligation to issue
353,356 shares of common stock if the Company has revenues exceeding $10,000,000
in four consecutive quarters. None of these shares are currently issuable, and
the revenue goal has not been satisfied for any quarter. The Company does not
anticipate issuing these shares in the near future.
We did not pay dividends to holders of our common stock during 2004, 2003 or
2002. We do not anticipate paying cash dividends on our common stock in the
foreseeable future, but instead will retain any earnings to fund our growth. In
fact, we are prohibited from declaring dividends on our common stock as long as
any shares of Series A, B, or C convertible preferred are outstanding unless all
accrued dividends on the Series A, B, and C convertible preferred stock have
been paid. Once there are no shares of Series A, B, or C convertible preferred
stock outstanding, any decision to pay cash dividends on the common stock will
depend on our ability to generate earnings, our need for capital, our overall
financial condition, and other factors our Board deems relevant.
ISSUANCE OF NON-REGISTERED SECURITIES IN FIRST QUARTER OF 2004.
During the first quarter of 2004, we initiated two private placements of
securities that provided immediate cash net of accrued commissions and expenses
to the Company of $4,661,888 and will provide additional funds of $2,312,500
throughout the remainder of the year. As of September 30, 2004, $1,157,907 of
subscriptions receivable remain outstanding.
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 on July 13, 2004, 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 ten consecutive days, provided that (ii) the
registration statement is effective for a period of 60 consecutive calendar
days. The Company received proceeds from this placement, net of commissions and
expenses of $325,612, 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.
28
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 convertible preferred
stock , which are convertible initially at $1.00 per share of common stock 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
convertible preferred stock regarding distributions upon liquidation of the
Company. Series C convertible preferred stock ranks junior to the Series B
preferred stock solely with respect to the priority security interest in the
Company's intellectual property. The 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 stock at the option of the Company. The Series C
convertible preferred stock ranks pari passu with Series A and Series B
convertible preferred stock with respect to payment of dividends. The Series C
convertible preferred stock has no voting rights except with respect to
transactions upon which they are entitled to vote as a class. The Series C
convertible 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 convertible 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 Series 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 Series C-1 and C-2 warrants commencing 12 months and 36
months, respectively, from the effective date of the registration statement
registering the common stock that would result from the exercise of the warrant
(July 13, 2004). However, in order to exercise the call option, the Company's
common stock must have been trading at a price greater than $3.00 for 10
consecutive trading days prior to the call notice and a registration statement
is then in effect and has been effective without lapse for a period of 60
consecutive days and trading in the Company's stock shall not have been
suspended. The Company, upon calling the warrant, will remit to the holder of
the warrant $.01 per called warrant and issue a new warrant representing the
number of warrants not subject to the call.
The Company commenced a separate private placement in which the Company has
offered for sale 4,500 units in return for an anticipated total of $4,500,000,
consisting of cash and negotiable subscription promissory notes receivable. Each
unit consists of 1,000 shares of common stock and a five-year warrant to
purchase an additional 1,000 shares of common stock at $1.50 per share. The
Company has received $3,358,000 in cash related to this transaction as of
September 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 professional and filing fees in the amount of $95,233
incurred relating to this placement.
The warrants issued in the unit offering 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 the registration statement registering the common stock which would result
from the exercise of the warrant (July 13, 2004). 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.
29
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 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. 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 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. The
Company also issued ten-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 convertible
preferred stock and 112,212 shares of Series B convertible 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 convertible preferred stock, respectively.
ISSUANCE OF NON-REGISTERED SECURITIES IN SECOND QUARTER OF 2004.
During the second 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 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 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 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 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 118,312 shares and Series B convertible preferred stock of 122,392
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". In
July 2004, the Company filed an amended form SB-2 and the registration statement
went effective on July 13, 2004. This process registered 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 2,800,000 shares of
Series C convertible preferred stock plus Series C-1 and C-2 warrants totaling
an additional 2,800,000 shares. Per the agreement, the company was responsible
for registering the outstanding share total plus 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 was outstanding.
30
ISSUANCE OF NON-REGISTERED SECURITIES IN THIRD QUARTER OF 2004.
During July 2004, the Company issued 500,167 common shares upon exercise of
619,393 Class A warrants and 1,875 Class B warrants. The Company received
$465,761 as a result of these exercises. An additional 90,058 Class A warrants
expired on July 29, 2004.
On July 13, 2004, the effective date for the registration of certain securities,
138 shares of Series C convertible stock automatically converted to 1,380,000
common shares in accordance with the terms of the Series C Convertible Stock
offering that required conversion of one half of the outstanding shares of
Series C convertible preferred to common stock upon the effective date of the
registration statement. During the remainder of the quarter ending September 30,
2004, an additional 403,500 commons shares were issued as a result of
conversions of additional shares of Series C convertible preferred stock. As of
September 30, 2004, an aggregate of 1,783,500 shares of common stock have been
issued from conversions of Series C convertible preferred.
In July, 43,922 common shares were issued to a shareholder upon conversion of
shares of Series B convertible preferred shares resulting in an over-issuance of
shares of common stock. The Company cancelled all of the shareholders'
outstanding Series B convertible preferred shares resulting in a net
overissuance of 5,332 shares of common stock.
On July 26, 2004, a placement agent from the Series C convertible preferred
offering exercised all of its 22,397 warrants (issued as commission for
placement agent activities) for 10,290 shares of common stock . This exercise
was on a "cashless" basis.
On August 12, 2004, in accordance with the letter agreement between Maier and
Company and the Company, 12,000 warrants were issued to Maier and Company with
an exercise price of $1.24, which represented the closing price of the Company's
common stock on the date the award was approved by the Board.
On September 30, 2004, a warrant to purchase 100,000 shares of common stock at
an exercise price of $2.00 per share was issued to The Carmen Group in
accordance with its consulting agreement which expired on October 1, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special meeting in lieu of an annual meeting on October 19,
2004, at the Company's offices located in Rockville, Maryland. At the meeting,
the following actions were taken:
The shareholders elected Robert Burkett, David P. Crews, David F. Drohan, Mark
T. McLouglin, and Kshitij Mohan as Directors to hold office until the next
annual meeting of shareholders and until their successors are duly elected.
VOTES
VOTES FOR WITHHELD ABSTENTIONS*
Robert Burkett 11,920,259 26,650 --
David P. Crews 11,930,191 16,718 --
David F. Drohan 11,930,194 16,715 --
Mark T. McLouglin 11,930,209 16,700 --
Kshitij Mohan 11,932,213 14,696 --
* Pursuant to the terms of the Proxy Statement, proxies received were voted,
unless authority was withheld, in favor of the election of the five nominees
named.
In addition to the five nominees elected at the meeting, Mr. James S. Benson was
appointed by the Board to fill a vacancy on the Board on November 1, 2004.
A proposal by the Board of Directors to approve an amendment to the Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock, par value $.0001, from 40,000,000 shares to 65,000,000
shares was approved by the shareholders. The shareholders cast 11,134,087 votes
in favor of this proposal and 799,902 votes against. There were 12,920
abstentions and no broker non-votes.
A proposal by the Board of Directors to approve an amendment to the Company's
Long-Term Incentive Plan to increase the total number of shares allocated to the
Plan by 1,663,477 additional shares, for a total of 4,000,000 shares. The
shareholders cast 6,307,641 votes in favor of this proposal and 840,601 votes
against. There were 17,240 abstentions and 4,781,427 broker non-votes.
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ITEM 5. OTHER INFORMATION.
The Company plans to hold an annual meeting in the second quarter of 2005. As
was stated in the Company's definitive proxy statement filed on September 20,
2004, the deadline for submitting shareholder proposals for inclusion in the
Company's proxy statement for the next annual meeting is December 1, 2004. If a
shareholder notifies the Company after February 15, 2005, of an intent to
present a proposal at the 2005 annual meeting of shareholders, the Company will
have the right to exercise its discretionary voting authority with respect to
such proposal without including information regarding such proposal in its proxy
materials.
ITEM 6. EXHIBITS.
The exhibits listed in the accompanying Exhibit Index are filed as part of this
report.
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: November 15, 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: November 15, 2004
/s/ William L. Allender
William L. Allender, Chief Financial Officer
Date: November 15, 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.
32
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, 2002, on Form 10-QSB for 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 Amendment to Restated Certificate of Incorporation of Cytomedix, Inc.
3.3 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 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).
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 1,
2004, on Form S-8, File No. 333-55818).
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 Ms. Carelyn P. Fylling (Previously filed on
December 5, 2002, on Form 10-QSB for quarter ended September 30, 2001, File No.
000-28443).
10.7 BDR/Cytomedix Consulting Arrangement (Previously filed on December 5, 2002,
on Form 10-QSB for quarter ended September 30, 2001, File No. 000-28443).
10.8 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).
10.9 Addendum to Employment Agreement with Mr. William L. Allender.
10.10 The Carmen Group/Cytomedix Consulting Agreement dated October 1, 2003
(Previously filed on May 10, 2004, on Form 10-QSB for quarter ended March 31,
2004, File No. 000-28443).
10.11 Employment Agreement with Kshitij Mohan, Ph.D., dated April 20, 2004
(Previously filed on May 7, 2004, on Form 8-K, File No. 00028443).
10.12 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).
10.13 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).
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10.14 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).
20.1 Definitive Proxy Statement (Previously filed on September 20, 2004 , 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 and Secretary 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 and Secretary of Cytomedix, Inc.,
pursuant to 18 U.S.C. ss.1350.
34