(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
416 Hungerford Drive, Suite 330 Rockville, MD 20850
(Address of Principal Executive Offices) (Zip Code)
(Registrants Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.0001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer o
Non-accelerated Filer x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o NO x
The aggregate market value of the voting stock (Common stock) held by non-affiliates of the registrant as of the close of business on June 30, 2007 was approximately $22 million based on the closing sale price of the Common stock on the American Stock Exchange on that date. The registrant does not have any non-voting common equity.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x NO o
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date. 31,938,074 shares of Common stock, par value $.0001, outstanding as of March 14, 2008.
This Annual Report on Form 10-K (including the section regarding Managements Discussion and Analysis of Financial Condition and Results of Operations) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Cytomedix, Inc. that is based on managements exercise of business judgment and assumptions made by and information currently available to management. Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of
management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases and reports released by the Company, the words anticipate, believe, estimate, expect, intend, the facts suggest and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect the Companys current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual
results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the expectations will materialize. Many factors could cause actual results to differ materially from these forward looking statements including those set forth in Item 1A of this report. Other unknown, unidentified or unpredictable factors could materially and adversely impact future results. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release any revisions to its forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
The Company files reports with the Securities and Exchange Commission (SEC or Commission). It makes available on its website (www.cytomedix.com) free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronic filing of such materials with or furnishing of them to the SEC. Information appearing at the Companys website is not a part of this Annual Report on Form 10-K. You can also read and copy any materials filed by the Company with the Commission at its Public Reference Room at 100 F Street,
NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission, including Cytomedix.
The Companys corporate headquarters are located at 416 Hungerford Drive, Suite 330, Rockville, MD 20850. Its phone number is (240) 499-2680. Its fiscal year begins on January 1, and ends on December 31, and any references herein to Fiscal 2007 mean the year ended December 31, 2007, and references to other Fiscal years mean the year ending December 31, of the year indicated.
The Company owns or has rights to various copyrights, trademarks and trade names used in its business. This report also includes other trademarks, service marks and trade names of other companies. Other trademarks and trade names appearing in this report are the property of the holder of such trademarks and trade names.
The Company obtained statistical data, market data and other industry data and forecasts used in this Form 10-K from publicly available information. While it believes that the statistical data, industry data, forecasts and market research are reliable, the Company has not independently verified the data, and does not make any representation as to the accuracy of that information.
Informatix Holdings, Inc. was incorporated in Delaware in 1998. In 1999, Autologous Wound Therapy, Inc. (AWT), an Arkansas Corporation, merged with and into Informatix Holdings, Inc. and the name of the surviving corporation was changed to Autologous Wound Therapy, Inc. In 2000, AWT changed its name to Cytomedix, Inc. (Cytomedix or the Company). In 2001, the Company filed bankruptcy under Chapter 11 of the United States Bankruptcy Code, after which Cytomedix was authorized to continue to conduct its business as debtor and debtor-in-possession. The Company emerged from bankruptcy in 2002 under a Plan of
Reorganization. At that time, all of the Companys securities or other claims against or 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 Cytomedix in exchange for their claims or equity interests prior to bankruptcy. All known and allowed claims and equity interests have been satisfied and resolved as of the filing of this Annual Report. The Companys principal offices are located in Rockville, Maryland.
Cytomedix is a biotechnology company that develops, sells, and licenses autologous cellular therapies (i.e., therapies using the patients own body products), including AutoloGelTM, a platelet rich plasma (PRP) gel cleared by the Food and Drug Administration (FDA) for use on a wide variety of open cutaneous wounds. To create AutoloGelTM, the patients own platelets and plasma are separated through centrifugation and combined with several reagents. This process releases multiple growth factors from the platelets, creates a fibrin matrix scaffold, and forms a gel that is topically applied to
a wound. Upon topical application, the Company believes that AutoloGelTM initiates a reaction that closely mimics the bodys natural wound repair process. Cytomedix sells its products primarily to health care providers in the United States and licenses its patents to medical device and product suppliers in the United States.
Cytomedixs primary target market is the multi-billion dollar, chronic, non-healing wound market. Chronic, non-healing wounds typically arise from one of three etiologies: diabetic foot ulcers, venous leg ulcers, and pressure ulcers. The following table lists the prevalence of these wound types:
The prevalence of chronic wounds in the U.S. is linked directly to increased aging demographics, vascular diseases, venous insufficiency, and excessive pressure and diabetic neuropathy. The prevalence of worldwide chronic wounds is estimated to be 18 million(5).
Diabetic Foot Ulcers According to the American Diabetes Association (1), there are approximately 20.8 million people with diabetes in the U.S., or 7% of the total population. It is estimated that 15% of these people with diabetes will develop a foot ulcer in their lifetime and that
14 24% of diabetic foot ulcers result in amputation.(2) Approximately 86,000 amputations per year occur due to these ulcers at an estimated amputation costs of $60,000 (2003 costs) per procedure(2), implying an aggregate cost of nearly $5.2 billion per year. The chances of a second amputation within 3 5 years may be as high as 50%, with a 5 year post-amputation mortality rate of 39 68%.(4)
Venous Stasis Leg Ulcers Venous leg ulcers are the most frequently occurring type of chronic wound. The prevalence rises dramatically with age, increasing to 1% of the population over age 60. It is estimated that treatment costs total between $2.5 to $3.5 billion annually (1998 costs) and a loss of 2 million workdays per year.(3)
Pressure Ulcers Over 2.0 million pressure ulcers occur each year with an annual cost greater than $1.3 billion (1994 costs). One study indicates that nearly 15% of hospitalized patients age 65 or older developed a pressure ulcer during a 5-day or longer stay. Furthermore, up to one-fifth of all home health service visits involve care of a pressure ulcer, and more than one-third of people with spinal cord injuries develop pressure ulcers.(3)
H.R 3203 Submitted to the House of Representatives, Sept 30, 2003.
Advanced Wound Management: Healing and Restoring Lives; Advanced Medical Technology Association (AdvaMed); June 2006.
Reiber GE, Boyko EJ, Smith DG: Lower Extremity Foot Ulcers and Amputations in Diabetes. In Diabetes in America. 2nd ed., National Institutes of Health, NIDDK, NIH Pub No. 95-1468, 1995.
Growth Factors: Indications, Products, and Markets; Kalorama Publications; October 2003.
The Company has developed a three-pronged strategy to leverage its intellectual property and capitalize on the market for its AutoloGelTM:
Obtain broad reimbursement from third-party payers.
Enforce rights under the Companys patents.
Target the non-reimbursement sensitive market.
In order to increase the prospects for securing broad reimbursement as well as enhance the sales and marketing efforts, the Company completed a well-controlled, prospective clinical trial and submitted a 510(k) Premarket Notification to the FDA.
In September 2007, the Company received FDA marketing clearance for its AutoloGelTM System. The indications for use are as follows:
The AutoloGelTM System is intended to be used at point-of-care for the safe and rapid preparation of platelet rich plasma (PRP) from a small sample of a patients own blood. Under the supervision of a healthcare professional, the PRP gel produced by the AutoloGelTM System is suitable for exuding wounds, such as leg ulcers, pressure ulcers, and diabetic ulcers and for the management of mechanically or surgically debrided wounds.
The FDAs clearance is specifically for the gel to be used as a wound dressing for the management of these wounds and that is the use for which the Company markets and promotes this product. However, Company-sponsored published and unpublished studies including a prospective randomized blinded clinical trial (published in a peer reviewed medical journal) indicate increased healing for AutoloGelTM as compared to published data on enhanced traditional treatments as well as competing treatments for the treatment of diabetic foot ulcers, which is the Companys initial focus within its target market. Increased healing is not
specifically included in the FDA cleared indication. In the 510(k) process that was used, the claim made by
the Company was that its product is substantially equivalent to other products legally on the market and therefore, the indication cleared was similar to that of other wound management products to which AutoloGelTM was compared.
This clearance is a broad indication for use that encompasses many more wound etiologies than just diabetic foot ulcers. It is the Companys belief that this also places Cytomedix as the only company with an FDA cleared PRP gel system for use on chronic wounds.
In conjunction with this positive decision from the FDA, the Company agreed to conduct a post-market surveillance study to further analyze the safety profile of bovine thrombin as used in the AutoloGelTM System. This study will include 300 patients over a two year period, does not contain any significant inclusion/exclusion criteria, consists of a few simple diagnostic blood tests, and is estimated to cost approximately $500,000. The Company will explore whether other stakeholders in the outcome of the study will offset a portion of this cost. The Company expects to leverage the data generated from this study to use as a tool in its sales
and marketing efforts.
In 2005, the Company completed its prospective, randomized, blinded, controlled, multi-center clinical trial designed to prove the efficacy and safety of its AutoloGelTM System for the treatment of non-healing diabetic foot ulcers. The audited results yielded 40 patients who met the trial protocol. Analysis of the size of wounds in the study showed that 35 out of the 40 patients (88%) had wounds that were less than or equal to 7 square centimeters in area and 2 cubic centimeters in volume. For these most common wound sizes in the study, the healing rate of the AutoloGelTM group was 81.3% and that for the control group was 42.1%.
The difference between these groups is clearly statistically significant, with a p-value of 0.036. Within the full cohort of the 40 patients, 68.4% of the patients treated with AutoloGelTM achieved full wound closure versus 42.9% of those patients treated in the control group. The difference between these groups is approaching statistical significance with a p-value of 0.125. Generally, full statistical significance requires a p-value of 0.05 or less. The Company believes, based on publicly available data related to full closure for some other products for which such data is available, that the healing rates of AutoloGelTM at 81.3% for the most common wound sizes in the study and 68.4% for all wound sizes are higher than any other wound care products cleared by the FDA or reimbursed by Medicare, although this comparison is not a definitive proof of overall clinical performance or superiority since, in order to prove that, one would have to conduct a head-to-head
clinical study in which the patients would, at random, be subjected to either AutoloGelTM or other technologies. Moreover, data on full closure of wounds from prospective, well-controlled, randomized, blinded clinical trials is not available for many wound management products on the market. In the Companys clinical trial, the control group patients were not on placebo; rather, they were treated using a saline gel cleared by the FDA for wound management. If the control group patients healed at the originally anticipated rate of 20-30% for standard treatments for diabetic foot ulcers, the difference between the healing rates in the AutoloGelTM group versus the control group would have been even more strongly statistically significant.
In September 2007, B&D Consulting (B&D), completed a Company-commissioned cost effectiveness analysis of AutoloGelTM as compared to certain alternative therapies for patients with diabetic foot ulcers (the Economic Study). Results of the study show that AutoloGelTM dominates other therapies analyzed in the study.
B&D, an independent, national, advisory and advocacy firm located in Washington, DC developed the research methodology, model structure, assumptions, and inputs from the peer-reviewed literature, including the publication of Cytomedixs completed clinical trial. Cytomedix paid B&D a fee for its work. This fee was not dependent on the results of the economic study.
The model developed by B&D simulates the clinical, cost, and quality-adjusted life years (QALYs) outcomes associated with using the AutoloGelTM System versus certain other treatment modalities in treating non-healing diabetic foot ulcers over a five-year period. The research shows that AutoloGelTM represents a potentially attractive treatment alternative for insurers and providers to address the cost burden and debilitating health effects associated with non-healing diabetic foot ulcers.
B&Ds model relies upon published data regarding health outcomes as well as costs associated with AutoloGelTM, a saline gel control, standard wound care, and certain other treatment modalities. The model
varies rates of healing, recurrence, infection, amputation, and death and associated costs reported in the literature for a hypothetical group of 200,000 diabetic foot ulcer patients.
The estimated 5-year average direct wound care costs (exclusive of lost work, disability, etc.) when AutoloGelTM was used to treat the most commonly sized diabetic foot ulcers was approximately $15,000. This was markedly less than similar costs ranging from approximately $24,000 to $47,000 when either standard of care or advanced therapies were simulated. Furthermore, the model suggests a measurable increase in QALYs (a function of increased survival rates and fewer wound complications) when AutoloGelTM is used. Data from published articles of alternative treatments utilized in this model included such therapies as standard of
care alone, tissue engineered grafts, ultrasound, and single growth factor therapies. Therapies that did not have published, peer-reviewed studies of their use in diabetic foot ulcers, with full wound healing as the primary endpoint, were not considered in the study.
The Company submitted this study to the Centers for Medicare and Medicaid Services (CMS) for consideration as CMS works through its open National Coverage Analysis (NCA) on PRP gel (see following discussion in the section titled Third-Party Reimbursement). While cost is not an official factor in the determination of national or local coverage decisions, the Company believes that the information may be helpful to CMS in considering the various data submitted regarding AutoloGelTM.
The Company believes the full market potential of the AutoloGelTM System cannot be achieved without broad third-party reimbursement from Medicare and commercial insurers.
In June 2007, at the Companys request, CMS officially opened an NCA to reconsider a previous non-coverage decision rendered in 1992 and amended in 2003 which is applicable to AutoloGelTM. In March 2008, CMS completed this NCA and reaffirmed its non-coverage decision, citing inadequate evidence. The Company disagrees with this decision, noting several studies completed subsequent to the 2003 decision that utilized some of the most rigorous scientific methods recognized by CMS. Furthermore, the data from these studies indicates that rates of healing when PRP Gel is used surpass rates of healing for all other wound care technologies with
which the Company is familiar, many of which are reimbursed by CMS.
Coverage decisions for most technologies are decided at the Medicare regional level and those decisions apply only to the respective region. Few technologies undergo national coverage decisions. The Company believes that a different standard is being applied at the regional level as compared to the national level. However, as the national non-coverage determination was in place, the Companys only course of action was to seek an amendment at the national level.
The Company is currently evaluating its alternative courses of action with respect to Medicare coverage. However, at this point, the Company is suspending any efforts to secure appropriate coding as it believes it is unlikely as long as the non-coverage decision remains in place. This decision does not in any way inhibit selling into the non-reimbursement sensitive market (discussed below) and the Company will therefore continue to pursue that strategy aggressively.
The Company will evaluate the feasibility of securing other third party reimbursement, but believes that CMSs national non-coverage decision would likely significantly impede that effort as commercial insurers often look to Medicare as a guideline for their coverage decisions.
Cytomedix regards its patents, trademarks, trade secrets, and other intellectual property (collectively, the Intellectual Property Assets) as critical to its success. Cytomedix relies on a combination of patents, trademarks, and trade secret and copyright laws, as well as confidentiality procedures, contractual provisions, and other similar measures, to establish and protect its Intellectual Property Assets. Cytomedix has in the past several years filed numerous patent applications worldwide seeking protection of its technologies. Cytomedix owns eight U.S. patents (including U.S. Patent No. 5,165,938 (the Knighton Patent) and
U.S. Patent No. 6,303,112 (the Worden Patent)), various corresponding foreign patents, and various trademarks. Cytomedix has received, filed, or is in the process of filing trademarks for the names Cytomedix, AutoloGel, and a few variants thereof. In addition, Cytomedix has numerous pending trademark
applications and foreign patent applications involving enriched platelet wound healant, platelet derived wound healant, angiogenic peptides, and anti-inflammatory peptides.
Although Cytomedix takes steps to protect its Intellectual Property Assets, it may not be able to prevent misappropriation of its technology or deter others from developing similar technology in the future. Furthermore, policing the unauthorized use of its Intellectual Property Assets is difficult. Litigation necessary to enforce Cytomedixs Intellectual Property Assets could result in substantial costs and diversion of resources. The Company is party to certain royalty agreements relating to its intellectual property under which it pays certain fees. See Note 5 to the Financial Statements.
In 2004, the Company initiated a broad based patent and licensing strategy intended to (i) enforce the rights under the Companys patents in order to ensure that Cytomedix shareholders derive economic benefit from the Companys intellectual property, and (ii) assist the Company in establishing a dominant market position for the AutoloGelTM System within the market for autologous growth factor products used for the treatment of chronic wounds. In 2005, 2006, and 2007 the Company identified and successfully pursued numerous companies that either marketed or sought to market products similar to the AutoloGelTM System, that
the Company believed were infringing, inducing infringement of, or would infringe its intellectual property rights. Settlements have been achieved and/or licenses have been granted to these companies resulting in a royalty stream for Cytomedix.
A table of the Companys primary settlement and license agreements, where it serves as licensor, follows below:
Date of Agreement
Date of Expiration(4)
On-going Royalty Percentage(2)
DePuy Spine, Inc.(1)
7.5% on disposables
1.5 % on hardware
Harvest Technologies, Inc.
7.5% on disposables
1.5 % on hardware
Perfusion Partners and Associates, Inc.
COBE Cardiovascular, Inc.
7.5% on disposables
1.5 % on hardware
SafeBlood Technologies, Inc.
8.0% to 9.0%
Biomet Biologics, Inc.(5)
Smith and Nephew, Inc.
Cytomedix has two license agreements with DePuy Spine, Inc. The original license agreement was dated March 19, 2001, subsequently amended on March 3, 2005, and provides for the use of applications under Cytomedix patents in the fields of diagnostic and therapeutic spinal, neurosurgery and orthopedic surgery. The second license agreement is dated March 4, 2005, and applies to all fields not covered in the original license agreement as amended.
Certain minimum royalties may apply to certain agreements and other royalty percentages may apply to future products covered under selected license agreements.
Some of these amounts are payable over a period of time as defined in executed notes payable to Cytomedix.
These dates reflect the expiration of the license in the U.S., which coincides with the expiration of the Knighton Patent in the U.S. In some cases, the licensing agreements applicable to territories outside the U.S. extend to the expiration of the patents in the respective foreign countries.
The Settlement and License Agreement with Biomet Biologics, Inc. (Biomet) called for a $2.6 million payout from Biomet to Cytomedix. This payout took the form of $1.4 million payable upon execution of
the agreement and $100,000 payable at the end of each of 12 consecutive quarters beginning with the quarter ending September 2006. These payments are not tied to any performance commitments by Cytomedix and are not dependent on Biomet sales.
For DePuy, CellMedix, and Smith and Nephew, the lump sum payments represent up-front fees for the prospective period from contract execution through termination that are in addition to any ongoing royalty percentage. For all other licensees, the up-front fees represent settlements for past patent infringement.
The Company is also working to penetrate the segment of the national market that is not sensitive to direct reimbursement for the Companys product. This effort is not affected by CMSs recent decision to reaffirm non-coverage for autologous blood-derived products for use on chronic wounds and represents a significant market opportunity on its own merits. This market includes capitated environments such as long-term acute care hospitals and health maintenance organizations, as well as state Medicaid, and federal government agencies, (e.g. the Veterans Administration), and has been the focus of the Companys product launch in 2008.
There are over 400 Long Term Acute Care (LTAC) facilities in the U.S. accredited by the Joint Commission on the Accreditation of Healthcare Organizations. There are approximately 1,300 Veterans Administration (VA) facilities and it is estimated that the VA, Department of Defense, and Workers Compensation Programs represent nearly 10% of the total national healthcare expenditures.
These organizations attempt to manage the overall cost of care. The Company believes that AutoloGel could represent an attractive treatment alternative to these organizations. Based on the Economic Study discussed above, overall cost of wound care decreases and quality of life years increases when AutoloGel is used.
The Company is primarily addressing various parts of this market via its internal sales force with some assistance from independent sales representatives.
Subsequent to FDA marketing clearance for the AutoloGelTM System, received in the latter part of 2007, Cytomedix increased its sales force by four, bringing its internal representatives to a total of five, each representing a distinct geographic region of the country. This effort is complemented by one independent sales representative. The Company expects to make further investments in the Sales and Marketing area in 2008.
In general, to raise awareness of the effectiveness of AutoloGelTM, posters and oral presentations of the clinical trial results have been presented at multiple scientific/medical meetings including: American Diabetes Association, American Podiatric Medical Association, the Clinical Symposium on Advances in Skin and Wound Care, and the Symposium on Advanced Wound Care and Wound Healing Society.
The Company outsources manufacturing for all the components of the AutoloGelTM System. While the Company utilizes single suppliers for several components of AutoloGelTM, such components are generally readily available on the open market and therefore the Company believes that, with one exception, no dependencies exist from its current sourcing practices. The one exception is a reagent, bovine thrombin, available exclusively through King Pharmaceuticals.
There are multiple wound care products across several categories, each of which may pose some form of competition to AutoloGelTM. However, many of these products may also be viewed and used in a complementary fashion with AutoloGelTM. A discussion of the competitive products follows below.
Wet to dry saline/gauze The clinician will apply a dry gauze cover to the wound and soak it in saline. When dry the gauze adheres, and can be removed to debride the wound. Cytomedix estimates that a significant majority of wounds are still managed with this inexpensive, long standing approach. Examples: Tyco, J&J gauze
Advanced wound dressings These dressings are designed to interact with the wound characteristics. These dressings may provide a wound cover, debridement, absorption, delivery of
moisture to the wound, etc. They typically use advanced materials or technology (e.g. foam, alginate, hydrocolloid, hydrogel) and may act as delivery systems for active ingredients (e.g. silver, iodine) These products seek to keep the wound moist, but not wet, and are also referred to as moist wound healing. Examples: Duoderm, Allevyn, Kaltostat, Tegaderm, Aquacel AG, Mepilex
Skin substitutes These include skin grafts or flaps, and biologically derived tissue or synthetic skin to replace the natural body cover. They are used frequently for burns and in selected chronic wounds to speed the process of wound healing. They tend to be used for large exposed areas, and the consequences of their failure to graft may prolong time to closure and be very expensive. Examples: Aloderm, Apligraf, Dermagraft
Wound devices Devices generally seek to circumvent deficiencies in the patients ability to regulate the biological, physical or chemical environment in the wound bed to facilitate the healing process. Usually these products can enhance the natural healing response through active alteration of the bodys regulation of heat, oxygen, electricity, pressure, or other homeostatic activity. Examples: Negative pressure wound therapy (e.g. VAC), hyperbaric oxygen, enzymatic debriding, electro stimulation
PRP Gel Other platelet gel companies, many of whom have licensing agreements with Cytomedix, may pose a competitive threat in the future. To date, these companies are selling platelet gel mostly into the surgical markets (e.g. cardiovascular, orthopedic), but may also try to sell into the chronic wound care market. When compared to these products, Cytomedixs AutoloGelTM System has the smallest, most portable centrifuge with the fastest spin time (1.5 minutes compared to 13 20 minutes). This makes it possible to more easily use in a greater variety of health care settings, i.e. hospital, outpatient clinics, physicians offices, or long term care, long term acute care, and home health settings. In addition, it is a user-friendly system so multiple health care providers can process the gel, rather than specialty technicians. Other PRO systems generally require a larger blood draw, more
detailed processing steps, and a longer spin time. While other platelet gel companies claim a larger growth factor and platelet count than at baseline, no studies exist that prove this is efficacious in chronic wounds. To date, Cytomedixs AutoloGelTM System is the only platelet gel system that has completed a prospective, randomized, controlled trial in humans in the U.S. and AutoloGel is the only PRP gel to enjoy FDA marketing clearance for use on chronic wounds.
Devices that the Company manufactures and distributes are subject to regulations by the Food and Drug Administration, including marketing clearance or approval, record-keeping requirements, good manufacturing practices and mandatory reporting of certain adverse experiences resulting from use of the devices, and certain state agencies. Labeling and promotional activities are also subject to regulation by the FDA and the Federal Trade Commission, in certain circumstances. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses and the agency scrutinizes the labeling and advertising of medical devices to
ensure that unapproved uses are not promoted. Before a new medical device can be introduced to the market, the manufacturer must generally obtain FDA clearance or approval. In the United States, medical devices are classified into one of three classes Class I, II or III. The controls applied by the FDA to the different classifications are those believed by the FDA to be necessary to provide reasonable assurance that the device is safe and effective. Class I devices are non-critical products that FDA believes can be adequately regulated by general controls that include provisions relating to labeling, manufacturer registration, defect notification, records and reports, and good manufacturing practices (GMP) based on the FDAs Quality Systems Regulations. Most Class I devices are exempt from pre-market notification and some are also exempt from GMP requirements. Class II devices are products for which the general controls of Class I devices,
by themselves, are not sufficient to assure safety and effectiveness and, therefore, require special controls. Additional special controls for Class II devices include performance standards, post-market surveillance patient registries, and the use of FDA guidelines. Standards may include both design and performance requirements. Class III devices have the most restrictive controls and require pre-market approval by the FDA. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices.
The FDA inspects medical device manufacturers and has a broad authority to order recalls of medical devices, to seize non-complying medical devices, and to criminally prosecute violators.
Section 510(k) of the Federal Food, Drug and Cosmetic Act requires individuals or companies manufacturing most medical devices intended for human use to file a notice with the FDA at least ninety days before intending to introduce the device into the market. This notice, commonly referred to as a 510(k), must identify the type of classified device into which the product falls, the class of that type, and a specific product already being marketed or cleared by FDA and to which the product is substantially equivalent. In some instances, the 510(k) must include data from human clinical studies in order to establish substantial
equivalence. The FDA must agree with the claim of substantial equivalence before the device can be marketed. The statutory time frame for clearance of a 510(k) is 90 days, though it often takes longer.
If a product is Class III and does not qualify for the 510(k) process, then the FDA must approve a pre-market approval (PMA) application before marketing can begin. PMA applications must demonstrate, among other factors, that the device in question is safe and effective. Obtaining a PMA application approval can sometimes take several years, depending upon the complexity of the issues involved with the device. The statutory time frame for the review of a PMA by the FDA is 180 days and many devices are reviewed and approved within that time frame or within a few months afterward. Marketing approval based on a PMA is generally a longer
process than the 510(k) clearance process that is typically obtained in comparatively less time.
Cytomedix has sought to ensure compliance with FDA regulations and policies for medical devices and, specifically, those pertaining to the use of platelet gel for management of chronic wounds.
The Company currently markets the AutoloGelTM System Centrifuge II, the AutoloGelTM Wound Dressing Kit, and certain commercially-available reagents (i.e. calcium chloride, ascorbic acid, ACD-A anticoagulant, and bovine thrombin). Each System component is a legally-marketed product that either has been cleared by FDA for marketing or is exempt from pre-market notification and clearance. The AutoloGelTM System Centrifuge II, when used with the AutoloGelTM Wound Dressing Kit and AutoloGel Reagents Kit, are suitable for use on exuding wounds such as leg ulcers, pressure ulcers and diabetic ulcers and for the
management of mechanically or surgically-debrided wounds. The Federal Food, Drug and Cosmetic Act does not authorize the FDA to limit or interfere with the physicians practice of medicine and use of legally-marketed devices for any condition or disease within a legitimate doctor-patient relationship as long as no specific claims are made for the product.
During 2003, the Company made a business decision to undertake a prospective, randomized, blinded, controlled trial for the AutoloGelTM System. The objective of the trial was to demonstrate safety and efficacy of the AutoloGelTM System for use on diabetic foot ulcers to the scientific and reimbursement community, as well as to the FDA. In making this decision, the Company subjected itself to increased FDA oversight and its regulations governing the investigational use of medical devices, codified at 21 C.F.R. Part 812. To this end, the Company submitted an Investigational Device Exemption (IDE) application
to the FDA under these rules and obtained approval on March 5, 2004, thus allowing the Company to begin its clinical trial. Once the study was completed and clinical results analyzed, the Company submitted a 510(k) requesting FDAs clearance of the AutoloGelTM System in January 2006, as discussed above, under the caption Clinical Trial and FDA Clearance.
As a manufacturer of medical devices, Cytomedix is also subject to and complies with good manufacturing practices of the Quality System Regulation in 21 C.F.R. Part 820 of the Food, Drug and Cosmetic Act.
The Company may also be indirectly subject to federal and state physician self referral laws. Federal physician self-referral legislation (commonly known as the Stark Law) prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain designated health services if the physician or an immediate family member has any financial relationship with the entity. A person who engages in a scheme to circumvent the Stark Laws referral prohibition may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil
monetary penalties of up to $15,000 per referral and possible exclusion from federal health care programs such as Medicare and Medicaid. The Stark Law also prohibits the entity receiving the referral from billing any
good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund such amounts. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a health care provider to their patients when referring patients to that provider. Both the scope and exception for such laws vary from state to state.
The Company may also be subject to federal and state anti-kickback laws. Section 1128B (b) of the Social Security Act, commonly referred to as the Anti-Kickback Law, prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal health care program such as Medicare and Medicaid. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are otherwise lawful in businesses outside of the health care
industry. The U.S. Department of Health and Human Services (DHHS) has issued regulations, commonly known as safe harbors that set forth certain provisions which, if fully met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Although full compliance with these provisions ensures against prosecution under the Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. The penalties for violating the Anti-Kickback Law include imprisonment for up to five years, fines of up to $250,000 per violation for individuals and up to $500,000 per violation for companies and possible exclusion from federal health care programs. Many states have adopted laws similar to the federal Anti-Kickback Law, and some of these state
prohibitions apply to patients for health care services reimbursed by any source, not only federal health care programs such as Medicare and Medicaid.
In addition, there are two other health care fraud laws to which the Company may be subject, one which prohibits knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any health care benefit program, including private payers (fraud on a health benefit plan) and one which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. These laws apply to any health benefit plan, not just Medicare and
The Company may also be subject to other laws which prohibit submitting claims for payment or causing such claims to be submitted that are false. Violation of these false claims statutes may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs. These statutes include the federal False Claims Act, which prohibits the knowing filing of a false claim (or causing the submission of a false claim) or the knowing use of false statements to obtain payment from the U.S. federal government. When an entity is determined to have violated the False
Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Suits filed under the False Claims Act can be brought by an individual on behalf of the government (a qui tam action). Such individuals (known as qui tam relators) may share in the amounts paid by the entity to the government in fines or settlement. In addition certain states have enacted laws modeled after the False Claims Act. Qui tam actions have increased significantly in recent years causing greater numbers of health care companies to have to defend false claim actions, pay fines or be excluded from the Medicare, Medicaid or other federal or state health care programs as a result of an investigation arising out of such action.
Several states also have referral, fee splitting and other similar laws that may restrict the payment or receipt of remuneration in connection with the purchase or rental of medical equipment and supplies. State laws vary in scope and have been infrequently interpreted by courts and regulatory agencies, but may apply to all health care products and services, regardless of whether Medicaid or Medicare funds are involved.
The Company is currently focusing its limited resources on broadly commercializing AutoloGelTM. It therefore expends only limited amounts on research and development activities (R&D). The Company currently focuses its R&D activities on the improvement of its current product offering, but, in the future, intends to develop the technology underlying its broader patent portfolio.
As of this Annual Report, the Company had eleven employees, including the Companys CEO, CFO, and VP of Professional Services. The remaining personnel consist of sales and marketing, accounting, and regulatory professionals. None of the Companys employees is covered by a collective bargaining agreement or represented by a labor union. The Company considers its employee relations to be good.
The Company faces many risks. The risks described below may not be the only risks the Company faces. Additional risks not yet known or currently believe to be immaterial may also impair Cytomedixs business. If any of the events or circumstances described in the following risks actually occur, the Companys business, financial condition or results of operations could suffer, and the trading price of its common stock could decline. You should consider the following risks, together with all of the other information in this Annual Report on Form 10-K, before making an investment decision with respect to Cytomedix securities.
Because the Company was in bankruptcy in 2002 and due to the rights of some of the Companys preferred shareholders, the Company may not be able to obtain debt financing. All working capital required to implement the Companys business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company. No assurance can be given that the Company will have revenues sufficient to support and sustain its operations. If the Company does not have sufficient working capital and is unable to generate revenues or raise additional funds, the Company may delay the completion of or significantly
reduce the scope of its current business plan; delay some of its development and clinical or marketing testing, its plans to pursue Medicare and/or commercial insurance reimbursement for its wound treatment technologies; or postpone the hiring of new personnel; or, under certain dire financial circumstances, cease its operations.
The Company has a history of losses, is not currently profitable, 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 will need to generate significant revenues to achieve and maintain profitability. The Company cannot assure that it will be able to generate these revenues, and it may never achieve profitability. The Company expects its expenses will increase for the foreseeable future as it seeks to expand its operations, implement internal systems and infrastructure and hire additional personnel. These ongoing financial losses may
adversely affect its stock price.
The Company must be evaluated in light of the uncertainties and complexities affecting an early stage biotechnology company. The Company has only recently implemented its current business plan. Thus, the Company has a very limited operating history. Continued operating losses, together with the risks associated with the Companys ability to gain new customers for its product offerings may have a material adverse effect on the Companys liquidity. The Company may also be forced to respond to unforeseen difficulties, such as decreasing demand for its products and services, regulatory requirements and unanticipated market pressures. Since
emerging from bankruptcy and continuing through today, the Company is developing a business model that includes protecting its patent position, addressing its third-party reimbursement issues, and developing a sales and marketing program. There can be no assurance that its business model in its current form can accomplish the Companys stated goals.
The Company regards its patents, trademarks, trade secrets, and other intellectual property assets as critical to its success. The Company relies on a combination of patents, trademarks, and trade secret and copyright laws, as well as confidentiality procedures, contractual provisions, and other similar measures, to establish and protect its intellectual property. The Company attempts to prevent disclosure of its trade secrets by restricting access to sensitive information and requiring employees, consultants, and other persons with access to the
Companys sensitive information to sign confidentiality agreements. Despite these efforts, the Company may not be able to prevent misappropriation of its technology or deter others from developing similar technology in the future. Furthermore, policing the unauthorized use of its intellectual property assets is difficult and expensive. Litigation has been necessary in the past and may likely be necessary in the future in order to protect the Companys intellectual property assets. Litigation could result in substantial costs and diversion of resources. The Company cannot assure that it will be successful in any litigation matter relating to
its intellectual property assets. Continuing litigation or other challenges could result in one or more of its patents being declared invalid. In such a case, any royalty revenues from the affected patents would be adversely affected although the Company may still be able to continue to develop and market its products. Furthermore, the unauthorized use of the Companys patented technology by otherwise potential customers in its target market, may significantly undermine its ability to generate sales.
The Companys patent covering the specific gel formulation that is applied as part of the AutoloGelTM System (the Worden Patent) expires no earlier than February 2019. The Companys U.S. Knighton Patent (which is the subject of license agreements between the Company and Medtronic, Inc., DePuy Spine, Inc., Biomet Biologics, Inc., COBE Cardiovascular, Inc., and Harvest Technologies Corporation, among others) expires in November 2009. There is no assurance that the Company will obtain a significantly increased share of the wound care market prior to the expiration of the U.S. Knighton Patent in 2009, after which the
Company may be more vulnerable to competitive factors because third parties will not then need a license from the Company to perform the methods claimed in the Knighton Patent.
The Companys success is also impacted by factors outside of the Companys control. The Companys current technology and products may be subject to extensive regulation by numerous governmental authorities in the United States, both federal and state, and in foreign countries by various regulatory agencies. Specifically, the Companys devices are subject to regulation by the FDA and state regulatory agencies. The FDA regulates drugs, medical devices and biologics that move in interstate commerce and requires that such products receive clearance or pre-marketing approval based on evidence of safety and efficacy. The regulations of
government health ministries in foreign countries are analogous to those of the FDA in both application and scope. In addition, any change in current regulatory interpretations by, or positions of, state regulatory officials where the AutoloGelTM System is used could materially and adversely affect the Companys ability to sell products in those states. The FDA will require the Company to obtain clearance or approval of new devices when used for treating specific wounds or marketed with specific wound healing claims.
The Company believes that the AutoloGelTM System and all Company products are legally marketed. The FDA has cleared the Company to market the AutoloGelTM System, including the Wound Dressing Kit and Centrifuge II, for use in exuding wounds such as leg ulcers, pressure ulcers, and diabetic ulcers, and the management of mechanically and surgically-debrided wounds. As the Company expands and offers additional products in the United States and in foreign countries, clearance or approval from the FDA and comparable foreign regulatory authorities prior to introduction of any such products into the market may be required. 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 Companys business and financial condition.
Compliance with FDA and other governmental requirements imposes significant costs and expenses. Further, the Companys failure to comply with these requirements could result in sanctions, limitations on promotional or other business activities, or other adverse effects on the Companys business. Further, recent efforts to control healthcare costs could negatively affect demand for the Companys products and services.
The Companys product candidates are subject to the risks of failure inherent in the development of biotherapeutic products. The results of early-stage clinical trials do not necessarily predict the results of later-stage clinical trials. Product candidates in later-stage clinical trials may fail to demonstrate desired safety and efficacy traits despite having successfully progressed through initial clinical testing. Even if the Company believes the data collected from clinical trials of its product candidates is promising, this data may not be sufficient to support approval by the U.S. or foreign regulatory agencies. Pre-clinical and clinical
data can be
interpreted in different ways. Accordingly, the regulatory officials could reach different conclusions in assessing such data, which could delay, limit or prevent regulatory approval. In addition, the U.S. regulatory authorities or the Company may suspend or terminate clinical trials at any time. Any failure or delay in completing clinical trials for product candidates, or in receiving regulatory approval for the sale of any product candidates, has the potential to materially harm the Companys business, and may prevent it from raising necessary, additional financing that may be needed in the future.
The Companys operations and future profitability are dependent, in large part, upon the ability to contract with healthcare providers on favorable terms. In any particular service area, healthcare providers could refuse to contract with Cytomedix or take other actions that could result in higher healthcare costs, or create difficulties in meeting the Companys regulatory requirements. In some service areas, certain healthcare providers may have a significant market presence. If healthcare providers refuse to contract with Cytomedix, use their market position to negotiate unfavorable contracts or place the Company at a competitive
disadvantage, the Companys ability to market services or to be profitable in those service areas could be adversely affected. Provider networks could also be disrupted by the financial insolvency of a large healthcare provider group. Any disruption in provider networks could adversely impact the Companys ability to generate revenues or profits.
The AutoloGelTM System is marketed to healthcare providers. Some of these providers, in turn, seek reimbursement from third-party payers such as Medicare, Medicaid, and other private insurers. Many foreign countries also have comprehensive government managed healthcare programs that provide reimbursement for healthcare products. Under such healthcare systems, reimbursement is often a determining factor in predicting a products success, with some physicians and patients strongly favoring only those products for which they will be reimbursed. With CMSs national non-coverage decision, the market for the AutoloGelTM
System could be greatly restricted and it may be difficult, if not impossible, to sell AutoloGelTM in most care settings. This would hamper the Companys ability to grow its revenues and could reduce the likelihood that it will ever achieve sustainable profitability.
While the Company currently has several primary licensing agreements that are expected to generate on-going royalty revenues, the Company cannot currently reasonably predict the magnitude of those revenues. Royalty streams from these agreements are entirely dependent on the sales of its licensees and are therefore outside the control of Cytomedix. Past levels of royalty revenues from these agreements are not necessarily an indication of future activity.
The commercial success of the Companys 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 Companys ability to sell the products and processes will be materially and adversely affected. While acceptance by the medical community may be fostered by broad evaluation via peer-reviewed literature, the Company may not have the resources to facilitate sufficient publication.
The future success of the Company depends on the ability to attract, retain and motivate highly skilled management, including sales representatives. The Company has retained a team of highly qualified officers and consultants, but the Company cannot provide assurance that it will be able to successfully retain all of them, or be successful in recruiting additional personnel as needed. The Companys inability to do so will materially and adversely affect the business prospects, operating results and financial condition. The Companys 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 Companys inability to hire additional qualified personnel may lead to higher recruiting, relocation and compensation costs for such personnel. These increased costs may reduce the Companys profit margins or make hiring new personnel impractical.
Political, economic and regulatory influences may subject 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 Companys 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 that may change the operating environment for its targeted customers including hospitals and managed care organizations.
Health care industry participants may react to such legislation by curtailing or deferring expenditures and initiatives, including those relating to the Companys 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.
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 assure that claims, suits or complaints relating to the use of the AutoloGelTM System and treatment administered by physicians will not be asserted against the Company in the future. The production, marketing and sale, and use of the AutoloGelTM System entail risks that
product liability claims will be asserted against the Company. These risks cannot be eliminated, and the Company could be held liable for any damages that result from adverse reactions or infectious disease transmission. Such liability could materially and adversely affect the Companys business, prospects, operating results and financial condition. The Company currently maintains professional and product liability insurance coverage, but the Company cannot give assurance that the coverage limits of this insurance would be adequate to protect against all potential claims. The Company cannot assure 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.
In the market for biotechnology products, the Company faces competition from pharmaceutical companies, biopharmaceutical companies, medical device companies, and other competitors. Other companies have developed or are developing products that may be in direct competition with the AutoloGelTM System. Biotechnology development projects are characterized by intense competition. Thus, the Company cannot assure any investor that it will be the first to the market with any newly developed products or that it will successfully be able to market these products. If the Company is not able to participate and compete in the cellular therapy market,
the Companys financial condition will be materially and adversely affected. The Company cannot assure 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 that will compete with the Companys products.
Economic downturns or other adverse economic changes (local, regional, or national) can hurt the Companys financial performance in the form of lower interest earned on investments and/or could result in losses of portions of principal in the Companys investment portfolio. While the Companys investment policy requires it to invest only in short-term, low risk investments, there is no assurance that principal will not be eroded as a significant portion of these investments is in excess of federally mandated insurance.
The average daily trading volume in Cytomedix Common stock is relatively low. As long as this condition continues, it could be difficult or impossible to sell a significant number of shares of Common stock at any particular time at the market prices prevailing immediately before such shares are offered. In addition, sales of substantial amounts of Common stock could lower the prevailing market price of the Companys Common stock. This would limit or perhaps prevent the Companys ability to raise capital through the sale of securities. Additionally, the Company has significant numbers of outstanding warrants and options that, if exercised and
sold, could put additional downward pressure on the Common stock price.
Sales of substantial amounts of shares of the Companys common stock in the public market, or the perception that those sales may occur, could cause the market price of its common stock to decline. Cytomedix has used, and will likely continue to use, its Common stock or securities convertible into or exchangeable for Common stock to fund working capital needs or to acquire technology, product rights or businesses, or for other purposes. If additional equity securities are issued, particularly during times when the Companys Common stock is trading at relatively low price levels, the price of its Common stock may be materially and adversely
There is a limited public trading market for the Companys common stock. Without an active trading market, there can be no assurance of any liquidity or resale value of Common stock, and stockholders may be required to hold shares of Cytomedixs Common stock for an indefinite period of time. In addition, in recent years, the stock market in general, and the market for life sciences companies in particular, have experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and it may adversely affect the
price of Cytomedixs common stock. These broad market fluctuations may adversely affect the price of the Companys securities, regardless of operating performance.
Provisions in Cytomedixs Restated Certificate of Incorporation and Restated Bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult for a third party to acquire control of the Company without the approval of the board of directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of the Companys outstanding voting Common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect the Common stock price.
The Company does not own any real property and does not intend to invest in any real property. The Companys offices and storage facilities are located in Rockville, Maryland, comprise 3,100 square feet under an operating lease expiring July 31, 2008. See Note 16 to the Financial Statements.
Since June 2005, the Companys Common stock has been listed on the American Stock Exchange under the symbol GTF. Prior to that, the Common stock was quoted in the Over-the-Counter Bulletin Board (OTC-BB) market under the symbol CYME.OB. Set forth below are the high and low closing sale prices for the Common stock for each quarter in the two most recent fiscal years as reported by AMEX.
December 31, 2007
September 30, 2007
June 30, 2007
March 31, 2007
December 31, 2006
September 30, 2006
June 30, 2006
March 31, 2006
On March 14, 2008, the closing price of the Companys Common stock was $1.54.
Cytomedix did not pay dividends to holders of Common stock in 2007 or 2006. The Company is prohibited from declaring dividends on Common stock if any dividends are due on shares of Series A, B, or C Convertible Preferred stock. If there are no unpaid dividends on shares of Series A, B, or C Convertible Preferred stock, any decision to pay cash dividends on Common stock will depend on the Companys ability to generate earnings, need for capital, and overall financial condition, and other factors the Board deems relevant. Cytomedix does not anticipate paying cash dividends on Common stock in the foreseeable future, but instead will retain any
earnings for reinvestment in the business.
Issuer Purchases of Equity Securities
The Company did not make any stock repurchases during the last quarter of 2007.
The Company issued 1,565,469 unregistered shares of Common stock during the fourth quarter of 2007. The following table lists the sources of and the proceeds from those issuances:
# of Shares
Total Exercise Price
Conversion of series A convertible preferred shares
Exercise of series C-2 warrants
Exercise of unit offering warrants
Exercise of other warrants
The Company has used the cash proceeds from these issuances for general corporate purposes. All shares were issued in private offerings exempt from registration pursuant to Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder. See Note 12 to the Financial Statements for further information on the Companys capital structure.
The following graphs the Companys performance in the form of cumulative total return to holders of its Common stock since January 27, 2003, comparing the Companys Common stock, the AMEX Biotechnology Index (an industry index), and the Russell Microcap Index (a broad market index). The graph assumes that $100 was invested on such date in each of the Companys Common stock and the indexes and that all dividends were reinvested. The comparisons shown in the graph below are based upon historical data. The stock price performance shown in the graph below is not necessarily indicative of, or intended to forecast, the potential future
performance of Cytomedix Common stock. The stock performance graph shall not be deemed to be soliciting material or to be filed with the SEC under the Securities Act or the Exchange Act, or incorporated by reference in any document so filed.
Comparison of 59 Month Cumulative Total Return Among Cytomedix, Inc., Amex Biotechnology Index, and Russell Microcap Index
The following discussion and analysis of the Companys financial condition and results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in thisAannual Report. The discussion in this section regarding the Companys business and operations includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as may, expect, anticipate,
estimate, or continue, or the negative thereof or other variations thereof or comparable terminology. You are cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the Risk Factors section and elsewhere in this annual report. We assume no obligation to update any such forward-looking statements. The following should be read in conjunction with the audited financial statements and the notes thereto included elsewhere herein. Certain numbers in this section have been rounded for ease of analysis.
Currently, the Companys revenues are primarily earned through its licensing agreements. These revenues, net of related royalty and contingent legal fees, represent the primary source of cash from operations for the Company. Sales of the Companys products are currently very modest. In the past twelve months, the Company has re-focused its sales strategy to target selected venues within the self-reimbursed market such as the Veterans Administration and capitated payment schemes at long-term acute care facilities. The Companys revenues are generally insufficient to cover its operating expenses. Operating expenses primarily consist of
employee compensation, professional fees, consulting expenses, and other general business expenses such as insurance, rent, and sales and marketing related items. In late September 2007, the Company did receive FDA clearance to market its AutoloGelTM System. The Company has launched this product in the first quarter of 2008. Also in the first quarter of 2008, CMS completed its NCA and decided to continue non-coverage of autologous blood derived products when used on chronic wounds. This will not affect the Companys current sales and marketing strategy, which targets the non-reimbursement sensitive market, however, it does postpone, for an indefinite amount of time, the Companys ability to access the broader market. The Company is currently evaluating its alternatives strategies vis a vis Medicare coverage for its AutoloGelTM System.
Cash generated from the Companys licensing agreements is wholly dependent on covered sales generated by its licensees, which are entirely outside of the Companys control. Although these revenues are entirely dependent on licensee sales and the Company cannot assure that these levels will continue, licensing revenues overall have been fairly stable in the recent past and the Company therefore believes that historical results of its licensing activities are a reasonable indicator of future performance in this area. Cash outflows from operations generally result from operating expenses. These cash outflows have remained fairly stable over the
past several quarters. The Company does not believe that historical results are indicative of future expense levels as such future expense levels will likely change as developments warrant. For example, the Company has begun further investment in its sales and marketing efforts in conjunction with its product launch and on-going sales efforts now that FDA marketing clearance has been obtained.
Comparison of Years Ended December 31, 2007 and 2006
Revenues fell $5,000 (0%) to $1,943,000 comparing the year ended December 31, 2007, to the same period in the previous year. Revenues are normally generated from two sources: the sale of disposable kits and reagents and royalties received from licensing activities. In 2006, the Company also recognized $117,000 in revenue related to comprehensive wound services provided for a government agency under a limited term contract. Following the expiration of the term of this contract, this service revenue did not continue in 2007. Increased royalties of $139,000 were offset by a $144,000 decrease in product sales. Increases in royalties were due to stronger
performance by the Companys licensees. Product sales decreased primarily due to a curtailing of investment in the sales and marketing area in order to conserve cash as the Company pursued FDA clearance and a decline in the service revenue discussed above.
Gross profit rose $159,000 (17%) to $1,093,000 comparing the year ended December 31, 2007, to the same period in the previous year. For the same periods, gross margins rose to 56% from 48%. The increase in gross profits is attributable to improved margins. Gross margins on royalties improved due to reduced contingent legal fees pursuant to the Companys agreement with its patent counsel reached on August 2, 2007 (see Note 4 to the Financial Statements for a further discussion of this agreement). Gross margins on product sales improved due to a shift in mix to higher margin items as the Company de-emphasized the sale of its lower margin reagent
products as it continued to seek marketing clearance from the FDA.
Royalties from the licensing agreements with DePuy Spine, Inc., inclusive of the amortization of deferred revenue associated with the initial deposit of $750,000, generates a gross margin of approximately 20%. The Company expects gross margins generated from all other licensing agreements to approximate 90%.
Operating expenses rose $1,608,000 (33%) to $6,446,000 comparing the year ended December 31, 2007, to the same period in the previous year. A discussion of the various components of Operating expenses follows below.
Salaries and wages fell $529,000 (24%) to $1,634,000 comparing the year ended December 31, 2007, to the same period in the previous year. The decrease was primarily due to lower non-cash equity-based compensation ($382,000) due to the completion of the service period in 2006 for certain grants and fewer employees.
Consulting expenses rose $22,000 (10%) to $244,000 comparing the year ended December 31, 2007, to the same period in the previous year. The increase was primarily due to non-cash equity-based compensation expenses associated with the modification of some consultant warrants ($45,000), partially offset by a reduction in the overall reduction in use of outside consultants.
Consulting expenses-related party fell $35,000 (100%) to zero comparing the year ended December 31, 2007, to the same period in the previous year. The decrease was due to the expiration of the consulting agreement with BDR, Inc.
Professional fees rose $2,166,000 (283%) to $2,929,000 comparing the year ended December 31, 2007, to the same period in the previous year. Professional fees consist primarily of legal and accounting services.
The increase was primarily due to non-cash equity-based compensation ($1,721,000) to the Companys patent counsel in exchange for a waiver of future contingent legal fee obligations on existing license agreements (see Note 4 to the Financial Statements for a further discussion of this agreement) and additional audit fees ($307,000) in 2007 related to the Companys financial restatements filed with the SEC in November 2007.
Clinical trial related expenses fell $62,000 (100%) to zero comparing the year ended December 31, 2007, to the same period in the previous year. The Company completed the active phase of the trial in 2005, incurred only limited expenses associated with the close-out of the trial in 2006, and incurred no expenses in 2007. The Company does not expect to incur any future expenditures related to this trial. However, the Company does plan to conduct a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost approximately $500,000 over the next few years.
General and administrative expenses rose $12,000 (1%) to $1,638,000 comparing the year ended December 31, 2007, to the same period in the previous year. Increases in investor services, AMEX filing fees,
and non-cash equity-based compensation to Directors was mostly offset by decreases in bad debt, depreciation, marketing, and travel related expenses. Beginning in 2007, the Company began to reflect royalty fees owed to Charles Worden in the General and administrative expenses line as it was determined that Mr. Worden was no longer considered a related party.
Other income fell $1,581,000 (83%) to $315,000 comparing the year ended December 31, 2007, to the same period in the previous year. The decrease was primarily due to decreased settlement income ($1,636,000) as the Company had reached significant settlements in 2006 with Companys who were infringing its patents. This decrease was partially offset by increased interest income ($52,000) on cash invested in institutional money market accounts.
Comparison of Years Ended December 31, 2006 and 2005
Revenues rose $434,000 (29%) to $1,948,000 comparing the year ended December 31, 2006, to the same period in the previous year. Revenues are normally generated from two sources: the sale of disposable kits and reagents and royalties received from licensing activities. In the third quarter of 2006, the Company also recognized $117,000 in revenue related to comprehensive wound services provided for a government agency under a limited term contract. This service revenue is not expected to continue. The increase was attributable to increased royalties of $496,000 and increased sales of $117,000 related to the services mentioned above, partially offset by
a $179,000 decrease in product sales. Increases in royalties were due to six new license agreements entered into during 2005. Product sales decreased primarily due to decreased sales to nursing homes, government agencies, and Medicaid customers.
Gross profit rose $300,000 (47%) to $934,000 comparing the year ended December 31, 2006, to the same period in the previous year. For the same periods, gross margins rose to 48% from 42%. The increase in gross profits is primarily attributable to the licensing agreements entered into after March 31, 2005 which carry a greater gross margin than previously existing licensing agreements. Royalties from the licensing agreements with DePuy Spine, Inc., inclusive of the amortization of deferred revenue associated with the initial deposit of $750,000, generates a gross margin of approximately 20%. The Company expects gross margins generated from all other
licensing agreements to be in the range of 50 70%.
Operating expenses fell $3,144,000 (39%) to $4,838,000 comparing the year ended December 31, 2006, to the same period in the previous year. A discussion of the various components of Operating expenses follows below.
Salaries and wages fell $649,000 (23%) to $2,163,000 comparing the year ended December 31, 2006, to the same period in the previous year. The decrease was primarily due to lower non-cash equity-based compensation ($648,000) and fewer employees.
Consulting expenses fell $170,000 (43%) to $222,000 comparing the year ended December 31, 2006, to the same period in the previous year. The decrease was primarily due to lower non-cash equity-based compensation ($152,000) and the overall reduction in use of outside consultants.
Professional fees fell $255,000 (25%) to $764,000 comparing the year ended December 31, 2006, to the same period in the previous year. Professional fees consist primarily of legal and accounting services. The decrease was primarily due to decreases in patent litigation related expenditures ($315,000) due to the successful completion of several patent infringement actions in 2005, decreases in fees to securities and general counsel
attorneys ($90,000) due primarily to reduced current period activity related to the Companys listing on the American Stock Exchange, and decreases in accounting fees ($55,000), partially offset by increases in audit fees ($75,000) driven by compliance with Section 404 of the Sarbanes-Oxley Act and increased attorneys fees ($175,000) related to the appeal of the FDAs decision regarding the Companys 510(k) Premarket Notification for AutoloGelTM System.
Clinical trial related expenses fell $1,527,000 (96%) to $62,000 comparing the year ended December 31, 2006, to the same period in the previous year. The Company completed the active phase of the trial in 2005 and in the first two quarters of 2006 incurred only limited expenses associated with the close out of the trial.
General and administrative expenses fell $544,000 (26%) to $1,551,000 comparing the year ended December 31, 2006, to the same period in the previous year. The decrease was due primarily to decreases in equity-based compensation ($297,000), travel related expenditures ($163,000), AMEX filing fees ($52,000), investor services ($43,000), and depreciation of fixed assets ($35,000), partially offset by increases in marketing related activities ($30,000).
Other income rose $954,000 (101%) to $1,896,000 comparing the year ended December 31, 2006, to the same period in the previous year. The increase was primarily due to increased interest income ($143,000) as a result of higher interest rates and larger cash balances, increased patent settlement income ($600,000, net), and a one time charge ($228,000) in 2005 recorded for the issuance of 65,000 shares of the Companys Common stock in return for a full settlement and release of all claims from a lawsuit brought against the Company relating to its emergence from bankruptcy.
The Company had the following contractual obligations as of December 31, 2007:
Payments Due by Period
Less Than 1 Year
1 3 Years
4 5 Years
More Than 5 Years
Amounts reflect royalty fees payable associated with settlement agreements. Amounts less than one year are included in the Accounts payable and accrued expenses line of the Balance Sheet.
Amount reflects remaining commitment under a purchase order for centrifuges.
In addition, the Company has committed to conduct a post-market surveillance study per its understanding reached with the FDA, estimated to cost approximately $500,000 over the next few years. Although there is currently no contractual obligation to expend these funds, the Company fully expects to conduct this study.
The Companys operating revenues do not cover the costs of its operations. The cash position of the Company at December 31, 2007 was approximately $5,136,000. The Company believes that it will have adequate cash on hand to fund operations for the next twelve months, based on the current level of licensing revenues and operating expenditures. However, additional cash may be required if operating revenues do not materialize or the cost of operations increases. The Company has certain warrants that are currently callable (subject to certain requirements including a minimum per share price of $4.50) at an aggregate exercise price of approximately
The Company has no material commitments for capital expenditures except for a commitment to purchase a minimum number of centrifuges in the first nine months of 2008 totaling approximately $50,000. However, the Company does plan to conduct a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost approximately $500,000 over the next few years.
Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. All working capital required to implement the Companys business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company. There can be no assurance that the Company will be able to raise additional capital if and when needed, and, even if needed capital is raised, there can be no assurance that the Company will achieve its strategic goals. To continue its operations and complete the implementation of its current business plan, the Company will likely require additional long-term
financing. There are no assurances that such financing will be available, or if available, it will be on terms acceptable to the Company. Any financing may result in significant dilution.
Cytomedixs success is directly dependent on the success of the AutoloGelTM System, and the Company believes that AutoloGelTM has a reasonable chance for success in the marketplace. First and foremost, the Company believes that, based on the results of the Companys clinical trial and other historical data as well as the results of a pharmaco-economic study, the AutoloGelTM System has higher healing rates for diabetic foot ulcers and is more cost effective than most other wound treatments. Additionally, based on other data and experience, the Company believes that AutoloGelTM offers similar
clinical and cost advantages when used to treat other chronic and open cutaneous wounds. The Company owns the patents on the process for utilizing platelet gel for treating damaged tissue and wound healing, which is the basis of its license agreements, through 2009 and for the specific formulation of AutoloGelTM, which it believes provides several competitive advantages, and which patents expire in 2019.
The Companys recent obtainment of FDA clearance for its AutoloGelTM System has increased the prospects for success. A key restriction on the Companys ability to market AutoloGelTM for its intended use has been removed and the Company has launched its product in the first quarter of 2008.
However, the recent CMS decision to continue its non-coverage of autologous blood-derived products when used on chronic wounds is a setback to the Companys overall strategy. While this decision will not have an impact on the Companys current sales and marketing strategy which targets the non-reimbursement sensitive market, it does limit, for an indefinite amount of time, the Companys ability to access the broader market for its products.
The Company is required to perform a review for impairment of goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill is considered to be impaired if it is determined that the carrying value of the Company exceeds its fair value. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. Examples of such events or circumstances include:
a significant adverse change in legal factors or in the business climate;
a significant decline in Cytomedixs stock price or the stock price of comparable companies;
a significant decline in the Companys projected revenue or cash flows;
an adverse action or assessment by a regulator;
a loss of key personnel;
a more-likely-than-not expectation that the Company will be sold or otherwise disposed of.
Assessing the impairment of goodwill requires that the Company make assumptions and judgments regarding the fair value of its net assets. The Company completed its most recent annual evaluation for impairment of goodwill as of December 31, 2007 and determined that no goodwill impairment existed. This evaluation was primarily based on the Market and Income Approaches. These approaches utilize information such as values of similar publicly traded companies, recent acquisitions of companies, arms-length transactions in the Companys stock, and forecasted revenues and cash flows of the Company.
There is no guarantee that future changes in the overall market or factors specific to the Company will not result in an impairment of goodwill, and a resulting a material impairment charge will not be recorded. Goodwill totaled approximately $2.0 million at December 31, 2007.
Under the Companys Long Term Incentive Plan (the LTIP), it grants share-based awards to eligible employees and directors to purchase shares of common stock. The benefits provided by this plans qualify as share-based compensation under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which requires the recognition of compensation expense based on estimated fair values determined on the date of grant for all share-based awards granted, modified or cancelled as of January 1, 2006 (the effective date). Prior to the effective date, the Company
recorded compensation for share-based awards under the LTIP in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and its related interpretations and adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Stock-Based Compensation (SFAS 123). APB 25 required expense to be recorded for options granted with an exercise price lower than the fair market value of the Companys Common stock on the date of grant.
The Company adopted SFAS No. 123R as of January 1, 2006, using the modified prospective application. Under this method, all equity-based compensation awarded after the adoption date has been determined under the fair value provisions of SFAS No. 123R. Additionally, for all equity-based compensation awarded prior to the adoption date, compensation for the portion of awards for which the requisite service is performed after the adoption date is recognized as service is rendered.
For the year ended December 31, 2007, the Company recognized $350,000 of compensation expense for stock options granted under the LTIP. At December 31, 2007, there was $200,000 remaining in unrecognized compensation cost related to stock options under the LTIP which is expected to be recognized over a weighted average period of 1.5 years.
The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes option-pricing method (Black-Scholes method), which was also used for the pro-forma information required to be disclosed under SFAS 123. The determination of fair value using this model requires the use of certain estimates and assumptions that affect the reported amount of share-based compensation cost recognized in the Companys Statements of Operations. These include estimates of the expected term of share-based awards, expected volatility of the Companys stock price, expected dividends and the risk-free interest rate. These estimates
and assumptions are highly subjective and may result in materially different amounts should circumstances change and the Company employs different assumptions in its application of SFAS 123R in future periods.
For share-based awards issued during the year ended December 31, 2007, the expected term was estimated by using peer company information as Cytomedixs history is limited. Estimated volatility was derived using the Companys historical stock price volatility. No cash dividends have ever been declared or paid on the Companys Common stock and currently none is anticipated, as any future earnings are expected to be used in
the development and expansion of the business or for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of the Board of Directors and will depend upon the Companys results of operations, financial condition, financial covenants, tax laws and other factors as the Board of Directors, in its discretion, deems relevant. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
In certain select cases, the Company has issued warrants, outside the LTIP, to service providers in exchange for the performance of consulting or other services. These warrants have generally been immediately vesting and expense was recognized equal to the fair value of the warrant on the date of grant using the Black-Scholes model. The same assumptions (and related risks) as discussed above apply, with the exception of the expected term. For these warrants issued to service providers, the Company estimates that the warrant will be held for the full term. For the year ended December 31, 2007, the Company recognized $1,014,000 of compensation expense
for warrants issued to service providers. At December 31, 2007, there was $92,000 remaining in unrecognized compensation cost related to unvested warrants which is expected to be recognized in 2008, subject to revaluation upon vesting per EITF 96-18 Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Under certain agreements, Cytomedix has been entitled to receive lump sum payments. If the lump sum payment is deemed to be an inducement to enter into an agreement, and is applicable to some future period, then this amount is recorded as deferred revenue and amortized to revenue on a straight line basis over the course of the agreement. If the lump-sum payment is deemed to be in settlement of prior infringement of Cytomedixs patents by the other party, then the lump sum, net of any associated fees, is recorded as non-operating income at its present value and reflected in the Patent litigation settlements, net line of the Statements of
The determination of whether a lump sum is associated with prior infringement or is part of an inducement to enter an agreement requires judgment by the Company. A number of factors must be considered including evidence of prior sales by the other party, nature of negotiations and/or court proceedings, accounting treatment by the other party. Each agreement requires a unique assessment to determine the true nature of the lump sum payment. Further, any future lump sums deemed a settlement of past infringement will be reflected in Operating Income.
In 2007, the Company recorded $11,000 (net of associated costs) in non-operating income associated with infringement settlements and added an additional $250,000 to deferred revenues to be recognized as revenue through November 2009.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB agreed to delay the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The
Company is currently evaluating the effect that the adoption of SFAS 157 will have on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its results of operations and financial position.
In December 2007, FASB issued SFAS No. 160 (SFAS 160), Interests in Consolidated Financial Statements an amendment of ARB No. 51, which impacts the accounting for minority interest in the consolidated financial statements of filers. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial position. However, the adoption of SFAS 160 is not expected to have a material impact on the Companys financial statements.
In December 2007, FASB issued SFAS No. 141R (SFAS 141R), Business Combinations, which impacts the accounting for business combinations. The statement requires changes in the measurement of assets and liabilities required in favor of a fair value method consistent with the guidance provided in SFAS 157 (see above). Additionally, the statement requires a change in accounting for certain acquisition related expenses and business adjustments which no longer are considered part of the purchase price. Adoption of this standard is required for fiscal years beginning after December 15, 2008. Early adoption of this standard is not permitted. The
statement requires prospective application for all acquisitions after the date of adoption. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial position. However, the adoption of SFAS 141R is not expected to have a material impact on the Companys financial statements.
The Company does not enter into financial instruments for speculation or trading purposes. In accordance with the Companys investment policy, cash is to be invested in bank and institutional money market funds, or in T-Bills or short-term T-Notes. At December 31, 2007, the Companys cash balance of approximately $5.1 million was maintained primarily in bank and institutional money market accounts. These accounts are sensitive to changes in the general level of interest rates. Based on the Companys cash balances at December 31, 2007, a 100 basis point increase or decrease in interest rates would have an approximately $51,000 impact on
the Companys annual interest income and net loss. Actual changes in rates may differ from the hypothetical assumption used in computing this exposure.
To the Board of Directors and Stockholders of Cytomedix Inc.
In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Cytomedix, Inc. at December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the year ended December 31, 2007 presents fairly, in all material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and the financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
To the Board of Directors and Shareholders Cytomedix, Inc. Rockville, Maryland
We have audited the accompanying balance sheet of Cytomedix, Inc. as of December 31, 2006, and the related statements of operations, stockholders equity, and cash flows for each of the years in the two-year period ended December 31, 2006 and the financial statement schedule appearing under Item 15(a)(2) for 2006 and 2005. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cytomedix, Inc. as of December 31, 2006 and its results of operations, changes in stockholders equity and its cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) for the two years ended December 31, 2006 present fairly, in all material respects, the information set forth therein when read in conjuction with the
related financial statements.
L J SOLDINGER ASSOCIATES, LLC
Deer Park, Illinois, USA February 23, 2007 (except as to Notes 2, 11, 12 and 13, which are as of November 13, 2007)
Prepaid expenses, inventory, and other current assets
Total current assets
Patent settlements receivable
Property and equipment, net
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses
Deferred revenues, current portion
Dividends payable on Series A and Series B preferred stock
Total current liabilities
Commitments and contingencies
Series A Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2007 and 2006 issued and outstanding 92,837 and 365,970 shares, respectively, liquidation preference of $92,837 and $365,970, respectively
Series B Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2007 and 2006 issued and outstanding 85,405 and 83,431 shares, respectively, liquidation preference of $85,405 and $83,431, respectively
Series C Convertible preferred stock; $.0001 par value, authorized 1,000,000 shares; 2007 and 2006 issued and outstanding 0.0 shares
Common stock; $.0001 par value, authorized 65,000,000 shares; 2007 issued and outstanding 31,926,788 shares; 2006 issued and outstanding 28,987,670 shares
Additional paid-in capital
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these financial statements.