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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _______
Commission file number 0-28443
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Cytomedix, Inc.
---------------
(Exact name of small business issuer as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation or organization)
23-3011702
----------
(I.R.S. Employer Identification Number)
1523 South Bowman Rd., Suite A, Little Rock, AR 72211
------------------------------------------------------
(Address of principal executive offices)
(501) 219-2111
--------------
(Issuer's telephone number)
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 [ ] No [X]
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 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. Cytomedix, Inc. had 9,671,211
outstanding shares of common stock, par value $.0001, as of November 19, 2002.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CYTOMEDIX, INC.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 3
Condensed Statements of Operations for the three months
ended March 31, 2002 and 2001 (unaudited) and for the
period December 11, 1998 (date of inception) through
March 31, 2002 (unaudited) 4
Condensed Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 (unaudited) and for the
period December 11, 1998 (date of inception) through
March 31, 2002 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Nature of Business 16
Results of Operations for Period Ending March 31, 2002 18
Liquidity and Capital Resources 20
Subsequent Events 20
Cautionary Statement Regarding Forward-Looking Information
And Risk Factors 22
Forward Looking Information 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Condensed Balance Sheets
ASSETS
------
March 31, December 31,
2001
------------- -------------
Current assets
Cash $ 250,867 $ 184,395
Receivables, prepaid expenses and other current assets 258,008 286,182
Note receivable - related party 8,500 8,500
------------- -------------
Total current assets 517,375 479,077
Property and equipment, net 6,295 -
Intangibles 622,646 641,805
Prepaid expenses, deposits and other assets 63,000 63,000
------------- -------------
$ 1,209,316 $ 1,183,882
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
Current liabilities
Short-term borrowings and current portion of long-term debt $ 437,500 $ 212,500
Accounts payable and accrued expenses 849,868 480,931
Accrued reorganization bonus - related party 125,053 -
Accrued royalty - related party 28,542 -
Deferred revenue 88,948 92,697
------------- -------------
Total current liabilities 1,529,911 786,128
------------- -------------
Long-term liabilities
Liabilities not subject to compromise 173,920 173,920
Liabilities subject to compromise 7,732,376 7,571,761
Deferred revenue 580,317 600,679
------------- -------------
Total long-term liabilities 8,486,613 8,346,360
------------- -------------
Total liabilities 10,016,524 9,132,488
------------- -------------
Commitment and contingencies
Mandatorily redeemable Series A 5% cumulative preferred stock
(subject to compromise); $.0001 par value; $1 liquidation value;
authorized, issued and outstanding - 1,625,000 shares 1,625,000 1,625,000
------------- -------------
Stockholders' (deficit) equity
Series B preferred stock; $.0001 par value; $.0001 liquidation value;
authorized 7,500,000 shares; at 2001 and 2000 issued and outstanding -
5,115,000 shares 512 512
Common stock; $.0001 par value; authorized - 40,000,000 shares; at
March 31, 2002 and December 31, 2001 issued and outstanding -
12,800,598 shares; 1,281 1,281
Additional paid-in capital 51,258,906 51,258,906
Deferred compensation -
Deficit accumulated in the development stage (61,692,907) (60,834,305)
------------- -------------
Total stockholders' (deficit) equity (10,432,208) (9,573,606)
------------- -------------
$ 1,209,316 $ 1,183,882
============= =============
See notes to condensed financial statements.
3
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Condensed Statements of Operations
December 11, 1998
Three Months Ended (Date of Incep-
March 31, tion) through
-------------------------- March 31,
2002 2001 2002
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
Revenues $ 27,250 $ 10,537 $ 397,356
Cost of sales - - 87,822
------------ ------------ ------------
Gross profit 27,250 10,537 309,534
------------ ------------ -------------
Operating expenses
Salaries and wages 135,587 452,367 24,361,005
Consulting expense 14,000 486,693 11,605,159
Professional fees 110,439 632,623 3,201,941
Merger costs - - 2,678,700
Royalty expense - related party 18,750 - -
General and administrative expenses and rent 188,543 603,656 3,999,980
------------ ------------ ------------
Total operating expenses 467,319 2,175,339 45,846,785
------------ ------------ -------------
Loss from operations (440,069) (2,164,802) (45,537,251)
------------ ------------ -------------
Other (income) expense
Interest expense 165,639 4,293,616 5,822,788
Interest and other income (32,446) (18,964) (413,156)
------------ ------------ ------------
Total other (income) expense, net 133,193 4,274,652 5,409,632
------------ ------------ -------------
Net loss from continuing operations before
reorganization items (573,262) (6,439,454) (50,946,883)
Discontinued operations:
Loss from discontinued Procuren
operations (less applicable income
taxes of $0) - (218,286) (8,248,244)
Loss on disposal of Procuren
operations (less income taxes of $0) - - (1,145,544)
Reorganization items:
Debt discount and issue cost - - (815,372)
Professional fees (211,287) - (321,031)
Consulting - related party (74,053) - (74,053)
------------ ------------ ------------
Net loss from operations (858,602) (6,657,740) (61,551,127)
------------ ------------ -------------
Preferred dividend on Series A
preferred stock - 20,312 141,780
------------ ------------ ------------
Net loss to common stockholders $ (858,602) $(6,678,052) $(61,692,907)
============ ============ ============
Basic and diluted loss per common
share $ (0.07) $ (0.63)
============ ============
Weighted average shares outstanding 12,800,598 10,671,875
============ ============
See notes to condensed financial statements.
4
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Condensed Statements of Cash Flows
December 11, 1998
(Date of Incep-
Three Months Ended tion) through
March 31, March 31,
--------------------------
2002 2001 2002
------------ ------------ ------------
Cash flows from operating activities
Net cash used in operating activities $ (151,928) $(1,184,021) $(8,118,403)
------------ ------------ ------------
Cash flows from investing activities
Purchase of equipment (6,600) (38,883) (628,326)
Purchase of business - (2,441,651) (2,441,650)
Cash acquired in merger - - 398,934
Acquisition costs, pre-closing - - (721,939)
Repayment from employees and related parties - (3,090) 86,890
------------ ------------ ------------
Net cash used in investing activities (6,600) (2,483,624) (3,306,091)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from line of credit - - 100,000
Proceeds from short-term borrowings 225,000 2,100,000 3,408,201
Repayments of line of credit and short-term debt - - (119,000)
Proceeds from notes payable - related parties - - 193,324
Repayment on long-term debt and lease obligations - (4,364) (34,390)
Repayment of notes payable - stockholders - - (252,469)
Proceeds from sale of common stock, net of offering costs paid - 30 8,475,086
Loans to related party - - (95,391)
------------ ------------ ------------
Net cash provided by financing activities 225,000 2,095,666 11,675,361
------------ ------------ ------------
Net increase (decrease) in cash 66,472 (1,571,979) 250,867
Cash, beginning of period 184,395 2,116,232 -
------------ ------------ ------------
Cash, end of period $ 250,867 $ 544,253 $ 250,867
============ ============ ============
Cash paid for interest $ - $ 96,769 $ 157,494
============ ============ ============
Cash paid for income taxes $ - $ - $ -
============ ============ ============
See notes to condensed financial statements.
5
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Cytomedix, Inc. (the "Company," "our" and "we") has prepared the financial
statements included herein without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Cytomedix Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001.
In the opinion of Cytomedix's management, the accompanying unaudited condensed
financial statements contain all adjustments, consisting solely of those
adjustments which are of a normal recurring nature necessary to present fairly
its financial position as of March 31, 2002 and the results of its operations
and its cash flows for the interim periods presented and the period from
December 11, 1998 (inception) through March 31, 2002. These financial
statements do not purport to present the current financial condition of the
Company. Therefore, this report must be read in conjunction with all reports
filed with the SEC after March 31, 2002 and other subsequent information
included in this report.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for any period after March
31, 2002.
Cytomedix is a development stage enterprise, and accordingly, certain additional
financial information is required to be included in the condensed financial
statements from the inception of Cytomedix to the date of this balance sheet.
Basic and diluted net loss per share was calculated based upon the net loss
available to common shareholders divided by the weighted average number of
shares of common stock outstanding during the period. Options and warrants of
6,065,835, in total, to purchase common stock are not included in the
computation of diluted loss per share because the effect of these instruments
would be anti-dilutive for loss periods presented.
Certain amounts from December 31, 2001 have been reclassified to conform to the
March 31, 2002 presentation.
Although the Company does have securities registered under the Securities
Exchange Act of 1934 (the "Act") and is a reporting company under the Act, it
has been unable to file the required periodic reports with the SEC. The Company
filed its last periodic report with the SEC on Form 10-KSB for the year ended
December 31, 2001. The Company, however, has reported current events and filed
its monthly operating reports (required by the Court as defined in Note 2) under
the cover of Form 8-K. The Company plans to file all of its missed periodic
reports for past periods and resume filing all periodic reports and other
reports which become due.
Upon entering Chapter 11 bankruptcy protection, the Company began preparing its
financial statements in conformity with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7") on a going concern
basis, which assumes continuity of operations and realization of assets and
settlement of liabilities and commitments in the normal course of business.
6
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
"Liabilities Subject to Compromise" refers to liabilities incurred prior to the
commencement of the Chapter 11 filings. These liabilities, consisting primarily
of short-term and long-term debt, accounts payable and accrued liabilities,
represent the Company's estimate of the allowed amount of known or potential
pre-petition claims to be resolved in connection with the Chapter 11 filing.
Such claims remain subject to future adjustments based on negotiation, actions
of the Court (defined below), further developments with respect to disputed
claims, future rejection of executory contracts or unexpired leases,
determination as to the value of any collateral securing claims, treatment under
the First Amended Plan of Reorganization with All Technical Amendments (the
"Plan") and other events. Payment terms for these amounts are established in
connection with the Plan.
Debt discounts have been expensed as necessary to report the debt at the allowed
amount. This expense has been recorded as a reorganization item in the
statement of operations.
Likewise, the redeemable Series A preferred stock whose disposition is also
dependent upon the outcome of the Chapter 11 case has been segregated as
"Mandatorily Redeemable Series A 5% Cumulative Preferred Stock Subject to
Compromise," and we ceased accruing dividends as of August 7, 2001.
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
The Company filed a voluntary petition for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court of the Northern District of
Illinois, Eastern Division (the "Court") (Case No. 01- 27610) on August 7, 2001
(the "Petition Date"). After the Petition Date, the Company was authorized to
continue to conduct its business as debtor and debtor-in-possession. As a
debtor-in-possession, the Company was authorized to operate its business but
could not engage in transactions outside its ordinary course of business without
the approval of the Court. While the Chapter 11 filing constituted a default
under the Company's various financing arrangements, Section 362 of the
Bankruptcy Code imposes an automatic stay that generally precludes creditors and
other interested parties under such arrangements from taking any remedial action
in response to any such resulting default without prior Court approval. In
addition, under the Bankruptcy Code the Company could assume or reject executory
contracts, including lease obligations. Parties affected by these rejections
could file claims with the Court in accordance with the reorganization process.
The Company actively engaged in this process and reviewed all claims and
executory contracts, reaching final decisions with respect to assuming or
rejecting the contracts. These decisions were included in the Company's Plan.
No trustee or creditors' committee was appointed in this case. The management at
the time of the Petition Date moved to retain a business broker that would
market the Company's assets, including its intellectual property assets, with a
view towards conducting an auction of the Company's assets. A group of
shareholders objected to this contemplated disposition of the Company's assets
and sought to remove the Company's then-existing board of directors by
soliciting support from other shareholders.
Shareholders representing a majority of the Company's voting shares submitted
written consents for the removal of the then-existing board of directors and the
election of the following three new directors: Messrs. Robert Burkett, Charles
Worden and David Crews. Initially, former management objected to the consent
solicitation, but later withdrew that objection and tendered their resignations
as officers; the new directors were recognized by the Court on October 16, 2001.
This event was reported on a Form 8-K filed with the SEC on October 17, 2001.
7
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (CONTINUED)
The newly constituted board of directors appointed Mr. Kent T. Smith as Chief
Executive Officer. Mr. Smith had served as the Company's Vice President of
Sales and Marketing from April 2000 until being laid off in late June 2001. The
new board also approved the hiring of Jimmy D. Swink, Jr., as Reorganization
Manager for the Company. Mr. Swink has been a contract consultant with the
Company since its inception, the collateral agent for the holders of the
outstanding 10% convertible secured promissory notes of the Company and a holder
of a substantial amount of the Company's equity. The Court allowed the Company
to obtain approximately $800,000 in debtor-in-possession financing ("DIP
Financing"), which was used during the bankruptcy for operations.
The Company began developing a new business model that would enable the Company
to provide a simpler, lower cost method of providing platelet rich plasma gel.
This new sales and distribution plan includes the sale of single use, licensed
disposable packs to qualifying health care providers. The Company has directly
and indirectly entered into license agreements that have enabled the Company to
introduce its treatment capabilities in wound care treatment centers and
long-term nursing home facilities.
The Company emerged from bankruptcy on July 11, 2002, pursuant to the terms of
the Plan as approved by the Court. The Plan was filed with the SEC under cover
of Form 8-K on June 28, 2002. In connection with the Plan, the Company
completed the initial phase of its financing plan by raising $2.8 million
through a private offering of common stock with warrants, pursuant to Rule 506
of Regulation D, promulgated under 4(2) of the Securities Act of 1933. Since
that time, an additional $414,252 has been raised in the private offering.
SUMMARY OF CLASSIFICATION AND TREATMENT OF ALLOWED CLAIMS AND EQUITY INTERESTS
UNDER THE PLAN
Under the Plan, allowed claims against and equity interests in the Company
are divided into classes according to their relative seniority and other
criteria. A "Claim" is any claim against the Debtor, whether or not asserted,
as defined in section 101(5) of the Bankruptcy Code. An "Equity Interest" in
the Company is defined as any ownership interest evidenced by any share
certificate or other instrument, whether or not transferable or denominated
"stock" (including, without limitation, interests denominated as common stock or
preferred stock), or similar security, and any warrant or right (other than a
right to convert) to purchase or subscribe to any such ownership interest. The
term "Allowed" as used in this report means that the Claim or Equity Interest
has been approved by final order of the Court or authorized by the Plan.
Section 1122 of the Bankruptcy Code requires that a plan of reorganization
classify Claims and Equity Interests. The classes of Claims and Equity
Interests, the treatment of those classes under the Plan, and the securities and
other property to be distributed under the Plan are described below. The
Bankruptcy Code also provides that, except for certain Claims classified for
administrative convenience, a plan of reorganization may place a Claim or Equity
Interest in a particular class only if such Claim or Equity Interest is
substantially similar to the other Claims of such class. The Plan separates
the classified Claims and Equity Interests into the following classes:
"Class 1A Claims" Secured Claims under the 12% Convertible Secured
Promissory Notes ("12% Notes")
"Class 1B Claims" Secured Claims under the 10% Convertible Secured
Promissory Notes ("10% Notes")
"Class 1C Claims" Secured Claims of Charles Worden, Sr.
"Class 1D Claims" Secured Claims Under the Curative Royalty Agreement
8
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (CONTINUED)
"Class 2 Claims" Priority Employee Claims
"Class 3 Claims" General Unsecured Claims
"Class 4A Claims" Existing Series A Preferred Stock
"Class 4B Claims" Existing Series B Preferred Stock
"Class 5 Claims" Existing Common Stock
"Class 6 Claims" Existing Stock Options
"Class 7 Claims" Other Equity Interests
Securities outstanding prior to the effective date of the Plan (the "Effective
Date") are identified as "Existing." Securities issued upon or after the
Effective Date are identified as "New." The Plan provides that upon receipt of
shares of New Common Stock under the Plan, the recipient shall be deemed to have
affirmatively covenanted to the "Short-Selling Bar Representation," which
requires the recipient of the New Common stock to refrain from engaging in short
sales for a period of five years following the Effective Date.
The Plan also provides treatment for certain unclassified Claims represented by
Administrative Claims, Postpetition Senior Secured Notes, and certain Priority
Tax Claims.
Administrative Claims, Priority Tax Claims, and Secured Tax Claims have not been
classified and are excluded from classification in accordance with Bankruptcy
Code section 1123(a)(1). The treatment under the Plan of these unclassified
Claims is set forth below.
* Administrative Claims represent Claims for payment of an administrative
expense of a kind specified in section 503(b) of the Bankruptcy Code and
entitled to priority pursuant to section 507(a)(1) of the Bankruptcy Code,
including, but not limited to, Postpetition Senior Secured Notes
(representing the Debtor-In-Possession Financing), the actual and necessary
costs and expenses incurred after the Petition Date of preserving the
estate and operating the business of the Cytomedix (including wages,
salaries, or commissions for services rendered after the Petition Date),
Professional Claims, and all fees and charges assessed against the estate
under chapter 123 of title 28, United States Code. These are collectively
referred to as Allowed Administrative Claims.
The Plan provides that each holder of an Allowed Administrative Claim that
has not been satisfied during the reorganization case will receive, on
account of and in full satisfaction of such Allowed Administrative Claim,
cash equal to the Allowed amount of such Claim on the latest of (i) the
Effective Date, (ii) if disputed (or in the case of a Professional Claim
not yet Allowed), upon entry of a final order of the Court allowing such
Claim, and (iii) the date on which the Allowed Administrative Claim becomes
due and payable in the ordinary course.
In lieu of receiving cash on account of its Allowed Administrative Claim,
if agreed to by the Company in its sole and absolute discretion, each
holder of an Allowed Administrative Claim may elect to exchange its Allowed
Administrative Claim for shares of New Common Stock at the administrative
rate of $1.00 per share (a Claimholder receives one share of New Common
Stock in exchange for each $1.00 of Allowed Claim, the "Administrative
Rate").
9
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (CONTINUED)
* Allowed Tax Claims are unclassified if they are "Allowed Priority Tax
Claims" (defined as a Claim entitled to priority under Bankruptcy Code
section 507(a)(8)) or "Allowed Secured Tax Claims" (defined as a Claim of
any taxing authority that is a Secured Claim). Based on the Company's
review of filed proofs of claim, the Company estimates total Allowed
Priority Tax Claims at $58,931 as of March 31, 2002. This figure primarily
represents Claims for unpaid withholding or sales taxes.
The Plan provides that each holder of an Allowed Tax Claim will receive
deferred cash payments over a period not exceeding six years from the date
of assessment of such Allowed Tax Claim, in an aggregate amount equal to
the amount of such Allowed Tax Claim, plus interest from the beginning of
the month following entry of the order confirming the Plan (the
"Confirmation Order") on the unpaid portion thereof, without penalty of any
kind, at a rate of four percent (4%) per annum. The payment of each such
Allowed Tax Claim shall be made in equal semi-annual installments, with the
first installment due on the latest of (i) the first business day following
the end of the first full fiscal quarter following the Effective Date, (ii)
the first business day following the end of the first full fiscal quarter
following the date on which an order allowing such Allowed Tax Claim
becomes a final order, and (iii) such other time or times as may be agreed
with the holder of such Allowed Tax Claim. Each installment shall include
simple interest on the unpaid balance of the Allowed Tax Claim, without
penalty of any kind. In exchange for the treatment provided herein, all
liens securing an Allowed Secured Tax Claim shall be deemed discharged and
released as of the Effective Date.
CLASS 1A - HOLDERS OF 12% NOTES:
Class 1A is comprised of the Allowed Secured Claims of the holders of the 12%
Notes. Allowed Class 1A Claims as of March 31, 2002 are approximately
$2,359,415. The treatment of Class 1A Claims is as follows:
* On the Effective Date, a minimum of 25% of each holder's Allowed Class 1A
Claim (and, at the election of such holder, up to 50% of its Allowed Class
1A Claim) is converted into shares of New Common Stock at the
Administrative Rate.
* Partial Conversion into New Series A Convertible Preferred Stock. On the
Effective Date, all remaining Allowed Class 1A Claims not converted to
shares of New Common Stock at the Administrative Rate are converted to New
Series A Convertible Preferred Stock at a rate of one (1) share of New
Series A Convertible Preferred Stock for each one dollar ($1.00) of said
remaining Allowed Class 1A Claim.
* The Amended and Restated Certificate of Designation provides that the
Company is prohibited, so long as any shares of New Series A Convertible
Preferred Stock are outstanding, from granting any security interest, lien,
or encumbrance on any of the Company's intellectual property assets.
CLASS 1B - HOLDERS OF 10% NOTES:
Class 1B is comprised of the Allowed Secured Claims of the holders of the 10%
Notes. Allowed Class 1B Claims as of March 31, 2002 are approximately
$2,705,167. The treatment of Class 1B Claims is as follows:
* On the Effective Date, a minimum of 25% of each holder's Allowed Class 1B
Claim (and, at the election of such holder, up to 50% of its Allowed Class
1B Claim) is converted into shares of New Common Stock at the
Administrative Rate
* Partial Conversion into New Series B Convertible Preferred Stock. On the
Effective Date, all remaining Allowed Class 1B Claims not converted to
shares of New Common Stock at the Administrative are converted to New
Series B Convertible Preferred Stock at a rate of one (1) share of New
Series B Convertible Preferred Stock for each one dollar ($1.00) of said
remaining Allowed Class 1B Claim.
10
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (CONTINUED)
* The Amended and Restated Certificate of Designation provides that the
Company is, so long as any New Series B Convertible Preferred Stock are
outstanding, from granting any security interest, lien, or encumbrance on
any of the Company's intellectual property assets.
CLASS 1C - SECURED CLAIMS OF WORDEN:
Class 1C is comprised of the Allowed Secured Claims of Charles Worden Sr. which
total approximately $106,124 as of March 31, 2002. This estimate includes
projected accrued interest on the principal balance of $72,100 notes payable and
reimbursement claims of $22,125. Each holder of an Allowed Class 1C Claim
receives New Common Stock at the Administrative Rate in full and complete
satisfaction of such holder's Allowed Class 1C Claim.
CLASS 1D - SECURED CLAIMS UNDER THE CURATIVE ROYALTY AGREEMENT:
Class 1D is comprised of the Allowed Secured Claims under the royalty agreement
entered into as of December 26, 2000, between Curative and the Company, as
amended by a first amendment thereto dated as of April 20, 2001 (collectively,
the "Curative Royalty Agreement"). The total Allowed Class 1D Secured Claims
are $55,745 based on payments on the DePuy Royalty received through the period
ending March 31, 2002, that have not been distributed to the holders of Class 1D
Secured Claims.
The Plan provides that, to the extent not already paid, each holder of an
Allowed Class 1D Secured Claim will receive cash on the Effective Date in an
amount equal to the Allowed amount of its Class 1D Secured Claim. The Plan also
provides that, from and after the Effective Date, all rights under the Curative
Royalty Agreement shall continue in full force and effect, and the legal,
equitable, and contractual rights arising thereunder shall be unaltered
(including the retention of all prepetition liens granted under the Curative
Royalty Agreement); provided, however, that following the Effective Date,
distributions to Waverly Holdings, LLC, an Arkansas Limited Liability Company
("Waverly") of its proportionate share of royalties payable under the Curative
Royalty Agreement may be made directly to Waverly instead of to Curative.
CLASS 2 - ALLOWED PRIORITY UNSECURED CLAIMS OF EMPLOYEES:
Class 2 is comprised of the Allowed Claims of employees against Cytomedix that
are specified as having priority in Bankruptcy Code sections 507(a)(3) or
507(a)(4), not to exceed $4,650 per employee. Such Claims include certain
Claims against the Company by its employees for unpaid prepetition wages,
salaries, or commissions. We estimate total Allowed Class 2 Claims as of March
31, 2002 are approximately $114,989.
Claims in Class 2 are unimpaired under the Plan ("Unimpaired" and "Impaired" as
defined by 1124 of the Bankruptcy Code). Each holder of an Allowed Class 2
Claim will receive cash on the Effective Date equal to the amount of said
holder's Allowed Class 2 Claim. In lieu of receiving cash for its Allowed Class
2 Claim, if agreed to by the Company in its sole and absolute discretion, each
holder of an Allowed Class 2 Claim (or its successors or assigns) may elect in
writing before or after the Effective Date to exchange each $1.00 of its Allowed
Class 2 Claim into shares of New Common Stock at such rate as is agreed to by
the Company in its sole and absolute discretion.
Upon receipt of shares of New Common Stock pursuant to said election, said
recipient shall be deemed to have affirmatively covenanted to the Short-Selling
Bar Representation which requires the recipient of the New Common Stock to
refrain from engaging in short sales for a period of five years following the
Effective Date.
11
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (CONTINUED)
CLASS 3 - ALLOWED GENERAL UNSECURED CLAIMS:
Class 3 is comprised of the Allowed General Unsecured Claims of Cytomedix that
are not cured, paid, released, or waived pursuant to the Plan, assumed by the
Company pursuant to the Plan or agreements incorporated in the Plan, or
classified in any other class of Claims. Class 3 Claims include, without
limitation, (i) Claims for goods sold and services rendered, (ii) Claims for
monies lent, (iii) Claims based upon guarantees of performance or payment of the
obligations or duties of any person, (iv) Claims for contribution,
reimbursement, or indemnity (excluding Claims for indemnification rights), (v)
Claims for fines, penalties, or assessments, (vi) Claims for tort liability,
(vii) Claims arising from the rejection of executory contracts and unexpired
leases, and (viii) Claims arising for environmental or bio-hazardous remediation
at locations that are not included in the assets vesting in the Company on the
Effective Date.
Option 3A (Distribution of Cash Only).
The Company pays to holders of Allowed Class 3 Claims under Option 3A a sum of
cash equal to twelve percent (12%) of such Allowed Class 3 Claim according to
the following distribution schedule: one-third shall be paid on the Initial
Distribution Date; one-third on the sixth month anniversary of the Initial
Distribution Date; and one-third on the first anniversary of the Initial
Distribution Date. The Company is contemplating accelerating these remaining
distributions for administrative convenience reasons.
Option 3B (Distribution of New Common Stock Only).
The holders of Allowed Class 3 Claims under Option 3B will receive one share for
each $5.00 of Allowed Class 3 Claims under Option 3B, with the New Common Stock
to be distributed in twelve (12) equal monthly installments commencing on the
Initial Distribution Date and continuing on each of the succeeding eleven (11)
monthly anniversaries. Upon receipt of shares of New Common Stock as provided
hereunder, said recipient shall be deemed to have affirmatively covenanted to
the Short-Selling Bar Representation and to be bound by its terms.
Holders of Allowed Class 3 Claims aggregating less than $1,000.00 are treated
under Option 3A in respect of such Claims and may not elect treatment of such
Claims under Option 3B.
CLASS 4 - ALLOWED PREFERRED STOCK INTERESTS:
Class 4A is comprised of all Allowed Equity Interests represented by the
1,625,000 shares of Existing Series A Preferred Stock issued and outstanding
prior to the Effective Date. The Existing Series A Preferred Stock had a
liquidation preference in the event of the Cytomedix's liquidation, dissolution,
or winding up of $1.00 per share in all assets remaining after payment of
liabilities. Additionally, Cytomedix was required to redeem the Existing Series
A Preferred Stock on the earlier of the seventh anniversary of the date of
issuance of the securities or the end of the fiscal quarter at which the Company
had gross revenues for four consecutive fiscal quarters of not less than $50
million.
At such time, if at all, that the Company attains aggregate gross revenues for
four consecutive fiscal quarters of not less than $10 million (the "Series A
Precondition"), holders of Allowed Class 4A Equity Interests will receive one
(1) share of New Common Stock for every five (5) shares of Existing Series A
Preferred Stock held as of the Effective Date.
Class 4B is comprised of all Allowed Equity Interests represented by the
Existing Series B Preferred Stock issued and outstanding prior to the Effective
Date. There are approximately 5,115,000 shares of Existing Series B Preferred
Stock issued and outstanding. The Existing Series B Preferred Stock had a
liquidation preference in the event of the Company's liquidation, dissolution,
or winding up of $0.0001 per share in all assets remaining after payment of
liabilities and the liquidation preference of the Existing Series A Preferred
Stock.
12
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (CONTINUED)
Allowed Class 4B Equity Interests will be redeemed in cash by the Company on the
Effective Date at the stipulated liquidation preference of $0.0001 per share, or
$511.50 in the aggregate.
CLASS 5 - EXISTING COMMON STOCK:
Class 5 is comprised of all Allowed Equity Interests represented by the Existing
Common Stock of Cytomedix that is issued and outstanding as of the Effective
Date.
Holders of Allowed Class 5 Existing Common Stock receive one share of New Common
Stock for every five (5) shares of Existing Common Stock. As a result of this
exchange, holders of Allowed Class 5 Equity Interests receive approximately
2,560,120 shares of New Common Stock in exchange for the estimated 12,800,598
shares of Existing Common Stock outstanding on the Petition Date. Upon receipt
of shares of New Common Stock as provided hereunder, said recipient shall be
deemed to have affirmatively covenanted to the Short-Selling Bar Representation
and to be bound by its terms.
CLASS 6 - EXISTING STOCK OPTIONS:
Class 6 is comprised of all Allowed Equity Interests represented by the Existing
Stock Options. Cytomedix had over six million options or warrants representing
contractual rights of persons prior to the Effective Date to purchase or acquire
Existing Common Stock. Holders of Allowed Class 6 Existing Stock Options do not
receive or retain any property or distributions for such Allowed Claims or
Allowed Equity Interests.
CLASS 7 - OTHER EQUITY INTERESTS, INCLUDING SECTION 510(B) CLAIMS:
Class 7 is comprised of all other Allowed Claims or Equity Interests in
Cytomedix, including Allowed Section 510(b) Claims, any Allowed Claims arising
from the rejection of agreements granting Existing Stock Options (to the extent,
if any, that they constitute executory contracts), and any Claims based upon
indemnification rights. The Company is not aware of any filed or scheduled
Class 7 Claims and estimates these Claims at zero.
Class 7 is Impaired under the Plan. Holders of Class 7 Claims and Equity
Interests, if any, do not receive or retain any property or distributions on
account of such Allowed Claims or Allowed Equity Interests.
NOTE 3 - DISCONTINUED OPERATIONS - IMPAIRMENT CHARGE
During the second quarter of 2001, it became evident that all Cytomedix
operations had to be closed and all employees other than essential management
had to be terminated, resulting in discontinued operations accounting treatment.
As a result of the adoption of the plan to discontinue the Procuren operations,
the Company's financial statement presentation has changed. In accordance with
APB 30, the results of the Procuren operations have been reported separately as
discontinued operations for all periods presented. In accordance with Paragraph
18 of APB 30, the net assets and liabilities (current and noncurrent) of the
discontinued segment have also been segregated for all periods presented.
Included in the loss from discontinued operations was the impairment charge
noted below plus the charge for abandonment of various assets.
13
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 3 - DISCONTINUED OPERATIONS - IMPAIRMENT CHARGE (CONTINUED)
Net sales, loss before taxes, and net loss applicable to the Procuren operations
were as follows:
Three Months
Ended
March 31,
2001
------------
Net sales $ 1,881,706
============
Loss before taxes $(9,400,979)
Tax benefit -
------------
Loss on discontinued operations, net of tax $(9,400,979)
============
NOTE 4 - LOSS PER SHARE
As of March 31, 2002 and 2001, Cytomedix had issued and issuable warrants and
options to acquire 6,065,835 and 6,302,392 shares of common stock of Cytomedix,
respectively, with exercise prices ranging from $.02 to $10.00 per share. These
options and warrants were not included in the calculation of weighted average
common stock outstanding as of March 31, 2002 and 2001 because the effect would
have been anti-dilutive (i.e., reduce the net loss per share).
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
A summary of the two categories of claims not subject to compromise as of March
31, 2002 is as follows:
Employee claims $ 114,989
Tax claims 58,931
------------
$ 173,920
============
A summary of the principal categories of claims classified as liabilities
subject to compromise at March 31, 2002 are as follows:
12% secured debt $ 2,359,415
10% secured debt 2,705,167
Note payable and accrued interest - related party 106,124
Accrued expenses - related party 99,825
Accounts payable and accrued expenses 1,640,699
Accrued employee claims 679,367
Series A Preferred Stock and accrued dividends 1,766,780
-------------
Total Liabilities Subject to Compromise $ 9,357,377
=============
14
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
All but approximately $2,359,415 of liabilities subject to compromise would have
been classified as current liabilities if the Company had not filed bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code.
NOTE 6 - NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets." SFAS No.
141 eliminated the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001 and is effective for any
business combination accounted for by the purchase method completed after June
30, 2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with SFAS No. 142. Effective for fiscal years
beginning after December 15, 2001, other intangible assets will continue to be
amortized over their useful lives. The provisions of SFAS 141 and 142 have been
adopted by the Company effective for accounting periods subsequent to January 1,
2002. The adoption of SFAS 141 and 142 is not expected to have any impact on the
results of operations or financial position of the Company.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" in
August 2001. This statement is effective for fiscal years beginning after
December 15, 2003. This new statement is not expected to have any impact on the
results of operations or financial position of the Company.
In December 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" that is applicable to the Company's fiscal
2002 financial statements. The FASB's new rules on asset impairment supersede
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and provide a single accounting model
for the disposition of long-lived assets. The Company has adopted the provisions
of SFAS No. 144 effective for accounting periods subsequent to January 1, 2002.
This new statement is not expected to have any impact on the results of
operations or financial position of the Company.
FASB Statement 146, "Accounting for Costs Associated with Exit or Disposal
Activities," addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between Statement 146 and Issue 94-3 relates to Statement 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. Statement 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
A fundamental conclusion reached by the FASB in this Statement is that an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. Therefore, this Statement eliminates the
definition and requirements for recognition of exit costs in Issue 94-3. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002, and is
not expected to have a material impact on the results of operations or financial
position of the Company.
15
CYTOMEDIX, INC.
(A DEVELOPMENT STAGE ENTITY)
(DEBTOR-IN-POSSESSION)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 7 - SUBSEQUENT EVENTS
Upon confirmation of the Plan on July 11, 2002, all of the Company's securities
were canceled on the Company's books and of no further force or effect. Under
the Plan, new common stock is issued to creditors and existing stockholders in
amounts approved by the Court, as is explained in further detail in Note 2.
Under the Plan, the Company's Existing common stock was exchanged for New common
stock at a rate of one New share for every five Existing shares. The New common
stock succeeded to the registered status of the Existing common stock under Rule
12g-3 as explained in 3S and 5S Rule 12g-3 in the Division of Corporation
Finance: Manual of Publicly Available Telephone Interpretations - March 1999
Supplement. The Company will adopt Fresh Start Accounting in accordance with SOP
90-7, upon its emergence from bankruptcy in the third quarter of 2002. Because
the share exchange was part of the Plan and is required to be reflected in the
Fresh Start Accounting, it has not been reflected in these financial statements.
In the third quarter of 2002 the Company adopted a new Long-Term Incentive Plan.
The new incentive plan permits incentive awards of options, SARs, restricted
stock awards, phantom stock awards, performance unit awards, dividend equivalent
awards or other stock-based awards. It provides that the Company is authorized
to make awards of up to 15% of the fully diluted stock of the Company on the
Effective Date. On October 16, 2002, the Board reserved and allocated 2,336,523
shares of common stock to the new plan.
The Company amended its consulting agreement with BDR on July 11, 2002
continuing until June 30, 2005. Under this agreement BDR is to receive
compensation of $108,000 per annum for services rendered to the Company. In
addition, the Company granted BDR stock options representing the right to
purchase 300,000 shares of the Company's common stock at $1.50 per share (the
fair market value on the date of grant). An option representing the right to
purchase 100,000 shares vested immediately on the date of grant with the
remaining 200,000 shares vesting over the next two years.
15a
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed
financial statements and related notes thereto included in Item 1 above and in
conjunction with our audited financial statements and related notes thereto and
management's discussion and analysis for the year ended December 31, 2001,
included in our annual report filed on Form 10-KSB for such period. This
discussion and analysis pertains to the Company's financial position on March
31, 2002. You must consider this report in conjunction with all reports filed
with the Securities and Exchange Commission ("SEC") after March 31, 2002, and
with the Subsequent Events section at the end of our discussion. We are in the
process of filing all missed periodic reports with the SEC.
The terms "Cytomedix," the "Company," "our" and "we," as used in this
quarterly report, refer to Cytomedix, Inc.
When used in this Form 10-QSB and in other filings by Cytomedix with the
SEC, the words "believes," "plans," "anticipates", "will likely result," "will
continue," "projects," "expects," and similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those projected.
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, and which involve
certain risks, including these risks defined below. Sales and other revenues
may not commence and/or continue as anticipated due to delays or otherwise. As a
result, our actual results for future periods could differ materially from those
anticipated or projected.
These forward-looking statements speak only as of the date this report is
filed. We do 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.
NATURE OF BUSINESS
Cytomedix is a biotechnology company whose business model is premised upon
the research, development, licensing and distribution of autologous cellular
therapies (i.e., therapies using the patient's own body products) for the
treatment of chronic non-healing wounds using our propriety platelet rich plasma
gel and related product therapies. To create the proprietary platelet rich
plasma gel product, the patient's own plasma, platelets and other essential
blood components are separated through centrifugation and formed into a gel,
AutoloGel TM (the "AutoloGel") that is topically applied to a wound under the
direction of a physician.
Our proprietary autologous platelet rich plasma gel, branded AutoloGel, is
being used by healthcare providers for treating chronic wounds. This product
contains autologous multiple growth factors, platelet membranes, fibrin matrix
scaffold, and provides a moist covering.
By definition, a chronic cutaneous ulcer is defined as a wound that has
failed to proceed through an orderly and timely series of events to produce a
durable structural, functional, and cosmetic closure. Many patients have wounds
often lasting for months or even years. The three most common types of chronic
wounds are diabetic foot ulcers, venous stasis ulcers and pressure ulcers,
formerly known as decubitus ulcers. AutoloGel is being used to treat these
recalcitrant wounds. While our intellectual property covers the use of platelet
rich plasma gel across both the acute and chronic wound areas, our management
team believes the chronic wound market affords the most opportunity for success.
The AutoloGel process begins by drawing a small volume of blood from the
patient using a standard blood draw medical procedure. After separating the
plasma and platelets from the red blood cells through an activation process, the
liquid platelet rich plasma (PRP) forms a gel. The physician or care provider
applies the gel onto the wound. AutoloGel mimics the natural healing process by
16
maintaining a moist wound environment and delivering multiple growth factors
into the wound bed with the gel while also providing a cellular matrix. Growth
factors are cellular proteins that act as signals for cells to regulate both the
growth and movement of cells.
The entire process to produce the gel, including the platelet harvesting,
takes approximately five to fifteen minutes and is done at the point of care by
nurses, nurse practitioners, physician assistants, or physical therapists under
the direction of a physician. The patient's own blood is used as the source of
the platelets, eliminating the risk of infection that would be present if donor
blood products were used. Because the blood can be collected at any time and the
resulting gel is applied immediately after preparation, there are no issues with
shelf life or transportation of the product.
AutoloGel is physician directed and does not require training of the
patient to apply the gel or to change dressings. In addition, since the
healthcare provider applies it, the use of AutoloGel aids in assuring the
continued assessment of the wound by the healthcare provider.
CUSTOMERS AND MARKETING
We are currently marketing AutoloGel into the chronic wound care market
through the sale of disposable kits (the "Kits") that provide single treatment
of the platelet rich plasma gel. We provide the disposable Kits to customers
desiring to use the AutoloGel process for the treatment of their patients. In
addition, we provide each customer with a specially-calibrated table-top
centrifuge which the customer uses solely for the purpose of performing the
AutoloGel process using the purchased Kits. We also provide the customer's
personnel with an initial training program of the AutoloGel process. The
end-user purchases the Kits (each Kit representing the right to a single-use
license of the AutoloGel process) at a fixed price, which will vary depending on
the customer's size, supply needs, term of contract, and related factors.
Since the beginning of 2002, we have entered into license and supply
agreements with nationally-recognized long term care providers, including
National Healthcare Corporation, Extendicare Health Services, Total Blood
Services, Provident Home Care and other long term care, long term acute care and
wound care providers.
COMPETITION
In the market for biotechnology products, we face competition from
pharmaceutical companies, biopharmaceutical companies and other competitors
whose products are marketed into the long term care space. Other companies have
developed or are developing products which may be in direct competition with the
AutoloGel process. Biotechnology development projects are characterized by
intense competition. 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.
It has become generally accepted that growth factors can aid significantly
in wound healing. The current market leader is Regranex marketed by a division
of Johnson & Johnson, Inc. The Regranex product has had great success in the
marketplace, and the Company cannot guarantee that its AutoloGel product can
successfully compete with Regranex.
In 2001, Apligraf, a cultured skin graft product which was developed by
Organogenesis, an American Stock Exchange company and marketed by Novartis, a
large U.S. based pharmaceutical company was available. The product was being
widely used and was reimbursed under Medicare but in the third quarter of 2002,
it was withdrawn from the market due to voluntary manufacturing recall.
Organogenesis subsequently filed for Chapter 11 protection and ended its sales
17
and marketing agreement with Novartis. Recently approved for sale in the U.S. is
a product called Dermagraft, which is produced by Advanced Tissue Sciences, a
NASDAQ company. Dermagraft is a dermal fibroblast skin substitute used to help
in the wound closure of diabetic foot ulcers. It is being marketed by Smith and
Nephew, a large healthcare company with an established wound care presence. It
is easier to apply than its predecessor, Apligraf, in that it can be applied in
a physician's office. However, it requires storage in a -70 degree Centigrade
freezer which most physicians' office do not own. It is covered under Medicare
reimbursement as well.
It also is generally accepted that the V.A.C. as marketed by KCI, Inc., is
the market leader in treating chronic wounds in the long term care and home
healthcare markets. "V.A.C." stands for vacuum assisted closure which consists
of a sponge that is placed in the wound connected by tubing to a vacuum
canister. This provides negative pressure wound therapy. The V.A.C. has been
very well received since its introduction two years ago and the company cannot
guarantee its AutoloGel can successfully compete with the V.A.C.
RESULTS OF OPERATIONS FOR PERIOD ENDING MARCH 31, 2002
These results of operations and the notes to the financial statements
pertain solely to the period ending March 31, 2002. These results must be
considered in conjunction with the Subsequent Events section of Item 2.
We are a development stage company as defined in Statement of Financial
Accounting Standards No. 7 and had only limited operations through March 31,
2002. 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 the licensing strategy for, and market expansion of,
AutoloGel and related disposable treatment packs and proprietary system. We
generated minimal revenues from inception through March 31, 2002.
OVERVIEW OF EVENTS
In January 2001, we acquired certain technology and other assets of
Curative Health Services, Inc. and CHS Services, Inc., (collectively,
"Curative") including the intellectual property rights related to the
development and production of platelet-derived growth factors (the "Procuren
Acquisition"). The Procuren Acquisition included assets relating to the
production of Curative's proprietary wound treatment agent, Procuren. With the
technology and other assets we have acquired from Curative, we intended to
develop, or license others to develop, other products associated with this
intellectual property. However, we sustained recurring losses from the Procuren
Acquisition and, in 2001, shut down the entire Procuren operation.
Because management had focused its resources on the Procuren Acquisition,
the AutoloGel operations had diminished. By the end of the second quarter of
2001, we had curtailed our operations substantially and had terminated the
majority of our workforce, other than a skeleton staff of three employees. On
August 7, 2001 (the "Petition Date"), the Company filed bankruptcy under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court of
the Northern District of Illinois, Eastern Division (the "Court") (Case No.
01-27610). After the Petition Date, we were authorized to continue to conduct
our business as debtor and debtor-in-possession. As a debtor-in-possession, we
were authorized to operate our business but could not engage in transactions
outside the ordinary course of business without the approval of the Court.
While the Chapter 11 filing constituted a default under our various
financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic
stay that generally precludes creditors and other interested parties from taking
any remedial action in response to such resulting default without prior
Bankruptcy Court approval. In addition, under the Bankruptcy Code, we had the
power to assume or reject executory contracts, including lease obligations.
Parties affected by these rejections were able to file claims with the Court in
accordance with the reorganization process. We actively engaged in this process
and reviewed all claims and executory contracts, reaching final decisions with
respect to assuming or rejecting the contracts and paying claims.
No trustee or creditors' committee was appointed in this case. The
management at the time of the Petition Date moved to retain a business broker
that would market our assets, including our intellectual property assets, with a
view towards conducting an auction of our assets. A group of shareholders
objected to this contemplated disposition of our assets and sought to remove our
18
then-existing board of directors by soliciting support from other shareholders.
The Court allowed us to obtain approximately $800,000 in DIP Financing.
This money provided us with working capital and funding to pay post-petition
bills. We continue to pay post-petition bills in the ordinary course of
business.
Pursuant to this consent solicitation, shareholders representing a majority
of the Company's voting shares submitted written consents for the removal of the
then-existing board of directors and the election of the following three new
directors: Messrs. Robert Burkett, Charles Worden and David Crews (the "Board").
Initially, former management objected to the consent solicitation, but later
withdrew that objection and tendered their resignations as officers; the new
directors were recognized by the Court on October 16, 2001. These events were
reported on a Form 8-K filed with the SEC on October 17, 2001, which is
incorporated herein by reference.
Upon former management's withdrawal of its objections, the Company
delivered prompt notice of those actions authorized pursuant to the consent
solicitation to the shareholders who did not consent in writing but who, if such
action had been taken at a shareholders' meeting, would have been entitled to
notice of the meeting. These notices were mailed to shareholders on October 17,
2001. The Notice was attached as an exhibit to the Form 10-QSB filed on November
12, 2002 and is incorporated herein by reference.
The Board then appointed Mr. Kent T. Smith as Chief Executive Officer. Mr.
Smith had served as our Vice President of Sales and Marketing from April 2000
until being laid off in late June 2001. The Board also approved the hiring of
Jimmy D. Swink, Jr., as Reorganization Manager for us. Mr. Swink has been a
contract consultant with us since our inception, is the collateral agent for the
holders of outstanding 10% Notes and is a holder of a substantial amount of our
equity.
The Court allowed us to obtain approximately $800,000 in debtor-in-
possession financing ("DIP Financing"). This money provided us with working
capital and funding to pay post-petition bills. We continue to pay post-petition
bills in the ordinary course of business.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
2001
As noted above, we filed for bankruptcy on August 7, 2001. This event had
a direct impact on all of our revenues and expenses described below.
Our revenues, cost of sales and gross profit for the three months ended
March 31, 2002 decreased as compared to the same period in 2001. During 2001
our management focused resources on the Procuren acquisition described above and
the AutoloGel operations diminished. Therefore, we entered bankruptcy and had
minimal operations during the first quarter of 2002.
Our losses of $858,602 from operations during 2002 decreased as compared to
losses of $6,657,740 in the first quarter 2001. The decrease in losses is due
to termination of all Procuren operations and commencing implementation of the
new AutoloGel distribution model while operating within the guidelines of a
business in Chapter 11 bankruptcy.
Our compensation expense for the three months ended March 31, 2002 was
approximately $135,587 as compared to $452,367 for the same period in 2001. The
decrease in the compensation expense in 2002 compared to 2001 was primarily due
to the minimal number of employees utilized during the first quarter 2002 to
operate the Company while in bankruptcy.
Our consulting and professional services expenses for the three months
ended March 31, 2002 were approximately $124,439, as compared to $1,119,316 for
the same period in 2001. The decrease in the consulting expenses in 2002
compared to 2001 was primarily due to our decision to retain only those
consultants necessary to effect the reorganization of the Company and to operate
the Company during bankruptcy.
Our general and administrative expenses for the three months ended March
31, 2002, were $207,293, as compared to $603,656 for the same period in 2001.
The decrease was due to reduced expenses to operate the business and the
relocation to a much smaller corporate office.
Our interest expense, net of interest income, for the 2002 period was
$133,193, as compared to $4,274,652 for the 2001 period. The material portion
of our interest expense in the first quarter of 2001 was primarily due to our
recording of $4,196,847 in non cash interest charges related to financing
obtained in connection with our purchase of the Procuren operations.
19
During the three months period ended March 31, 2002, we incurred
reorganization expenses of $285,340 for professional fees and consulting
expense related to the bankruptcy and the Company's reorganization.
LIQUIDITY AND CAPITAL RESOURCES AS OF MARCH 31, 2002
On August 7, 2001, we filed bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code because of our lack of liquidity and demanding cash needs. We
were authorized by the Court to conduct our business as debtor-in-possession,
but we could not engage in transactions outside the ordinary course of business
without prior court approval.
As of the quarter ended March 31, 2002, the Company had not generated
positive cash flow from operations. At March 31, 2002, we had cash and cash
equivalents of approximately $250,867. Working capital at March 31, 2002 was a
deficit of approximately ($1,012,536) after reclassifying approximately
$7,906,296 to long-term liabilities as a result of the Chapter 11 filing.
Furthermore, filing for bankruptcy constituted a default under our various
financing arrangements.
The Court did authorize the Company to obtain $800,000 in DIP financing and
to initiate a private offering in conjunction with the Plan to provide the
Company with working capital. We believe that funds from the private offering,
the DIP Financing and generated revenues will be sufficient to meet our cash
needs through the end of 2002.
SUBSEQUENT EVENTS
Because this report is filed late and subsequent events have occurred since
the end of the time period covered by this report, this report must be read in
light of the following material events occurring subsequent to March 31, 2002.
These events are discussed below and many have been previously reported in Forms
8-K filed with the SEC.
Shortly after removal of prior management, new management focused on the
formulation of a plan of reorganization that would enable us to reorganize and
emerge quickly from Chapter 11 in order to preserve our value as a going
concern. Our limited available funds mandated that we move swiftly to
reorganize.
We engaged in negotiations with several interested parties in the case,
including holders of the 12% convertible secured promissory notes (the "12%
Notes") and 10% convertible secured promissory notes (the "10% Notes"), Charles
Worden, Curative Health Services, Inc., and others. Concurrently, we had
discussions with prospective new investors about the terms of an investment in
the Company to fund our reorganization. Among the numerous factors considered
in these various discussions and negotiations were our business plan and
projected financial results, the amounts and nature of claims asserted, the
time, expense, and risks involved in failing to obtain consensus on a plan of
reorganization, the adverse impact of a prolonged case, and the alternatives to
reorganization.
The Plan reflects understandings reached with certain noteholders,
prospective new investors, and Charles Worden regarding the terms to be
incorporated in a plan of reorganization. We developed the Plan in a manner
that we believe most fairly treats all classes, taking into consideration the
relative rights and negotiating positions of new investors and various competing
claimants and equity interest holders.
On March 21, 2002, we filed our initial plan of reorganization with the
accompanying disclosure statement and filed a motion to approve the adequacy of
the disclosure statement. On April 23, 2002, the Court approved the disclosure
statement and related notices, established voting procedures and set the
confirmation hearing date for June 6, 2002. We then amended the plan of
reorganization, and on April 24, 2002, we filed our First Amended Plan of
Reorganization with the accompanying disclosure statement. After such date, we
made certain technical amendments to the Plan. On June 14, 2002, finding that
the required debt holders had voted to accept the First Amended Plan of
Reorganization, the Court confirmed the Company's First Amended Plan of
Reorganization with Technical Amendments. On June 27, 2002, the Court approved
other technical amendments to the Plan and confirmed the Company's First Amended
Plan of Reorganization with All Technical Amendments (the "Plan"). The Court's
confirmation of the Plan was reported on an 8-K filed with the SEC on June 28,
2002. Both the confirmation order and the Plan were attached as exhibits to
that report, and are incorporated herein by reference.
20
Although the Court entered the initial confirmation order on June 14, 2002,
the Plan did not become effective until we raised the minimum aggregate amount
($2.8 million) through a private offering of shares of common stock with
warrants. During bankruptcy, we initiated this private offering to accredited
investors only (as said term is defined by Rule 501(a) of Regulation D) pursuant
to Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
promulgated thereunder. For each $1.00 invested in the private offering,
investors received one share of common stock, 1/4th of a Class A Warrant
(exercisable for 2 years at $1.00 per share) and 3/20ths of a Class B Warrant
(exercisable for 3 years at $1.50 per share).
On July 11, 2002, the Company had raised the minimum aggregate amount from
private accredited investors and the proceeds were released from the escrow
account to the Company; said date serves as the "Effective Date" of the Plan.
We raised aggregate proceeds totaling $3,214,252 in the private offering.
Under the Plan, all of the Company's securities or other instruments or
documentation representing a claim against or an equity interest in the Company
were canceled and of no further force or effect. Holders of certain claims or
securities were entitled to receive new securities from the Company in exchange
for their claims or equity interests in the Company prior to bankruptcy. Under
the Plan, holders of existing common stock receive one share of new common stock
for every five shares of existing common stock. Holders of existing Series A
Preferred stock receive one share of new common stock for every five shares of
existing Series A Preferred Stock (subject to certain conditions). Holders of
existing Series B Preferred stock receive $.0001 for each share owned.
Under the Plan, the Company no longer has any outstanding 12% convertible
secured promissory notes ("12% Notes") or 10% convertible secured promissory
notes (the "10% Notes"). Holders of the 12% Notes receive a combination of
shares of common stock (up to 50% of their claim) and shares of new Series A
Convertible Preferred Stock. Holders of the 10% Notes receive a combination of
shares of common stock (up to 50% of their claim) and shares of new Series B
Convertible Preferred Stock. Noteholders are entitled to one share (of either
common or preferred stock) for every $1.00 owed to them under their respective
notes.
In addition, under the Bankruptcy Code we could assume or reject executory
contracts, including lease obligations. Parties affected by these rejections
could file claims with the Court in accordance with the reorganization process.
We actively engaged in this process and reviewed all claims and executory
contracts, reaching final decisions with respect to assuming or rejecting the
contracts. These decisions were included in the Plan. See the 10-KSB for the
year ended December 31, 2001, and the Notes to the Financial Statements included
in this report for a more detailed analysis of the Plan.
Under the Plan, holders of existing common stock receive one share of new
common stock for every five (5) shares of existing common stock. On July 26,
2002, this exchange was recognized by the markets and our new common stock began
trading under a new symbol - CYME. The exchange of five shares of existing
common stock for one share of new common stock is not reflected in the
accompanying financial statements.
The new common stock succeeded to the registered status of the existing
common stock under Rule 12g-3 as explained in 3S and 5S Rule 12g-3 in the
Division of Corporation Finance: Manual of Publicly Available Telephone
Interpretations - March 1999 Supplement.
In conjunction with the Plan, we executed new corporate documents and filed
them with the Delaware Secretary of State as required. These new corporate
documents include the Restated Certificate of Incorporation, the Amended and
Restated Certificate of Designation and the Restated By-Laws. We also approved
and implemented a new Long-Term Incentive Plan.
Under the Plan, the only remaining members of the Board as of July 11, 2002
(the Effective Date) were Messrs. Robert Burkett and David Crews. On August 19,
2002, our Board appointed Mr. Steve Holden as the third member of the Board.
In October 2001, our principal executive offices were relocated from Three
Parkway North, Suite 200, Deerfield, Illinois 60015 to Eden Tower Plaza, 790
Frontage Road, Northfield, Illinois 60093. During the first quarter 2002, the
Company's records were kept in Northfield and our corporate address was in
Northfield; however, existing employees conducted business from their remote
offices. In August 2002, we moved our corporate headquarters from Northfield,
21
Illinois to 1523 S. Bowman, Suite A, Little Rock, Arkansas 72211. Our telephone
number at the Arkansas location is (501) 219-2111.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND 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 included in this report. The risks
described below are not to be deemed an exhaustive list of all potential risks.
WE ARE A COMPANY WHICH FILED FOR BANKRUPTCY WITH LIMITED WORKING CAPITAL.
Because the Company has been in bankruptcy, the Company cannot anticipate
how the market will receive it or its products. Furthermore, the Company will
not be obtaining extensive debt financing. All working capital required to
implement the Company's business plan after confirmation of the Plan will be
provided by funds obtained through its private offering and revenues generated
by the Company.
If we do not have sufficient working capital and are unable to generate
revenues or raise additional funds, the following may occur: delaying the
implementation of our new business plan or significantly reducing the scope of
the business plan; delaying some of our development and clinical testing;
delaying our plans to initiate government regulatory and reimbursement approval
processes for our wound treatment technologies; and postponing the hiring of new
personnel. The occurrence of any or all of these events could have a material
adverse effect on the Company.
WE HAVE HAD A HISTORY OF LOSSES.
The Company has a history of losses and expects to incur substantial losses
and negative operating cash flows for the foreseeable future. The Company may
never achieve or maintain profitability. The Company is not currently
profitable and expects to continue to incur net losses in the foreseeable
future. The Company also expects to experience negative cash flow for the
foreseeable future. The Company will need to generate significant revenues to
achieve and maintain profitability. The Company cannot guarantee that it will
be able to generate these revenues and it may never achieve profitability in the
future.
WE HAVE A SHORT OPERATING HISTORY AND LIMITED OPERATING EXPERIENCE.
The Company must be evaluated in light of the uncertainties and
complexities affecting an early stage biotechnology company. The Company is a
development stage company and has only recently begun to implement its current
business plan since the change in management occurring in October 2001. Thus,
the Company has a very limited operating history and limited experience in
conducting these operations. 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 process 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.
During bankruptcy, we began developing a new business model. Our failure to
successfully implement our new business plan would adversely affect our
business, prospects, operating results and financial condition. If we do not
have sufficient working capital and are unable to generate revenues or raise
additional funds, the following may occur: delaying the implementation of our
new business plan or significantly reducing the scope of the business plan;
delaying some of our development and clinical testing; delaying our plans to
22
initiate government regulatory and reimbursement approval processes for our
wound treatment technologies; and postponing the hiring of new personnel. The
occurrence of any or all of these events could have a material adverse effect on
the Company.
AUTOLOGEL IS SUBJECT TO GOVERNMENTAL REGULATION.
The Company's success is also impacted by factors outside of the Company's
control. Our therapies are subject to governmental regulation by numerous
governmental authorities, including the United States Food and Drug
Administration (the "FDA"). Changes in regulation or failure to obtain required
approvals would have a material adverse impact on the Company.
The Company's current therapies will be subject to extensive regulation by
numerous governmental authorities in the United States, both federal and state,
and in foreign countries by regulatory agencies. Specifically, the Company's
therapies will be subject to regulation by the FDA and state regulatory
agencies. 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 process is practiced, could materially
and adversely affect the Company's ability to sell products in those states.
Further, as the Company expands and offers additional products in the
United States and in foreign countries, the Company may require approval from
the FDA and comparable foreign regulatory authorities prior to introduction of
any such products into the market. The Company has no assurance that it will be
able to obtain all necessary approvals from the FDA or comparable regulatory
authorities in foreign countries for these products. Failure to obtain the
required approvals would have a material adverse impact on the Company's
business and financial condition.
OUR SUCCESS COULD BE ADVERSELY AFFECTED IF OUR CUSTOMERS CANNOT OBTAIN
REIMBURSEMENT.
AutoloGel is provided to healthcare providers. Some of these providers, in
turn, seek reimbursement from third party payors such as Medicare, Medicaid, and
other private insurers. The Company has not submitted an application for
Medicare reimbursement for the AutoloGel process. At present, the AutoloGel
process does not qualify for Medicare or Medicaid reimbursement. 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 procedure code for AutoloGel,
the Company will have to undertake a prospective, randomized, controlled, clinic
trial so as to provide the necessary data as required by the Center for Medicare
and Medicaid Services, formerly known as the Healthcare Financing Agency
("HCFA"). In addition, a 1992 HCFA ruling prohibiting the reimbursement of
growth factor products for chronic wounds will have to be dismissed. The
Company's ability to obtain reimbursement approval from governmental agencies
and private insurers may be a significant factor in determining its abilities to
increase its revenues. The Company cannot guarantee that third-party payors will
elect to reimburse treatments using the Company's products or processes or, if
such reimbursement is approved, that the level of reimbursement granted will be
sufficient to cover the cost of the product or 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 AUTOLOGEL 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.
23
WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL.
The future success of the Company depends on the ability to attract, retain
and motivate highly-skilled management, including sales representatives. The
Company has retained a team of highly-qualified officers and consultants, but
the Company cannot assure you that it will be able to successfully integrate
these officers and consultants into its operations, retain all of them or be
successful in recruiting additional personnel as needed. The Company's
inability to do so will materially and adversely affect the business prospects,
operating results and financial condition.
The Company's ability to maintain and provide additional services to its
existing customers depends upon its ability to hire and retain business
development and scientific and technical personnel with the skills necessary to
keep pace with continuing changes in cellular therapy technologies. Competition
for such personnel is intense, the Company competes with pharmaceutical,
biotechnology and healthcare companies. The Company's inability to hire
additional qualified personnel may lead to higher recruiting, relocation and
compensation costs for such personnel. These increased costs may reduce the
Company's profit margins or make hiring new personnel impracticable.
LEGISLATIVE AND ADMINISTRATIVE ACTION MAY HAVE AN ADVERSE EFFECT ON THE
COMPANY.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company cannot
predict what other legislation relating to its business or to the health care
industry may be enacted, including legislation relating to third-party
reimbursement, or what effect such legislation may have on the Company's
business, prospects, operating results and financial condition. The Company
expects federal and state legislators to continue to review and assess
alternative health care delivery and payment systems, and possibly adopt
legislation affecting fundamental changes in the health care delivery system.
Such laws may contain provisions, which may change the operating environment for
our targeted customers, including hospitals and managed care organizations.
Health care industry participants may react to such legislation by
curtailing or deferring expenditures and initiatives, including those relating
to our products. Future legislation could result in modifications to the
existing public and private health care insurance systems that would have a
material adverse effect on the reimbursement policies discussed above.
THE COMPANY COULD BE AFFECTED BY MALPRACTICE CLAIMS.
Providing medical care entails an inherent risk of professional malpractice
and other claims. The Company does not control or direct the practice of
medicine by physicians or health care providers who use the products and does
not assume responsibility for compliance with regulatory and other requirements
directly applicable to physicians. The Company cannot guarantee that claims,
suits or complaints relating to the use of the AutoloGel process administered by
physicians will not be asserted against the Company in the future.
The marketing, sale, and use of the AutoloGel process entail risks that
product liability claims will be asserted against the company. These risks
cannot be eliminated and the Company could be held liable for any damages that
result from adverse reactions or infectious disease transmission. Such liability
could materially and adversely affect the Company's business, prospects,
operating results and financial condition.
The Company currently maintains professional and product liability
insurance coverage, but the Company cannot assure you that the coverage limits
of this insurance would be adequate to protect us against all potential claims.
The Company cannot guarantee that it will be able to obtain or maintain
professional and product liability insurance in the future on acceptable terms
or with adequate coverage against potential liabilities.
AUTOLOGEL HAS EXISTING COMPETITION IN THE MARKETPLACE.
In the market for biotechnology products, the Company faces competition
from pharmaceutical companies, biopharmaceutical companies and other competitors
whose products are marketed into the long-term care market. Other companies
have developed or are developing products which may be in direct competition
with the AutoloGel process. Biotechnology development projects are
24
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 product. 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.
OUR COMMON STOCK IS QUOTED ON THE PINK SHEETS AND WE MAY NEVER BE LISTED ON
A NATIONAL EXCHANGE.
Our common stock is currently traded in the over-the-counter market and
quoted on the Pink Sheets LLC (the "Pink Sheets") (Until July 26, 2002, our
common stock was quoted under the symbol "CYDX" and since said date has been
quoted under the symbol "CYME"). Although Cytomedix is currently a publicly
held company, there can be no assurance as to whether an active trading market
for our common stock will be developed or maintained or that our 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.
PURCHASES OF OUR SHARES ARE SUBJECT TO THE SEC'S PENNY STOCK RULES.
If a trading market for our 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 our 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 our common stock, which could severely limit the
liquidity of the common stock and the ability of shareholders to sell our common
stock in the secondary market.
FORWARD-LOOKING INFORMATION
Initial reports from healthcare providers treating hard-to-heal chronic
wounds with AutoloGel have stated that they have found increased healing in a
shorter period of time than they have experienced with other products. There is
an existing long term care market where we believe AutoloGel is perfectly
positioned for success. With what we believe to be a strong patent position and
an easy-to-use system to treat wounds, we believe we are positioned to
successfully introduce AutoloGel into the long-term care market.
25
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 7, 2001, the Company filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. We were not involved in any other legal
proceeding in the first quarter of 2002, other than those actions and claims
brought in connection with the bankruptcy.
UPDATING INFORMATION
However, after July 11, 2002, the Company commenced the following
litigation in the District Court for the Northern District of Illinois, Eastern
Division: (i) Cytomedix, Inc. v. LB Hyperbarics, Inc., et al., Case No. 02 C
4774; (ii) Cytomedix, Inc. v. Perfusion Partners & Associates, Inc., Case No. 02
C 4776; (iii) Cytomedix, Inc. v. James Gandy, et al., Case No. 02 C 4779; (iv)
Cytomedix, Inc. v. Little Rock Foot Clinic, P.A., et al., Case No. 02 C 4782;
(v) Cytomedix, Inc. v. Autologous Blood Technology, L.L.C., et al., Case No. 02
C 4863; and (vi) Cytomedix, Inc. v. Safeblood Technologies, Inc., et al., Case
No. 02 C 4773. In each of these cases, the Company has asserted that the
Defendants have infringed the Company's patents and engaged in unfair
competition. In the Gandy and Little Rock proceedings, breaches of contract are
also asserted. In all these actions the Company seeks unspecified damages and
injunctive relief. The cases are generally in the early stages involving
motions to dismiss by the defendants in each case, and responses by the Company.
Thus far, the Company has successfully defended against a motion to dismiss in
the LB Hyperbarics case. Briefing on the motions to dismiss in all the other
pending cases (except the Gandy adversary, where a responsive pleading has not
yet been filed) is proceeding and rulings on these pending motions are expected
by year end 2002.
In September 2002, the Company filed with the Bankruptcy Court for the
Northern District of Illinois, Eastern Division, an adversary proceeding
captioned Cytomedix, Inc. v. Keith Bennett, et al., Adv. No. 02 A 01292. In
this action, the Company objects to Bennett's $1.1 million claim asserted as a
Class 3 general unsecured claim under Option 3A (under which Bennett would
receive a 12% cash recovery on his Allowed Claim, if any) in the Company's
bankruptcy case. In addition, the Company asserts affirmative claims of patent
infringement, breach of contract, and unfair competition. Management intends to
vigorously pursue the litigation. The Company has successfully defended against
Bennett's motions to dismiss or, alternatively, to compel arbitration or
transfer venue of the case to a federal court in Arkansas.
Although the Company has not yet been served with the complaint, it has
come to our attention that 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 vigorously disputes the allegations, and intends to
bring counterclaims against Harvest for patent infringement and unfair
competition. However, an unfavorable resolution of, settlement, or defense
costs related to this lawsuit could have a material adverse effect on our
business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Between January 1, 2002 and March 31, 2002, we did not issue any additional
securities.
As of March 31, 2002, we had issued and issuable warrants to acquire
4,425,046 shares of common stock and issued and issuable options to acquire
1,640,789 shares of common stock (but see Updating Information below). The
exercise prices on these warrants and options ranged from $.02 to $10.00 per
share.
26
UPDATING INFORMATION:
Under the Plan, all outstanding options and warrants are canceled on our
books and are of no further force or effect. Holders of options and warrants do
not receive any exchange consideration under the Plan.
In connection with the Plan, we initiated a private offering of Common
Stock of Cytomedix, Inc. and Warrants to Purchase Common Stock of Cytomedix,
Inc. to accredited investors only (as said term is defined by Rule 501(a) of
Regulation D). The private offering was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933
and Rule 506 of Regulation D promulgated thereunder. For each $1.00 invested in
the private offering, investors received one share of common stock, 1/4th of a
Class A Warrant (exercisable for 2 years at $1.00 per share) and 3/20ths of a
Class B Warrant (exercisable for 3 years at $1.50 per share). Commissions of
10% of the sale price were paid to the selling agents with 50% of the commission
amount paid in cash and 50% paid in shares of common stock (one share of common
stock for each $1.00 of commission earned payable in stock for an aggregate
amount of 128,463 shares of restricted common stock issued to selling agents).
R.M. Duncan Securities of Little Rock, Arkansas, Founder's Equity of Dallas,
Texas, and Crews & Associates of Little Rock, Arkansas served as the principal
selling agents. The Company used the $3,085,789 in net aggregate proceeds
($3,214,252 less $128,463 in commissions paid) for working capital.
Pursuant to the Plan and section 1145 of the U.S. Bankruptcy Code, the
Company is in the process of exchanging new securities for "Allowed Claims" and
"Allowed Equity Interests" as defined in the Plan. See the Notes to the
Financial Statements in Item 1 for a more detailed explanation of the exchange
consideration issued under the Plan.
Under the HMA Financial Services agreement entered into July 29, 2002, we
issued to HMA a warrant representing the right to purchase 600,000 shares of
common stock at $1.00 per share.
Since emerging from bankruptcy, we have issued stock in lieu of cash to
certain legal professionals rendering their services after July 11, 2002. This
stock is being issued pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Our filing for bankruptcy constituted a default under both the 12% Notes
and 10% Notes. However, under the Plan, both the 12% Notes and the 10% Notes
have been cancelled and are of no further force or effect. See the Notes to the
Financial Statements in Item 1 for more detailed information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the interim
period covered by this report.
UPDATING INFORMATION
It should be noted that the entry of the Court's order confirming the Plan
constituted an order of the Court authorizing the Company to take certain
corporate actions without the need for any further action by the Court or any of
the officers, directors, or shareholders of the Company. Pursuant to this
order, the Company was authorized and did take all actions necessary and
appropriate to execute and adopt the following: the Restated Certificate of
Incorporation, the Restated Bylaws, the Amended and Restated Certificate of
Designation, and the Long-Term Incentive Plan. The Court's confirmation of the
Plan also authorized the Company, among other things, to select our initial
directors and officers and to remove any directors or officers of the Company.
The Plan included the removal of Mr. Charles Worden from the Board. As
authorized, the Board subsequently appointed Mr. Steve Holden as the third
member of the Board.
ITEM 5. OTHER INFORMATION.
Prior to the date this 10-QSB was due, the Company filed for bankruptcy.
The Company did not file any periodic reports during bankruptcy. We did,
however, file our monthly operating reports required by the Court under the
cover of Forms 8-K and reported other current events under Forms 8-K. The
Company plans to file all missed reports for past periods and all reports which
become due. Because this report is filed late and subsequent events have
occurred since the end of the time period covered by this report, this report
must be read in conjunction with Management's Discussion and Analysis and in
27
conjunction with the Forms 8-K filed with the SEC after March 31, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The Exhibits listed in the accompanying Exhibit Index are filed as part of
this report.
On Form 8-K filed December 10, 2001, we reported our intentions to file our
monthly operating reports, required to be filed with the Court, with the SEC
under the cover of Forms 8-K. On February 22, 2002, we filed our monthly
operating reports with the SEC for the following months: August 2001, September
2001 (an amended monthly operating report to replace the September report filed
December 10, 2001), October 2001, November 2001, December 2001 and January 2002.
Subsequent to March 31, 2002, we have reported other material events on Forms
8-K filed with the SEC as follows:
April 8, 2002 Filing of Plan of Reorganization
April 12, 2002 February 2002 Monthly Operating Report
April 12, 2002 March 2002 Monthly Operating Report
May 21, 2002 Filing of First Amended Plan of Reorganization
June 7, 2002 April 2002 Monthly Operating Report
June 28, 2002 Filing and Confirmation of First Amended Plan of
Reorganization with All Technical Amendments
July 16, 2002 Effective Date of Plan and Removal of Director under the Plan
July 25, 2002 Reverse Split of Common Stock and Trading under New Symbol
August 21, 2002 Engagement of New Independent Accountant
August 26, 2002 Dismissal of Independent Accountant
October 3, 2002 May 2002 Monthly Operating Report
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cytomedix, Inc.
/s/Kent T. Smith
- -----------------------------
Kent T. Smith
Chief Executive Officer
Date: November 21, 2002
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kent T. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cytomedix, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: November 21, 2002
/s/Kent T. Smith
Kent T. Smith
Chief Executive Officer
29
EXHIBIT LIST
2.1 Amended and Restated Asset Purchase Agreement, effective as of October
12, 2000 and executed as of December 26, 2000, by and among Cytomedix, Inc., CHS
Services, Inc. and Curative Health Services, Inc. (Previously filed on January
17, 2001, on Form 8-K, File No. 000-28443).
2.2 First Amended Plan of Reorganization with All Technical Amendments
(Previously filed on June 28, 2002, on Form 8-K, File No. 000-28443).
3.1 Restated Certificate of Incorporation of Cytomedix, Inc. (Previously
filed on November 7, 2002, on Form 10-QSB for quarter ended June 30, 2001, File
No. 000-28443).
3.2 Restated Bylaws of Cytomedix, Inc. (Previously filed on November 7,
2002, on Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
4.1 Convertible Secured Promissory Note issued to Curative Health Services,
Inc., dated as of December 26, 2000 (Previously filed on January 17, 2001, on
Form 8-K, File No. 000-28443).
4.2 Convertible Secured Promissory Note issued to TSENVI, LLC, dated as of
December 26, 2000 (Previously filed on January 17, 2001, on Form 8-K, File No.
000-28443).
4.3 Convertible Secured Promissory Note issued to Bel-Cap Delaware, LLC,
dated as of December 26, 2000 (Previously filed on January 17, 2001, on Form
8-K, File No. 000-28443).
4.4 Convertible Secured Promissory Note issued to Bristol Investment Fund,
LLC, dated as of December 26, 2000 (Previously filed on January 17, 2001, on
Form 8-K, File No. 000-28443).
4.5 Warrant issued to Curative Health Services, Inc., dated as of December
26, 2000 (Previously filed on January 17, 2001, on Form 8-K, File No.
000-28443).
4.6 Warrant issued to TSENVI, LLC, dated as of December 26, 2000 (Previously
filed on January 17, 2001, on Form 8-K, File No. 000-28443).
4.7 Warrant issued to Bel-Cap Delaware, LLC, dated as of December 26, 2000
(Previously filed on January 17, 2001 on Form 8-K, Registration No. 000-28443).
4.8 Warrant issued to Bristol Investment Fund, LLC, dated December 26, 2000.
(Previously filed on January 17, 2001, on Form 8-K, Registration No. 000-28443).
4.9 Warrant issued to FAC Enterprises, Inc., dated as of December 26, 2000
(Previously filed on February 16, 2001, on Form SB-2, File No. 333-55818).
4.10 Warrant issued to Smoke Rise Investments, LLC dated as of February 13,
2001. (Previously filed on February 16, 2001, on Form SB-2, File No. 333-55818).
4.11 Warrant issued to The Kriegsman Group, dated as of December 26, 2000
(Previously filed on February 16, 2001, on Form SB-2, File No. 333-55818).
4.12 Amended and Restated Certificate of Designation of the Relative Rights
and Preferences of Series A Preferred, Series B Preferred and Common Stock of
Cytomedix, Inc. (Previously filed on November 7, 2002, on Form 10-QSB for
quarter ended June 30, 2001, File No. 000-28443).
10.1 Royalty Agreement, dated as of December 26, 2000, by and between
Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed on January
17, 2001, on Form 8-K, File No. 000-28443).
30
10.2 Supply Agreement, dated as of December 26, 2000, by and between
Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed on January
17, 2001, on Form 8-K, File No. 000-28443).
10.3 Securities Purchase Agreement, dated as of December 26, 2000, by and
among Cytomedix, Inc., TSENVI, LLC, Bel-Cap Delaware, LLC, Bristol Investment
Fund, Ltd. and Curative Health Services, Inc. (Previously filed on January 17,
2001, on Form 8-K, File No. 000-28443).
10.4 Registration Rights Agreement, dated as of December 26, 2000, by and
among Cytomedix, Inc., TSENVI, LLC, Bel-Cap Investments, Ltd., Bristol
Investment Fund, LLC and Curative Health Services, Inc. (Previously filed on
January 17, 2001, on Form 8-K, File No. 000-28443). 21
10.5 Security Agreement, dated as of December 26, 2000, by and among
Cytomedix, Inc., TSENVI, LLC, Bel-Cap Investments, Ltd., Bristol Investment
Fund, LLC and Curative Health Services, Inc. (Previously filed on January 17,
2001, on Form 8-K, File No. 000-28443).
10.6 Assignment and Assumption Agreement, dated as of December 26, 2000, by
and between Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed
on January 17, 2001, on Form 8-K, File No. 000-28443).
10.7 Form of Lease Assignment and Assumption Agreement, dated as of December
26, 2000, by and between Cytomedix, Inc. and Curative Health Services, Inc.
(Previously filed on January 17, 2001, on Form 8-K, File No. 000-28443).
10.8 Assignment of Marks, dated as of December 26, 2000, by and among
Cytomedix, Inc., Curative Health Services, Inc. (formerly known as Curative
Technologies, Inc. and Curatech, Inc.) and CHS Services, Inc. (Previously filed
on January 17, 2001, on Form 8-K, Registration No. 000-28443).
10.9 Assignment of Patents, dated as of December 26, 2000, by and among
Cytomedix, Inc., Curative Health Services, Inc. (formerly known as Curative
Technologies, Inc. and Curatech, Inc.) and CHS Services, Inc. (Previously filed
on January 17, 2001, on Form 8-K, Registration No. 000-28443).
10.10 Assignment of Copyrights, dated as of December 26, 2000, by and among
Cytomedix, Inc., Curative Health Services, Inc. and CHS Services, Inc.
(Previously filed on January 17, 2001, on Form 8-K, Registration No. 000-28443).
10.11 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,
File No. 000-28443).
10.12 Consent, Waiver, Payoff and Exchange Agreement dated April 20, 2001,
by and among Cytomedix, Inc., Curative Health Services, Inc., Bel-Cap Delaware,
LLC, Bristol Investment Fund, Ltd. and TSENVI, LLC (Previously filed on April
27, 2001, on Form 8-K, File No. 000-28443).
22.1 Notice of Shareholders to Cytomedix, Inc. dated October 17, 2001
(Previously filed on November 12, 2002, on Form 10-QSB, File No. 000-28443).
99.1 Certificate of Chief Executive Officer of Cytomedix, Inc., pursuant to
18 U.S.C. 1350.
99.2 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).
31