UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[_] 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 Drive, Suite 330 Rockville, MD 20850
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (240) 499-2680
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 2, 2005: 23,447,931 shares of common stock, $.0001 par value
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
1
CYTOMEDIX, INC.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) Page 3
Condensed Statements of Operations (Unaudited) Page 4
Condensed Statements of Cash Flows (Unaudited) Page 5
Notes to Condensed Financial Statements Page 6
Item 2. Management's Discussion and Analysis or Plan of Operations Page 11
Overview of Business Page 11
Results of Operations Page 15
Liquidity and Capital Resources as of March 31, 2005 Page 20
Risk Factors Page 20
Prospects for the Future Page 24
Item 3. Controls and Procedures. Page 25
PART II
Item 1. Legal Proceedings. Page 25
Item 2. Changes in Securities. Page 26
Item 3. Defaults Upon Senior Securities Page 28
Item 4. Submission of Matters to a Vote of Security Holders. Page 28
Item 5. Other Information. Page 28
Item 6. Exhibits and Reports on Forms 8-K. Page 28
Signatures Page 29
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Balance Sheets
March 31, December 31,
ASSETS 2005 2004
---- ----
(Unaudited)
Current assets
Cash $ 4,162,510 $ 3,274,934
Receivables, net 280,703 315,566
Prepaid expenses, other current assets and inventory 191,460 274,045
------------ ------------
Total current assets 4,634,673 3,864,545
Cash - restricted -- 21,375
Property and equipment, net 169,414 194,719
Intangibles, net 4,074,254 4,105,833
------------ ------------
Total assets $ 8,878,341 $ 8,186,472
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,308,239 $ 1,015,185
Deferred revenue 81,448 81,448
Dividends payable on Series A, Series B and Series C preferred stock 247,270 199,891
------------ ------------
Total current liabilities 1,636,957 1,296,524
------------ ------------
Long-term liabilities
Deferred revenue 335,973 356,335
------------ ------------
Total liabilities 1,972,930 1,652,859
------------ ------------
Commitments and contingencies
Stockholders' equity
Series A Convertible preferred stock; $.0001 par value, $1.00 liquidation
value, authorized 5,000,000 shares; at March 31, 2005 issued - 421,431
shares; at December 31, 2004 issued - 1,575,784 shares 42 157
Series B Convertible preferred stock; $.0001 par value, $1.00 liquidation
value, authorized 5,000,000 shares; at March 31, 2005 issued - 116,273
shares; at December 31, 2004 issued - 1,387,042 shares, 11 138
Series C Convertible preferred stock: $.0001 par value, $10,000 liquidation
Value, authorized 1,000 shares; at March 31, 2005 issued - 79.75 shares;
at December 31, 2004 issued - 83.9 shares -- --
Common stock; $.0001 par value, authorized 65,000,000 shares; at
March 31, 2005 issued - 23,336,033 shares, issuable 25,000 shares;
at December 31, 2004 issued - 20,675,837, issuable 825,000 shares 2,337 2,151
Additional paid-in capital 27,329,275 25,674,088
Deferred compensation (538,613) (567,788)
Subscriptions Receivable -- (831,599)
Deficit accumulated in the development stage (19,887,641) (17,743,534)
------------ ------------
Total stockholders' equity 6,905,411 6,533,613
------------ ------------
Total liabilities and stockholders' equity $ 8,878,341 $ 8,186,472
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Statements of Operations - Unaudited
Three Months Ended July 1, 2002
March 31, (Inception)
------------------------------ Through
2005 2004 March 31, 2005
------------ ------------ --------------
Revenues
Sales $ 113,812 $ 124,715 $ 1,245,575
Royalties 157,362 181,635 1,924,296
------------ ------------ ------------
Total Revenues 271,174 306,350 3,169,871
------------ ------------ ------------
Cost of revenues
Cost of sales 27,979 56,777 389,838
Cost of royalties 126,462 148,867 1,562,644
------------ ------------ ------------
Total cost of revenues 154,441 205,644 1,952,482
------------ ------------ ------------
Gross profit 116,733 100,706 1,217,389
------------ ------------ ------------
Operating expenses
Salaries and wages 667,043 375,511 3,787,510
Consulting expense 106,926 1,156,795 3,908,699
Consulting expense - related party 84,480 300,451 1,595,952
Professional fees 282,825 168,589 2,442,851
Royalty expenses - related party 18,750 18,750 207,926
Clinical Trial related expenses 523,915 264,981 2,178,939
General and administrative expenses 325,705 267,693 3,326,953
------------ ------------ ------------
Total operating expenses 2,009,644 2,552,770 17,448,830
------------ ------------ ------------
Loss from operations (1,892,911) (2,452,064) (16,231,441)
------------ ------------ ------------
Other (income) expense
Interest (income) expense, net (19,250) (1,289) (55,320)
Settlement and other expense 223,068 5,210 201,784
------------ ------------ ------------
Total other (income)expense 203,818 3,921 146,464
------------ ------------ ------------
Net loss from continuing operations (2,096,729) (2,455,985) (16,377,905)
------------ ------------ ------------
Preferred dividend on Series A and B preferred stock 35,985 59,711 619,148
Preferred dividend on Series C preferred stock 11,394 2,802,301 2,890,589
------------ ------------ ------------
Net loss to common stockholders $ (2,144,108) $ (5,317,997) $(19,887,642)
============ ============ ============
Basic and diluted loss per common share $ (.10) $ (0.40) $ (1.35)
============ ============ ============
Weighted average shares outstanding 22,320,136 13,307,164 14,703,815
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
4
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Statements of Cash Flows - Unaudited
Three Months Ended July 1, 2002
March 31, (Inception)
------------------------------ Through
2005 2004 March 31, 2005
------------ ------------ --------------
Cash Flows from operating activities:
Net loss $ (2,096,729) $ (2,455,985) $(16,377,905)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 56,884 53,938 574,731
Amortization - deferred consulting fees 82,729 1,313,181 3,587,190
Amortization - stock based employee compensation 327,420 115,938 905,822
Amortization of stock issued for services -- 17,000 68,000
Consulting/legal expense for issuance of securities -- -- 113,904
Stock issued for reorganization bonus -- -- 487,218
Stock issued for litigation settlement 227,500 -- 227,500
Loss on disposal of assets -- 4,655 4,655
Interest earned on subscriptions outstanding (866) -- (21,874)
Other -- -- (11,506)
Change in assets 139,198 1,062 114,618
Change in liabilities 38,533 242,270 (277,818)
------------ ------------ ------------
Cash flows used in operating activities (1,225,331) (707,941) (10,605,465)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment -- (2,042) (374,336)
(Increase) Decrease in restricted cash 21,375 (158) --
------------ ------------ ------------
Net cash provided by (used in) investing activities 21,375 (2,200) (374,336)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of common and preferred stock, net 832,465 4,811,576 12,281,265
Repayment of note payable -- (6,544) (140,841)
Proceeds from option and warrant exercises 1,259,067 -- 2,898,032
------------ ------------ ------------
Net cash provided by financing activities 2,091,532 4,805,032 15,038,456
------------ ------------ ------------
Net increase in cash 887,576 4,094,891 4,058,655
Cash, beginning of period 3,274,934 811,385 103,855
------------ ------------ ------------
Cash, end of period $ 4,162,510 $ 4,906,276 $ 4,162,510
============ ============ ============
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 2004 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, 2005.
Cytomedix is a development stage enterprise, and accordingly, certain additional
financial information is required to be included in the condensed financial
statements.
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 13,880,480 and 18,338,551 at March 31,
2005 and 2004, respectively.
As a Small Business filer, the Company has chosen to defer adoption of FASB No.
123R until January 1, 2006 but will continue to disclose the impact of stock
based employee compensation utilizing the provisions of SFAS No. 123 "Accounting
for Stock Based Compensation ("SFAS 123"). As has been permitted under SFAS No.
123, the Company has continued to utilize APB 25 "Accounting for Stock Issued to
Employees" in accounting for its stock-based compensation to employees. Had
compensation expense for the quarters ended March 31, 2005 and 2004 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 to common
shareholders and net loss to common shareholders per share would have differed
as follows:
Three Months Ended
March 31,
-----------------------------
2005 2004
---- ----
Net loss to common stockholders, as reported $(2,144,108) $(5,317,997)
Add: Stock-based employee compensation expense included
in reported net loss determined under APB No. 25,
net of related tax effects 260,260 --
Total stock-based employee compensation expense adjustment
determined under fair-value-based method for all awards,
net of related tax effects (603,297) 16,648
----------- -----------
Pro forma net loss to common shareholders $(2,487,145) $(5,301,349)
----------- -----------
Earnings per share:
Basic - as reported $ (0.10) $ (0.40)
Basic - pro forma $ (0.11) $ (0.40)
6
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes option pricing model. The following summarizes the weighted
average of the assumptions used in the model.
Three Months Ended
March 31,
-------------------------------
2005 2004
------------- -------------
Risk free rate 4.39% 3.78%
Expected years until exercise 9.1 9.7
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.
NOTE 3 - CAPITAL STOCK ACTIVITY
For the three months ending March 31, 2005, the Company issued 1,860,196 shares
of the Company's common stock resulting from various exercises of options and
warrants and conversions of the Company's various series of preferred stock as
follows:
- 385,279 shares of the Company's common stock were issued in exchange
for 1,154,353 series A convertible preferred shares.
- 422,768 shares of the Company's common stock were issued in exchange
for 1,270,769 series B convertible preferred shares.
- 42,000 shares of the Company's common stock were issued in exchange
for 4.2 series C convertible preferred shares.
- 36,250 shares of the Company's common stock were issued as a result
of exercises of 36,250 class A warrants. The Company received
proceeds of $36,250 as a result of these exercises.
- 3,810 shares of the Company's common stock were issued as a result
of exercises of 3,810 class B warrants. The Company received
proceeds of $5,715 as a result of these exercises.
7
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
- 274,300 shares of the Company's common stock were issued as a result
of exercises of 274,300 class C-1 warrants. The Company received
proceeds of $405,750 as a result of these exercises.
- 218,200 shares of the Company's common stock were issued as a result
of exercises of 218,200 class C-2 warrants. The Company received
proceeds of $311,250 as a result of these exercises.
- 100,000 shares of the Company's common stock were issued as a result
of exercises of 100,000 unit offering warrants. The Company received
proceeds of $150,000 as a result of these exercise.
- 200,000 shares of the Company's common stock were issued as a result
of exercises of 200,000 various other warrants. The Company received
proceeds of $325,000 as a result of these exercises.
- 14,750 shares of the Company's common stock were issued as a result
of exercises of 14,750 employee stock options. The Company received
proceeds of $22,125 as a result of these exercises.
- 4,870 shares of the Company's common stock were issued as a result
of exercises of 6,093 placement agent warrants. 1,895 shares were
issued on a cashless basis in exchange for 3,118 warrants. The
Company received proceeds of $2,975 as a result of these exercises.
- 92,969 shares of the Company's common stock were issued on a
cashless basis in exchange for 175,000, 5 year stock rights
originally issued to the former CEO.
- 65,000 shares of the Company's common stock value at $227,500 were
issued as settlement and release of all claims on litigation
initiated in 2002.
NOTE 4 - 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 on August 7, 2002 (the fair market value on the date of
grant). An option representing the right to purchase 100,000 shares vested
immediately on the date of grant with the remaining 200,000 shares vesting
annually over the next two years. Additionally, on February 25, 2004, the
Company issued 10-year warrants to purchase an additional 200,000 shares of
common stock at $1.50 to BDR, in connection with the consulting agreement. For
the three months ending March 31, 2005, the Company incurred expenses of $84,480
pertaining to this agreement of which $27,000 was paid in cash with the
remaining $57,480 being non-cash compensation relating to the value of options
granted to BDR. For the three months ending March 31, 2004, the company incurred
expenses of $144,571 pertaining to this agreement of which $27,000 was paid in
cash with the remaining $117,571 being non-cash charges relating to the value of
options granted to BDR, valued in accordance with FAS 123.
8
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
THE CARMEN GROUP
The Carmen Group, Inc. was engaged during the second quarter of 2003 as a
business consultant to strategically position and represent the Company before
the federal government and the various federal agencies affecting the Company. A
director of the Company, Robert Burkett, is also a consultant with The Carmen
Group, Inc. Effective on October 1, 2003, a formal agreement was signed with The
Carmen Group, Inc. for a period of one year to provide services for the Company
for a flat fee of $15,000 per month plus expenses. Additionally, the agreement
stipulates that the Company would issue to The Carmen Group, Inc. an option to
purchase 100,000 shares of common stock immediately exercisable at $1.25 with an
additional option to purchase 100,000 shares of common stock being issuable one
year from the date of agreement at an exercise price of $2.00. For the three
months ending March 31, 2004, the Company incurred expenses of $155,880
pertaining to this agreement of which $45,577 was paid in cash with the
remaining $110,303 being non-cash charges relating to the value of options
granted to The Carmen Group, Inc., in accordance with SFAS 123. The Company did
not incur any expenses relating to this agreement for the three months ending
March 31, 2005 as this agreement expired September 30, 2004 and was neither
renewed nor extended.
NOTE 5 - 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 Plan
(the "Plan"), the Company's prior Existing Series A Preferred stock and the
dividends accrued on this Series A Preferred stock held as of the effective date
of the Plan may be exchanged into one share of the Company's common stock for
every five shares of prior Existing Series A Preferred shares. This exchange is
contingent on the successor Company attaining aggregate gross revenues for four
consecutive quarters of at least $10,000,000.
The Company outsources the manufacturing of AutoloGel(TM) system kits to
Tri-State Hospital Supply Corporation. Under a purchase agreement dated August
1, 2002, Cytomedix agreed to purchase kits in pre-established usage levels.
Should the Company terminate the 36-month agreement, it is required to purchase
unique components and finished goods inventory up to a maximum amount of
approximately $50,000.
The Company is prohibited from granting a security interest in the Company's
patents and/or future royalty streams under the terms of the Series A and B
preferred stock.
NOTE 6 - RECLASSIFICATION
For comparability purposes, certain figures for the 2004 and cumulative periods
have been reclassified where appropriate to conform with the financial statement
presentation used in 2005. These reclassifications had no effect on the reported
net loss.
9
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Financial Statements
NOTE 7 - SUBSEQUENT EVENTS
On April 25, 2005, a settlement agreement was entered into by and between the
Company and Medtronic, Inc., relating to the claims that had been filed or
asserted in their respective pleadings in the litigation proceedings. In
connection with the settlement, the Company and Medtronic entered into a
mutually agreeable licensing arrangement for all applications covered under the
Knighton patent involving autologous platelet releasate therapy.
On April 6, 2005, the Board of Directors adopted the following resolutions:
o Awarded 70,000 options to purchase common stock to board members for past
and present services, which vest immediately, and are exercisable through
2015 at prices ranging from $1.15 though $2.55.
o Awarded 75,000 options to purchase common stock to an employee,
exercisable through 2015 at $3.14, with 25,000 options vesting each year
beginning in April 2006.
o Awarded 125,000 options to purchase common stock to a financial advisory
firm, which vest immediately, and are exercisable through 2010 at $3.14.
This award represents a partial payment for developing an analyst report
and consultation for developing strategic alliances.
o Declared a dividend on shares of Series C Preferred Stock at the rate of
six percent, amounting to $90,500. The dividend is calculated based on the
number of days during the year the shareholder was the owner and is to be
paid in cash.
o Authorized a bonus payment of $150,000 to the CEO for meeting performance
criteria provided for in his employment contract to be paid in cash or
stock (exercisable at $1.50 per share) at the CEO's discretion.
Additionally, the Board authorized the issuance of options to the CEO
representing the right to purchase 100,000 shares of common stock at an
exercise price of $1.50 to vest and become exercisable immediately and to
expire ten years from the date of issuance.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The terms "Cytomedix" and the "Company," as used in this quarterly report, refer
to Cytomedix, Inc. The following discussion and analysis should be read in
conjunction with the financial statements, including notes thereto, filed under
Item 1 of this report and 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, 2004. The Company's financial condition and results of
operation are not intended to be indicative of future performance.
In addition to the historical information included in this report, the reader is
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.
OVERVIEW OF BUSINESS
Cytomedix, Inc. is a biotechnology Company, incorporated in Delaware, which
employs eight full-time employees and one part-time employee. Its business model
is premised upon developing, producing, licensing, and distributing autologous
cellular therapies (i.e., therapies using the patient's own body products),
including Cytomedix's proprietary AutoloGel(TM) System ("the AutoloGel(TM)
System") to produce the platelet rich plasma gel (hereinafter, "AutoloGel(TM)")
for the treatment of chronic, non-healing wounds. To create AutoloGel(TM), the
patient's own platelets and other essential blood components, which together
constitute the multiple growth factors necessary for the healing process, are
separated through centrifugation and when combined with several reagents are
formed into a gel that is topically applied to a wound (under the direction of a
physician). Upon topical application, the Company believes that AutoloGel(TM)
initiates a reaction that closely mimics the body's natural healing process.
Multiple growth factor therapies have not been widely used in the traditional
commercial setting because such therapies have generally not been available or
widely known by clinicians. Until recently, the autologous process of securing
multiple growth factors from a patient's blood products was, substantially, an
exclusive treatment available through outpatient wound care centers affiliated
with Curative Health Services ("Curative"). In January 2001, the Company
purchased certain technology, assets and intellectual property rights associated
with autologous multiple growth factor therapies from Curative and has since
refined the product to a more marketable state. With these refinements,
Cytomedix can now offer autologous multiple growth factor therapies in any
health care setting where wound patients are located.
Beginning in 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.
STRATEGY
The first area involves reimbursement from third-party payers. While the Company
has made inroads with Medicaid reimbursement in some states and within certain
segments of the commercial insurance market, the true market potential cannot be
achieved without broad third party reimbursement. The Company believes a
necessary predicate to securing this broad reimbursement is through obtaining a
national reimbursement code which, in part, involves securing Food and Drug
Administration ("FDA") clearance or 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. The second area involves reestablishing and enforcing the rights
11
under the Company's patents in order to ensure that Cytomedix shareholders
derive economic benefit from the Company's intellectual property. The Company
has identified numerous competing companies, both small and large, that
currently market products similar to AutoloGel(TM), and we believe these
competing companies are infringing or inducing infringement of our intellectual
property rights. If successful in our strategies, these companies could be
subject to damages, potential enjoinment from the market, or at our discretion,
candidates for royalty and licensing arrangements. Finally, the third area
involves penetrating a segment of the national market that is not reimbursement
sensitive. This includes governmentally sponsored and funded programs managed by
the Bureau of Indian Affairs and the Veterans Administration.
CLINICAL TRIAL AND REIMBURSEMENT
During 2003, the Company developed and began execution of a strategic plan to
address both the securing of a national reimbursement code and FDA approval for
the AutoloGel(TM) System; areas that we have found have limited our ability to
establish broad market acceptance of our product. Currently, each of the
components utilized in the AutoloGel(TM) System is currently marketed by other
companies. These components, such as syringes, wound dressings, stopcocks,
reagents, and centrifuges, are made available to the physicians, who use them at
their discretion for a variety of uses in the wound care area. Also, the
AutoloGel(TM) System is an "autologous" therapy performed under the "physicians
practice of medicine". This approach represents the practice currently prevalent
in the platelet gel therapy industry, both in the treatment of chronic wounds as
well as the use of platelet gel therapies in the operating room in fields such
as orthopedic and cardiovascular surgery. 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 Centers 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 scope of the "physicians practice of medicine".
Further, without FDA approval, the Company's ability to make claims for the
AutoloGel(TM) System regarding its use to treat or heal wounds is limited. The
Company believes this is a significant barrier to broad clinical and market
acceptance of the Company's product. It is also possible that at some point the
FDA may require that companies should conduct clinical trials on all specific
clinical therapies and uses for which their products can be used, whether or not
they make a specific labeled claim to that effect. It is also possible that FDA
could require companies to stop marketing platelet gel therapies until FDA
approval for specific wound healing claims is obtained. The Company has,
therefore, initiated a rigorous clinical trial for a specific type of chronic
wound.
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 clearance or approval for the AutoloGel(TM) System.
This process is multi-faceted, time and resource intensive, and very costly. The
Company also cannot predict whether its efforts will be successful. Considerable
funds were expended in 2003 and 2004, and the Company has achieved two
milestones in its pursuit of FDA approval to date.
In the second quarter of 2003, the Company received 510K clearance from the FDA
for the AutoloGel(TM) System's centrifuge. On March 5, 2004, the Company's IDE
application was fully approved by the FDA, which allowed the Company to 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 clearance would 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 third quarter of 2005.
The trial is being conducted in 14 centers on 72 patients. The conduct of the
clinical trial includes several stages. In the first stage, patients are
pre-screened to eliminate those patients who are unacceptable under the patient
exclusion criteria in the trial protocol. Such exclusion criteria include, for
example, patients with active infection in their wound, inadequate perfusion, or
small wounds likely to heal without intervention using traditional therapy. 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
12
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 ensures 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 arm. All
participants including the patient, family, investigator, nursing staff (except
one person who maintains confidentiality, applies the treatments, and does not
participate in any other part of the trial), the Contract Research Organization
("CRO") (which is Constella Clinical Informatics, Inc.), and the Company are
blinded. As such, it is not known which treatment is being applied to the
patient who has been screened and selected for the clinical trial. This type of
prospective, randomized, controlled and blinded clinical trial is very rigorous
and meets the highest standards of research in the scientific, clinical,
regulatory, and reimbursement communities.
The treatment phase of the trial continues for 12 weeks or until the wound is
healed. At that time the trial data will be unblinded and the data analyzed. The
primary endpoint of the study is complete healing as evidenced by
epithelialization, which is the regrowth of skin. Once the wound is healed, the
patient is followed for another 12 weeks to confirm the wound remains healed. As
the trial proceeds and as is the case with many clinical trials, the Company may
make modifications or changes in the trial protocol if necessary.
While it is difficult to predict the completion of any clinical trial, the
Company expects that the trial should be completed during the later half of
2005. As of May 6, 2005, the required 72 patients have been enrolled. Once the
treatment phase of the trial is completed and the data unblinded (i.e. one would
then know which patients were 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 originally budgeted $2,800,000 for completion of the clinical trial
and has spent in excess of $1,800,000 through March 31, 2005. While these trials
are not yet completed, the Company anticipates that overruns will occur due to
the larger than anticipated number of screenings required to yield a sufficient
number of qualifying patients and the expansion of the trials to include a
larger sample. Based on information currently available, the Company does not
anticipate that these overruns will be unmanageable and has adjusted its cash
commitment accordingly. Yet, there are additional unforeseen events and
situations that could emerge that could materially increase the costs, delay the
trials, affect the quality of the trials or could yield unanticipated results.
Since the infra-structure for the conduct of this clinical trial is in place,
the Company may decide to add additional patients for added reassurance that if
there is an unexpected drop-out or loss to follow-up on patients currently
enrolled, it would still have a sufficient number of patients to demonstrate
clearly the rate of success or failure of the treatment. The Company currently
does not anticipate that such an increase in the patient numbers will be a
necessity, but may do so in the interest of added precaution.
REIMBURSEMENT
Upon completion of the patient treatment phase of the trials, the Company will
evaluate the clinical trial data and if satisfactory submit the data to the FDA
to seek approval for specific labeling. Even though this product is regulated
under the Medical Device Amendments of the Food, Drug and Cosmetic Act, the
Center for Biologics Evaluation and Research ("CBER") has the jurisdiction for
reviewing such products. FDA assigned CBER as the primary center that reviewed
and approved the Investigational Device Exemption (IDE) under which this
clinical trial is being conducted. In parallel, we would also be making the
necessary submissions to the Centers 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)
technology. Such studies are performed primarily in the drugs area but now
increasingly in the medical device area to present scientific, demographic and
economic information to justify to CMS and other payor organizations that a
particular product and therapy is clinically safe and effective and cost
effective with respect to its alternatives. Should the Company be successful in
its efforts, the AutoloGel(TM) System can then be positioned as an approved
alternative treatment to capture a significant portion of the estimated 5
million plus chronic wounds that are treated each year in the United States.
13
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.
Based on its ownership of the "Knighton Patent" (US Patent No. 5,165,938), 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 enable the Company to enforce its rights
against companies with substantial revenues, who could be become subject to
claims for royalties and other 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 (except in respect of the action against Medtronic, which is
being handled on a full contingency basis by Fish & Richardson). On March 26,
2004, the District Court for the Northern District of Illinois favorably
interpreted the claims of the Knighton Patent in Cytomedix, Inc. v. Little Rock
Foot Clinic. 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. In the second and third quarters of 2004, there were three additional
court rulings that fully supported the Company's position in two cases that the
Company had initiated. On June 8, 2004, the United States District Court for the
Northern District of Illinois entered a consent judgment against 21st Century
Wound Care and Advanced Therapy, L.L.C., and its owner, James Gandy. In that
consent judgment, 21st Century Wound Care and Mr. Gandy admitted that
Cytomedix's Knighton patent, which covers the use of compositions containing
platelet releasates for wound healing purposes, is valid and enforceable. The
Court declared that 21st Century Wound Care and Gandy had infringed the Knighton
Patent and enjoined them, effective immediately and continuing through
expiration of the Knighton patent in November 2009, from making, using,
offering, or selling within the United States autologous cellular therapies,
platelet gel products, or any other processes or products-such as their "P-Gel"
formulation-that infringe the claims of the Knighton Patent On July 26, 2004,
Judge James B. Zagel of the Northern District of Illinois entered a summary
judgment ruling of patent infringement against the Little Rock Foot Clinic,
finding the defendants' use of a process supplied by SafeBlood Technologies,
Inc., known as the SafeBlood Graft(tm) procedure, literally infringes
Cytomedix's 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(tm) 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, 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 jury trial on invalidity
and other issues is scheduled to commence on May 16, 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
infringers.
The Company is also attempting to identify specific entities that encompass
certain company 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
proprietary AutoloGel(TM) platelet derived therapy. Based in Sikestown, MO.,
Health Systems, Incorporated oversees a sizable network of nursing care
facilities in the Midwest region of the country.
In March 2005, the Company amended its license agreement with DePuy Spine, Inc.
(f/k/a DePuy AcroMed, Inc.) to eliminate the exclusivity provisions in the
license granted to DePuy relating to platelet-based growth factors in the
specific field of use covering diagnostic and therapeutic spinal, neurosurgery
and orthopedic surgery. Simultaneous with the amendment to the first license
agreement with DePuy, the Company entered into a second licensing agreement with
DePuy for all applications not covered under the first agreement of its
autologous platelet releasate therapy, excluding treatment of chronic wounds,
such as pressure ulcers, venous stasis or diabetic foot ulcers.
14
Additionally, on April 25, 2005, a settlement agreement was entered into by and
between the Company and Medtronic, Inc., that settled the claims that had been
filed or asserted in their respective pleadings in the Medtronic action which
was filed on November 10, 2004, in the United States District Court for District
of Maryland. In connection with the settlement, the Company and Medtronic
entered into a mutually agreeable licensing arrangement for all applications
covered under the Knighton patent involving autologous platelet releasate
therapy.
NON-REIMBURSEMENT SENSITIVE MARKET
During 2004, the Company entered into an agreement with the Indian Health
Service in Oklahoma to perform an Educational Initiative (the "Initiative") on
wound care with selected hospitals and clinics managed by the Indian Health
Service. The Company's AutoloGel(TM) System as prescribed by various staff
physicians at these hospitals and clinics has been the cornerstone of this
Initiative. This Initiative was completed during the first quarter of 2005 and
based on the results, the Company is exploring the possibility of creating or
expanding wound care initiatives through additional hospitals and clinics within
the Indian Health Service jurisdiction throughout Oklahoma. Also, the Company is
currently providing its AutoloGel(TM) System to two Veterans Administration
Hospitals.
RESULTS OF OPERATION
The Company is a development stage company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7. Our main activities during this start-up
phase have consisted of recruiting and hiring a new management team and
corresponding personnel, as well as the development of both a short and
long-range business plan that has included all aspects of the business.
Considerable resources were expended in previous years and continuing into 2005
on non-reoccurring activities relating to the legal defense of our patents,
researching and preparing the IDE for submission to the FDA, including
development of the protocol for our FDA clinical trials, the subsequent
initiation of clinical trials, and securing and diversifying our current and
anticipated capital requirements.
COMPARATIVE RESULTS OF OPERATION FOR THE THREE MONTHS ENDED
March 31, 2005 AND 2004.
For the three months ended March 31, 2005, the Company had revenue of $271,174
as compared to revenue of $306,350 for the three months ended March 31, 2004; a
decrease of $35,176 or 11.48%. 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 2005, revenues decreased
$10,903 or 8.74%, from the sale of kits and reagents ($113,812 as compared to
$124,715). This decrease is primarily attributable to the substantial decrease
in revenues generated from two of the Company's large nursing home customers.
During 2004, these two customers generated revenue of $55,825 or 44.76% of the
sales of kits and reagents. During 2005, these customers generated revenue of
$4,500 or 3.95% of the sales of kits and reagents. Additionally, the commercial
insurance revenues decreased $20,272 as compared to 2004 due to increased
difficulty in qualifying patients for reimbursement. The Company in 2005 was
able to mitigate these decreases through additional revenue from the
non-reimbursement sensitive segment of the market of $60,157. Revenues from
royalties and licensing activities in the first quarter of 2005 decreased
$24,273 or 13.36%, ($157,362 as compared to $181,635). This decrease is
attributable to the DePuy licensing arrangement.
Gross profit for the three months ended March 31, 2005 was $116,733 or 43.04% of
revenue as compared to gross profit of $100,706 or 32.87% of revenue for the
comparable period in 2004. The gross profit from the sale of disposable kits and
reagents increased 38.44% from a profit margin of 54.47% earned in 2004 to
75.41% in 2005. This increase is attributable to the fact that the Company is
currently focusing on more profitable segments of the market while discouraging
less profitable business. While revenues decreased from royalties received from
licensing activities, the gross profit margins increased 8.76% from a profit
margin of 18.04% in 2004 to 19.62% in 2005. 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. The Company retains 7.7% of the
current royalties received.
15
Operating Expenses for the three months ended March 31, 2005 were $2,009,644
(with non-cash equity based compensation expenses of $410,149) as compared to
$2,552,770 during the same period in 2004 (with non-cash equity-based
compensation expenses of $1,446,120). This results in a net increase, excluding
non-cash equity-based compensation expenses of $492,845 or 44.53% as described
below.
OPERATING EXPENSE INFORMATION NOT IN CONFORMITY WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
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 ended March
31, 2005 and 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 Company's operating expenditures
between years.
CYTOMEDIX, INC.
OPERATING EXPENSE ANALYSIS
THREE MONTHS ENDED MARCH 31, 2005
NON-GAAP
OPERATING EXPENSES
ACCOUNT GAAP EQUITY BASED WITHOUT EQUITY
AS REPORTED COMPENSATION BASED COMPENSATION
- ----------------------------------------------------------------------------------------
Salaries and wages $ 667,043 ($ 327,420) $ 339,623
Consulting expense 106,926 (25,249) 81,677
Consulting expense - related party 84,480 (57,480) 27,000
Professional fees 282,825 -- 282,825
Royalty expenses - related party 18,750 -- 18,750
Clinical trial related expenses 523,915 -- 523,915
General and administrative expenses 325,705 -- 325,705
---------- ---------- ----------
Total Operating Expenses $2,009,644 ($ 410,149) $1,599,495
========== ========== ==========
SALARIES AND WAGES
Salaries and wages expense for the three months ended March 31, 2005 amounted to
$667,043 of which $327,420 was non-cash equity based compensation, a net cash
expense of $339,623; as compared to $375,511 for three months ended March 31,
2004 of which $115,938 was non-cash equity based compensation; a net cash
expense of $259,573 for the comparable period in 2004; i.e. a net cash increase
of $80,050 between years. As of March 31, 2005, the Company employed eight full
time employees and one part time employee as compared to ten and one for the
comparable period in 2004. Yet, the executive compensation costs for the current
period are considerably higher and include additional executive bonus accruals
of $81,071 which accounts for the increase between years.
16
During the board meeting held on April 6, 2005, the Company awarded to the
Company's CEO, 100,000 options to purchase the Company's common stock for $1.50
when the closing price as of that date was $3.17; a differential of $1.67 per
share. This differential of $167,000 was recorded as accrued bonus and expensed
to salaries and wages for the three months ended March 31, 2005. Additionally,
and in accordance with the employment agreement between the Company and the CEO,
the CEO has the ability to take his base bonus in cash or in shares of the
Company's common stock at a conversion value of $1.50. Consequently, since the
conversion value was below the market price, an additional $67,160 was recorded
in anticipation of the CEO exercising this option. A gross total of $315,231 was
recorded for the three months ended March 31, 2005 attributable to executive
bonuses.
CONSULTING AND RELATED PARTY CONSULTING
Consulting and related party consulting expense for the three months ended March
31, 2005, amounted to $191,406 of which $82,729 was non-cash equity-based
compensation; a net cash expense of $108,677. For the comparable period ended in
2004, this expense was $1,457,246 of which $1,310,618 was non-cash equity-based
compensation; a net cash expense of $146,628 and a net cash decrease of $37,951
between years. In 2004, the Company relied upon the issuance of options to
purchase common stock to attract and retain senior level consultants to assist
in all phases of the operations. This includes strategic planning ($861,986
gross expense, $31,248 net after deducting equity-based compensation
attributable to Nadine Smith), financing related support ($268,022 gross
expense, $16,878 net after deducting equity-based compensation attributable to
consultants), governmental/support and lobbying ($155,880 gross expense, $45,577
net after deducting equity-based compensation relating to a related party
affiliation) and on-going managerial support provided by BDR Consulting, Inc.
($144,571 gross expense, $27,000 net after deducting equity-based compensation
relating to a related party). For the three months ended March 31, 2005, the
Company continued to utilize Nadine Smith ($31,248 cash expense) and BDR
Consulting Inc. ($84,480 gross expense, $27,000 net after deducting equity-based
compensation) but significantly curtailed the use of consultants for financing
related support and eliminated expenditures for governmental support and
lobbying.
PROFESSIONAL FEES
Professional fees consist substantially of legal and accounting services for the
three months ended March 31, 2005, amounted to $282,825 as compared to $168,589
in 2004; an increase of $114,236 or 67.76%. The increase between years is
primarily attributable to an increase in legal and litigation related expenses
of $92,326 ($194,034 as compared to $101,708) and an increase in the auditing
fees of 12,605 ($71,357 as compared to $58,752) and other accounting services of
$15,112. The increase in the legal and litigation related expenses is primarily
attributed to an increase of i) litigation related expenditures of $55,686, ii)
FDA compliance services of $14,444, and iii) SEC compliance activities of
$22,196.
CLINICAL TRIAL RELATED EXPENSE
For the three months ended March 31, 2005, the Company incurred expenses of
$523,915 as compared to expenditures of $264,981 for the comparable period of
2004; an increase of $258,934. The Company is currently in the active treatment
phase of the testing requiring significant expenditures for the various clinical
locations participating in the trials as well as the ongoing expenditures
required for our contract clinical research organization.
GENERAL AND ADMINISTRATIVE
For the three months ended March 31, 2005, the Company incurred general and
administrative expenses of $325,705 as compared to $267,693 for the comparable
period of 2004; an increase of $58,012 or 21.67%. In February 2005, the Company
made an application for listing of its common stock on the American Stock
Exchange. This required an application fee of $65,000 which substantially
accounts for the increase between periods.
17
OTHER
Related party royalty expenses of $18,750 were paid to Mr. Charles E. Worden for
each of the periods covering the three months ended March 31, 2005 and 2004,
respectively.
Other (income) and expense for the three months ended March 31, 2005 amounted to
expense of $203,818 as compared to an expense of $3,921 for the comparable
period in 2004. Of this amount, income was recorded for 2005 of $23,682 with
$19,250 consisting of interest income with $4,432 consisting of various expense
recoveries.
Offsetting this income was expense relating to the settlement of certain
litigation. On March 23, 2005, the Company issued 65,000 shares of the Company's
common stock to Keith Bennett in full settlement and release of all claims
arising out of bankruptcy that were asserted or could have been asserted by
Bennett against the Company and its affiliates, agents, officers or directors.
As of that date, the Company recorded the full value of the stock as expense at
the day's closing price of $3.50 per share or $227,500.
PREFERRED DIVIDEND ON SERIES C PREFERRED STOCK
A preferred dividend on Series C convertible preferred stock in the amount of
$2,802,301 was recorded during the quarter ended March 31, 2004. This amount
relates to the impact of issuing convertible securities that are convertible at
prices less than the Company's stock price as of the day of closing of the
financing.
18
MODIFIED EBITDA INFORMATION NOT IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Throughout this report, the Company has presented income statement items in
conformity with generally accepted accounting principles (GAAP). Given the
magnitude of the non-cash expenses, the Company utilizes a modified EBITDA
(earnings before income taxes, depreciation and amortization and other non cash
items) to evaluate and monitor the results of operations. Although EBITDA is a
non-GAAP financial measure, the Company believes 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 the Company's 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
March 31,
-----------------------------
2005 2004
---- ----
Net loss to common
Stockholders as reported per GAAP $(2,144,108) $(5,317,997)
Adjustments to Reconcile net loss to common
stockholders to modified EBITDA:
Preferred Dividends accrued 47,379 62,012
Series C Preferred stock dividend attributable to
below market beneficial conversion features -- 2 ,800,000
Depreciation and amortization of patents 56,884 53,990
Amortization of Research Works Report (1) -- 17,000
Amortization - Deferred Consulting Fees (2) 82,729 1,313,181
Amortization of the value of stock options
recorded as compensation (3) 327,420 115,938
Other expense (4) 227,500 --
----------- -----------
MODIFIED EBITDA - NON GAAP $(1,402,196) $ (955,876)
=========== ===========
(1) Consists of the amortization of stock valued at $68,000 issued in August,
2003 to Research Works as compensation for analyst report.
(2) Consists of the amortization attributable to the value of stock rights
issued to various consultants as compensation in lieu of cash.
(3) Consists of the value as determined for the options and rights granted
upon termination of Kent Smith, former CEO, in 2004. In 2005, this
consists of the value of the unqualified options granted to the new CEO as
an inducement award, the full value of the additional options awarded on
April 7, 2005 and the potential additional value of the bonus if an
election is made to receive stock in lieu of cash.
(4) Consists of 65,000 shares issued to Keith Bennett on March 23, 2005 at the
closing price on that date of $3.50 per share.
19
LIQUIDITY AND CAPITAL RESOURCES AS OF MARCH 31, 2005
The Company's cash balance at March 31, 2005 was $4,162,510.
The Company's current cash position is as follows:
Cash on hand as of March 31, 2005: $4,162,510
----------
Less: Cash budgeted for remaining clinical trials expense 1,325,000
----------
Cash available for operations as of March 31, 2005 $2,837,510
==========
During the first quarter of 2005, the Company received $831,599 for the
subscriptions receivable that were in arrears as of December 31, 2004 and
received an additional $1,259,067 from the exercise of warrants and options. The
Company believes that it has adequate cash on hand to fund operations for the
next twelve months. However, for subsequent periods, additional cash may be
required if the clinical trials require substantially more cash than budgeted,
operating revenues do not materialize or if the cost of operation increase
substantially.
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.
THE COMPANY HAS LIMITED SOURCES OF WORKING CAPITAL.
Because the Company has been in bankruptcy, the Company will not be able to
obtain 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 the Company will have revenues sufficient to support and sustain
our operations through 2006.
If the Company does not have sufficient working capital and is unable to
generate revenues or raise additional funds, the following may occur: delaying
the completion of the Company's current business plan or significantly reducing
the scope of the business plan; delaying some of its development and clinical
testing; delaying its plans to initiate government regulatory and reimbursement
approval processes for its wound treatment technologies; postponing the hiring
of new personnel; or, in an extreme situation, ceasing operations.
THE COMPANY HAS A HISTORY OF LOSSES.
The Company has a history of losses and expects to incur substantial losses and
negative operating cash flows for the foreseeable future. The Company may never
achieve or maintain profitability. The Company is not currently profitable and
expects to continue to incur net losses in the foreseeable future. The Company
also expects to experience negative cash flows 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.
20
THE COMPANY HAS A SHORT OPERATING HISTORY AND LIMITED OPERATING EXPERIENCE.
The Company must be evaluated in light of the uncertainties and complexities
affecting an early stage biotechnology Company. The Company is a development
stage Company and has only recently begun to implement its current business
plan. 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 pending approval from FDA and a national
reimbursement code from CMS. There can be no assurance that its business model
in its current form can accomplish the Company's stated goals.
THE COMPANY'S INTELLECTUAL PROPERTY ASSETS ARE CRITICAL TO ITS SUCCESS.
The Company regards its patents, trademarks, trade secrets, and other
intellectual property assets as critical to its success. The Company relies on a
combination of patents, trademarks, and trade secret and copyright laws, as well
as confidentiality procedures, contractual provisions, and other similar
measures, to establish and protect its intellectual property assets. The Company
attempts to prevent disclosure of its trade secrets through a number of means,
including restricting access to sensitive information and requiring employees,
consultants, and other persons with access to the Company's sensitive
information to sign confidentiality agreements. Despite these efforts, the
Company may not be able to prevent misappropriation of its technology or deter
others from developing similar technology in the future. Furthermore, policing
the unauthorized use of the Company's intellectual property assets is difficult
and expensive. Litigation has been necessary in the past and will be necessary
in the future in order to enforce the Company's intellectual property assets.
Litigation could result in substantial costs and diversion of resources. The
Company cannot guarantee that it will be successful in any litigation matter
relating to its intellectual property assets. Continuing litigation or other
challenges could result in one or more of its patents being declared invalid. In
such a case, any royalty revenues from the affected patents would be adversely
affected although the Company may still be able to continue to develop and
market its products.
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.
The FDA could require the Company to stop selling The AutoloGel(TM) System until
it obtains clearance or approval of a specific wounding healing claim. While the
Company believes that all of the components of The AutoloGel(TM) System are
legally marketed, the FDA could take the position that the Company cannot market
the The AutoloGel(TM) System for wound healing until the Company has a specific
approval or clearance to do so from FDA. The Company believes, however, that its
marketing practices are consistent with what other companies in this field are
doing and has not received any indication from the FDA that it objects to the
Company's practices or those of its competitors. There is, however, no guarantee
FDA will not do so in the future.
21
Further, as the Company expands and offers additional products in the United
States and in foreign countries, the Company may require approval from the FDA
and comparable foreign regulatory authorities prior to introduction of any such
products into the market. The Company has no assurance that it will be able to
obtain all necessary approvals from the FDA or comparable regulatory authorities
in foreign countries for these products. Failure to obtain the required
approvals would have a material adverse impact on the Company's business and
financial condition.
THE COMPANY COULD BE ADVERSELY AFFECTED IF CUSTOMERS CANNOT OBTAIN
REIMBURSEMENT.
AutoloGel(TM) is provided to healthcare providers. Some of these providers, in
turn, seek reimbursement from third party payers such as Medicare, Medicaid, and
other private insurers. Many foreign countries also have comprehensive
government managed healthcare programs that provide reimbursement for healthcare
products. Under such healthcare systems, reimbursement is often a determining
factor in predicting a product's success, with some physicians and patients
strongly favoring only those products for which they will be reimbursed.
In order to achieve a national reimbursement product code for the AutoloGel(TM)
System, the Company has chosen to undertake a prospective, randomized,
controlled, multi-site clinical trial as approved by the FDA so as to provide
the necessary data as required by CMS, formerly known as the Healthcare
Financing Agency. In addition, a 1992 HCFA ruling prohibiting the reimbursement
of growth factor products for chronic wounds may have to be dismissed in order
to secure a national reimbursement product code. If the results of those
clinical trials are favorable, this will positively affect the Company's ability
to obtain reimbursement approval from governmental agencies and private
insurers. If the results are not favorable, the Company cannot guarantee that
third-party payers will elect to reimburse treatments using the Company's
products or processes or, if such reimbursement is approved, that the level of
reimbursement granted will be sufficient to cover the cost of the product or
process to the physician or to the patient.
Healthcare providers' inability to obtain third-party reimbursement for the
treatment could have an adverse effect on the 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.
THE COMPANY MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL.
The future success of the Company depends on the ability to attract, retain and
motivate highly-skilled management, including sales representatives. The Company
has retained a team of highly-qualified officers and consultants, but the
Company cannot provide assurance that it will be able to successfully integrate
these officers and consultants into its operations, retain all of them, or be
successful in recruiting additional personnel as needed. The Company's inability
to do so will materially and adversely affect the business prospects, operating
results and financial condition.
The Company's ability to maintain and provide additional services to its
existing customers depends upon its ability to hire and retain business
development and scientific and technical personnel with the skills necessary to
keep pace with continuing changes in cellular therapy technologies. Competition
for such personnel is intense, the Company competes with pharmaceutical,
biotechnology and healthcare companies. The Company's inability to hire
additional qualified personnel may lead to higher recruiting, relocation and
compensation costs for such personnel. These increased costs may reduce the
Company's profit margins or make hiring new personnel impractical.
22
LEGISLATIVE AND ADMINISTRATIVE ACTION MAY HAVE AN ADVERSE EFFECT ON THE
COMPANY.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. The Company cannot predict
what other legislation relating to its business or to the health care industry
may be enacted, including legislation relating to third-party reimbursement, or
what effect such legislation may have on the Company's business, prospects,
operating results and financial condition. The Company expects federal and state
legislators to continue to review and assess alternative health care delivery
and payment systems and possibly adopt legislation affecting fundamental changes
in the health care delivery system. Such laws may contain provisions which may
change the operating environment for our targeted customers including hospitals
and managed care organizations.
Health care industry participants may react to such legislation by curtailing or
deferring expenditures and initiatives, including those relating to the
Company's products. Future legislation could result in modifications to the
existing public and private health care insurance systems that would have a
material adverse effect on the reimbursement policies discussed above.
THE COMPANY COULD BE AFFECTED BY MALPRACTICE CLAIMS.
Providing medical care entails an inherent risk of professional malpractice and
other claims. The Company does not control or direct the practice of medicine by
physicians or health care providers who use the products and does not assume
responsibility for compliance with regulatory and other requirements directly
applicable to physicians. The Company cannot guarantee that claims, suits or
complaints relating to the use of the AutoloGel(TM) System 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 give assurance that the coverage limits of this
insurance would be adequate to protect against all potential claims. The Company
cannot guarantee that it will be able to obtain or maintain professional and
product liability insurance in the future on acceptable terms or with adequate
coverage against potential liabilities.
AUTOLOGEL(TM) HAS EXISTING COMPETITION IN THE MARKETPLACE.
In the market for biotechnology products, the Company faces competition from
pharmaceutical companies, biopharmaceutical companies and other competitors.
Other companies have developed or are developing products which may be in direct
competition with The AutoloGel(TM) System. Biotechnology development projects
are characterized by intense competition. Thus, the Company cannot assure any
investor that it will be the first to the market with any newly developed
products or that it will successfully be able to market these products. If the
Company is not able to participate and compete in the cellular therapy market,
the Company's financial condition will be materially and adversely affected. The
Company cannot guarantee that it will be able to compete effectively against
such companies in the future. Many of these companies have substantially greater
capital resources, larger marketing staffs and more experience in
commercializing products. Recently developed technologies, or technologies that
may be developed in the future, may be the basis for developments which will
compete with the Company's products.
THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER MARKET, AND IT
MAY NEVER BE LISTED ON A NATIONAL EXCHANGE.
The Company's common stock is currently traded in the over-the-counter market
and quoted on the OTC Bulletin Board under the symbol "CYME". Although Cytomedix
is currently a publicly held company quoted on the OTC Bulletin Board, there can
be no assurance as to whether an active trading market for our common stock will
be developed or maintained or that its common stock will ever be listed on a
national securities exchange. This means that it may be hard or impossible to
find a willing buyer for the Company's common stock in the future.
23
PURCHASES ARE SUBJECT TO THE SEC'S PENNY STOCK RULES.
If a trading market for the Company's common stock develops in the future, the
Company is uncertain as to whether the market price would be above $5.00 per
share. Securities which trade below $5.00 per share are subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934. These rules require additional disclosure by broker-dealers in connection
with any trades involving the stock defined as a "Penny Stock." Generally, any
non-Nasdaq equity security that has a market price of less than $5.00 per share
is a Penny Stock. As a result of its common stock being characterized as a Penny
Stock, the market liquidity for the common stock may be adversely affected by
the regulations. This could restrict an investor's ability to sell the common
stock in a secondary market.
The rules governing Penny Stock require the delivery, prior to any Penny Stock
transaction, of a disclosure schedule explaining the Penny Stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell Penny Stocks to persons other than established customers
and accredited investors (generally defined as an investor with a net worth in
excess of $1,000,000 or annual income exceeding $200,000, $300,000 together with
a spouse). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The broker-dealer
also must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the Penny Stock and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing prior to effecting the transaction and in writing
before or with the customer confirmation. Monthly statements must be sent
disclosing recent price information for the Penny Stock held in the account and
information on the limited market in Penny Stock.
The additional burdens imposed on broker-dealers may discourage them from
effecting transactions in the Company's common stock, which could severely limit
the liquidity of the common stock and the ability of shareholders to sell the
Company's common stock in the secondary market.
PROSPECTS FOR THE FUTURE
Cytomedix's success is directly dependent on the success of AutoloGel(TM), and
the company believes that AutoloGel(TM) has a good chance for success in the
marketplace for several reasons. In the long-term care, long-term acute care,
and home healthcare markets where healthcare products and services are delivered
in a capitated environment, the weekly use of AutoloGel(TM) saves both the cost
of daily and multiple dressing changes as well as the labor needed to perform
these tasks. Combining this significant cost savings in this economically-driven
environment with a faster wound-healing rate as shown by the Company's
retrospective studies and current reports from clinicians, the Company expects
that both the facility/agency providing the care as well as the wound patient
will see added value through the use of AutoloGel(TM). The Company believes that
this model of providing easy-to-access advanced therapy with increased healing
in a shorter period of time will be very attractive to all types of capitated
health care providers and is actively pursuing these customers at both the group
level and, to a lesser degree, the individual facility.
In addition, based on the cost of current treatments and competitive products
for this market, the cost of 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 rapidly
gaining a significant market share position in the capitated care market.
Thereafter, upon the successful completion of a strategy to have the
AutoloGel(TM) System reimbursed and approved by the FDA, the company believes
the product can be successfully positioned against the higher priced biological
and device alternatives, as well as more traditional wound therapies (such as
wet to moist dressings) based on its efficacy and ease of overall use in
hospitals, wound care centers, and physicians' offices.
24
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 March 31, 2005, 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.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company's annual
report for the fiscal year ending December 31, 2006, 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
is in the process of strengthening those controls currently in place. The
Company has retained Roche & Associates, PC, Certified Public Accountants, to
assist in this process. Roche & Associates, PC will be acting on behalf of the
Company. As such, they 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.
In order to further strengthen the internal control environment, on December 17,
2004, an audit committee was formed to provide the corporate oversight required.
Additionally, on March 15, 2005, a formal audit committee charter was approved
by unanimous consent of the Board of Directors. This audit committee charter is
available on the Company's website at www.cytomedix.com.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In order to establish precedent and to vigorously protect its rights under
certain of its patents, the Company initiated litigation in 2002 in the District
Court for the Northern District of Illinois, Eastern Division, against a number
of defendants. In each of these lawsuits, the Company has asserted that the
Defendants have infringed upon the Company's Knighton Patent and engaged in
unfair competition. The only remaining litigation currently pending is
Cytomedix, Inc. v. Perfusion Partners & Associates, Inc., Case No. 02 C 4776,
filed July 3, 2002.
In August 2004, Perfusion Partners & Associates ("PPAI") filed a petition for
relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the
Middle District of Florida, Fort Myers division. On March 10, 2005, the
Bankruptcy Court entered an order granting PPAI's motion for authority to escrow
royalty payments and PPAI has since commenced the escrowing of interim adequate
protection royalty payments to Cytomedix for the period starting January 1,
2005. Cytomedix had expected to consummate a license and settlement agreement
with PPAI in the second quarter of 2005, but the parties have been unable to
reach agreement on the terms of a confirmable plan of reorganization. Cytomedix
recently filed a motion to replace PPAI's management with a Chapter 11 trustee,
as to which a preliminary hearing has been scheduled for May 19, 2005. Because
the Company's patent infringement action against PPAI in the District Court for
the Northern District of Illinois was stayed by the pendency of the bankruptcy
case, that action was dismissed, with leave granted to the Company to have the
case reinstated upon the lifting of the automatic stay by the bankruptcy court.
In September 2002, the Company restyled its objection and counterclaims into an
adversary proceeding 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 in the Company's bankruptcy
case. In addition, the Company asserted affirmative claims of patent
infringement, breach of contract, and unfair competition. On March 24, 2005, the
25
Company settled its objections to Bennett's filed proofs of claims by agreeing
to issue 65,000 shares of Cytomedix common stock to Bennett in full exchange and
release of all claims that were or could have been asserted by Bennett against
the Company and its affiliates, agents, officers, or directors.
On October 23, 2002, Harvest Technologies Corp. initiated an action against the
Company in the Federal District Court for the District of Massachusetts, Case
No. 02-12077. Plaintiff seeks a declaratory judgment that its activities do not
constitute the infringement of any patent rights claimed by the Company, and it
seeks damages for alleged false advertising, unfair competition, intentional
interference with contractual rights or a prospective business relationship and
unfair and deceptive trade acts or practices as defined by Massachusetts law.
The claim for damages is unliquidated. The Company on March 27, 2003, filed its
answer and counterclaims against Harvest for patent infringement, tortious
interference with prospective business relationships, unfair competition and
deceptive trade practices. The Company seeks damages and permanent injunctive
relief against Harvest Technologies Corp. 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 jury trial on invalidity and other
issues is scheduled to commence on May 16, 2005.
On June 6, 2003, the Company commenced a lawsuit against Safeblood Technologies,
Inc., Jim Limbird, and Charles Worden, Jr. (collectively, "Safeblood
Defendants") in the United States District Court for the Eastern District of
Arkansas, Civil Action No. 4-03-CV-00422JMM. In this complaint, the Company has
sought damages and injunctive relief for its patent infringement claim. The
Safeblood Defendants filed their answer and counterclaim on June 27, 2003. In
their answer, the Safeblood Defendants deny any infringement. Their counterclaim
alleges that the Company has violated the Lanham Act, has tortiously interfered
with contractual relations and prospective economic advantage and has engaged in
unfair competition. The Safeblood Defendants seek damages and a declaratory
judgment. The Company has filed a motion seeking summary judgment against
Safeblood for infringement. In late 2004, the Safeblood Defendants' counsel of
record withdrew, thus delaying disposition of the case until new counsel was
appointed, which occurred in the first quarter of 2005.
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. In this complaint, the Company has sought
damages and injunctive relief from Medtronic for patent infringement. The
Company voluntarily dismissed this action against Medtronic on November 10,
2004, and refiled the case against Medtronic on that same date in the United
States District Court for the District of Maryland, Case No. 04-3593. On April
25, 2005, a settlement agreement was entered into by and between the Company and
Medtronic that settled all claims that had been filed or asserted in their
respective pleadings in the Maryland action. In connection with the settlement,
the Company and Medtronic entered into a mutually agreeable licensing
arrangement for all applications of Cytomedix's autologous platelet releasate
therapy.
No opinion can be provided as to whether an unfavorable outcome or out-of-court
settlement will result in any of the pending cases.
ITEM 2. CHANGES IN SECURITIES.
OUTSTANDING COMMON STOCK AND DIVIDENDS.
There are approximately 686 shareholders and 23,447,931 shares of the Company's
common stock outstanding as of May 2, 2005.
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.
26
The Company did not pay dividends to holders of its common stock during 2005,
2004, 2003 or 2002. The Company does not anticipate paying cash dividends on the
common stock in the foreseeable future, but instead will retain any earnings to
fund growth. In fact, the Company is prohibited from declaring dividends on the
common stock as long as any shares of Series A convertible preferred, Series B
convertible preferred or Series C convertible preferred stock are outstanding
unless all accrued dividends on the Series A convertible preferred, Series B
convertible preferred or Series C convertible preferred stock have been paid.
Once there are no shares of Series A, Series B and Series C convertible
preferred stock outstanding, any decision to pay cash dividends on the common
stock will depend on the ability to generate earnings, the need for capital, the
overall financial condition, and other factors the Board deems relevant.
CAPITAL STOCK ACTIVITY
For the three months ended March 31, 2005, the Company issued 1,860,196 shares
of the Company's common stock resulting from various exercises of options and
warrants and conversions of the Company's various series of preferred stock as
follows:
- 385,279 shares of the Company's common stock were issued in exchange
for 1,154,353 series A convertible preferred shares.
- 422,768 shares of the Company's common stock were issued in exchange
for 1,270,769 series B convertible preferred shares.
- 42,000 shares of the Company's common stock were issued in exchange
for 4.2 series C convertible preferred shares.
- 36,250 shares of the Company's common stock were issued as a result
of exercises of 36,250 class A warrants. The Company received
proceeds of $36,250 as a result of these exercises.
- 3,810 shares of the Company's common stock were issued as a result
of exercises of 3,810 class B warrants. The Company received
proceeds of $5,715 as a result of these exercises.
- 274,300 shares of the Company's common stock were issued as a result
of exercises of 274,300 class C-1 warrants. The Company received
proceeds of $405,750 as a result of these exercises.
- 218,200 shares of the Company's common stock were issued as a result
of exercises of 218,200 class C-2 warrants. The Company received
proceeds of $311,250 as a result of these exercises.
- 100,000 shares of the Company's common stock were issued as a result
of exercises of 100,000 unit offering warrants. The Company received
proceeds of $150,000 as a result of these exercise.
- 200,000 shares of the Company's common stock were issued as a result
of exercises of 200,000 various other warrants. The Company received
proceeds of $325,000 as a result of these exercises.
- 14,750 shares of the Company's common stock were issued as a result
of exercises of 14,750 employee stock options. The Company received
proceeds of $22,125 as a result of these exercises.
- 4,870 shares of the Company's common stock were issued as a result
of exercises of 6,093 placement agent warrants. 1,895 shares were
issued on a cashless basis in exchange for 3,118 warrants. The
Company received proceeds of $2,975 as a result of these exercises.
- 92,969 shares of the Company's common stock were issued on a
cashless basis in exchange for 175,000, 5 year stock options by Kent
Smith, a former CEO.
27
- 65,000 shares of the Company's common stock were issued as
settlement and release of all claims by Keith Bennett for claims
made and asserted by Bennett in the Company's bankruptcy case.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders during the first
quarter of 2005.
ITEM 5. OTHER INFORMATION.
N/A
ITEM 6. EXHIBITS
The exhibits listed in the accompanying Exhibit Index are filed as part of this
report.
28
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: May 13, 2005
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: May 13, 2005
/s/ William L. Allender
William L. Allender, Chief Financial Officer
Date: May 13 2005
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.
29
EXHIBIT LIST
2.1 First Amended Plan of Reorganization with All Technical Amendments
(Previously filed on June 28, 2002, on Form 8-K, File No. 000-28443).
2.2 Amended and Restated Official Exhibits to the First Amended Plan of
Reorganization of Cytomedix, Inc. with All Technical Amendments (Previously
filed on May 10, 2004, on Form 10-QSB for the quarter ended March 31, 2004, File
No. 000-28443).
3.1 Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed
on November 7, 2002, on Form 10-QSB for quarter ended June 30, 2001, File No.
000-28443).
3.2 Amendment to Restated Certificate of Incorporation of Cytomedix,
Inc.(Previously filed on November 15, 2004, on Form 10-QSB for quarter ended
September 30, 2004, File No. 000-28443).
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 Cytomedix, Inc. Long-Term Incentive Plan (Previously filed on November 7,
2002, on Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
10.2 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).
10.3 Amendment dated March 3, 2005, to the License Agreement by and between
Cytomedix, Inc. and DePuy Spine, Inc. (f/k/a DePuy Acromed, Inc.) (Previously
filed on March 31, 2005, on Form 10-KSB for year ended December 31, 2004, File
No. 000-28443).
10.4 Second License Agreement dated March 3, 2005, to the License Agreement by
and between Cytomedix, Inc. and DePuy Spine, Inc. (f/k/a DePuy Acromed, Inc.)
(Previously filed on March 31, 2005, on Form 10-KSB for year ended December 31,
2004, File No. 000-28443).
10.5 Settlement and License Agreement dated May 1, 2005 by and between
Cytomedix, Inc. and Medtronic, Inc. (Previously filed on May 10, 2005, on Form
8-K, File No. 000-28443).
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 of Cytomedix, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
32.2 Certificate of Chief Financial Officer of Cytomedix, Inc., pursuant to 18
U.S.C.ss.1350.
30