NUO THERAPEUTICS, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended September 30, 2013
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from _______ to ________
Commission file number 001-32518
(Exact Name of Registrant as Specified in its Charter)
|
Delaware
|
|
23-3011702
|
|
(State or Other Jurisdiction of
|
|
(IRS Employer
|
|
Incorporation or Organization)
|
|
Identification No.)
|
209 Perry Parkway, Suite 7
Gaithersburg, MD 20877
(Address of Principal Executive Offices) (Zip Code)
(240) 499-2680
(Registrant’s Telephone Number, Including Area Code)
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
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
|
Large Accelerated Filer
¨
|
Accelerated Filer
x
|
|
|
Non-accelerated Filer
¨
|
Smaller Reporting Company
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
APPLICABLE ONLY TO CORPORATE ISSUERS
As of October 31, 2013, the Company had 105,351,057 shares of common stock, par value $.0001, issued and outstanding.
CYTOMEDIX, INC.
TABLE OF CONTENTS
|
|
|
Page
|
|
|
|
|
|
PART I.
|
FINANCIAL INFORMATION
|
1
|
|
|
|
|
|
Item 1.
|
Financial Statements
|
1
|
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
22
|
|
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
33
|
|
|
|
|
|
Item 4.
|
Controls and Procedures
|
34
|
|
|
|
|
|
PART II.
|
OTHER INFORMATION
|
35
|
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
35
|
|
|
|
|
|
Item 1A.
|
Risk Factors
|
35
|
|
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
35
|
|
|
|
|
|
Item 3.
|
Defaults Upon Senior Securities
|
35
|
|
|
|
|
|
Item 4.
|
Mine Safety Disclosures
|
35
|
|
|
|
|
|
Item 5.
|
Other Information
|
35
|
|
|
|
|
|
Item 6.
|
Exhibits
|
35
|
|
|
|
|
|
Signatures
|
36
|
|
|
Exhibit Index
|
37
|
|
| i | ||
|
|
FINANCIAL INFORMATION
CYTOMEDIX, INC.
(unaudited)
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,644,462
|
|
$
|
2,615,805
|
|
|
Short-term investments, restricted
|
|
|
53,257
|
|
|
53,248
|
|
|
Accounts and other receivable, net
|
|
|
2,132,403
|
|
|
1,733,742
|
|
|
Inventory
|
|
|
1,801,909
|
|
|
1,170,097
|
|
|
Prepaid expenses and other current assets
|
|
|
1,624,224
|
|
|
737,445
|
|
|
Deferred costs, current portion
|
|
|
211,776
|
|
|
136,436
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,468,031
|
|
|
6,446,773
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
894,621
|
|
|
2,440,081
|
|
|
Deferred costs
|
|
|
538,488
|
|
|
180,783
|
|
|
Intangible assets, net
|
|
|
33,860,537
|
|
|
34,135,287
|
|
|
Goodwill
|
|
|
1,128,517
|
|
|
1,128,517
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
46,890,194
|
|
$
|
44,331,441
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
5,176,773
|
|
$
|
2,812,371
|
|
|
Deferred revenues, current portion
|
|
|
2,502,254
|
|
|
—
|
|
|
Note payable, current portion
|
|
|
1,800,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,479,027
|
|
|
2,812,371
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
4,034,010
|
|
|
2,100,000
|
|
|
Deferred revenues
|
|
|
1,542,446
|
|
|
—
|
|
|
Derivative and other liabilities
|
|
|
913,087
|
|
|
1,415,159
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,968,570
|
|
|
6,327,530
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditionally redeemable common stock (909,091 issued and outstanding)
|
|
|
500,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock; $.0001 par value, authorized 200,000,000 shares;
2013 issued and outstanding - 105,190,479 shares; 2012 issued and outstanding - 93,808,386 shares |
|
|
10,428
|
|
|
9,381
|
|
|
Common stock issuable
|
|
|
432,100
|
|
|
489,100
|
|
|
Additional paid-in capital
|
|
|
116,309,680
|
|
|
108,485,646
|
|
|
Accumulated deficit
|
|
|
(86,330,584)
|
|
|
(70,980,216)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
30,421,624
|
|
|
38,003,911
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
46,890,194
|
|
$
|
44,331,441
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 | ||
|
|
CYTOMEDIX, INC.
(unaudited)
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
|
September 30,
|
|
September 30,
|
|
||||||||
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
||||
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
2,925,971
|
|
$
|
1,703,311
|
|
$
|
7,541,874
|
|
$
|
5,203,675
|
|
|
License fees
|
|
|
67,063
|
|
|
—
|
|
|
67,063
|
|
|
3,154,722
|
|
|
Royalties
|
|
|
244,350
|
|
|
56,000
|
|
|
369,646
|
|
|
103,021
|
|
|
Other revenue
|
|
|
128,835
|
|
|
—
|
|
|
128,835
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,366,219
|
|
|
1,759,311
|
|
|
8,107,418
|
|
|
8,461,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,817,386
|
|
|
992,277
|
|
|
5,439,401
|
|
|
2,815,623
|
|
|
Cost of royalties
|
|
|
32,504
|
|
|
5,658
|
|
|
41,578
|
|
|
10,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,849,890
|
|
|
997,935
|
|
|
5,480,979
|
|
|
2,826,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
516,329
|
|
|
761,376
|
|
|
2,626,439
|
|
|
5,635,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
1,967,965
|
|
|
1,745,520
|
|
|
6,011,337
|
|
|
5,586,743
|
|
|
Consulting expenses
|
|
|
415,947
|
|
|
501,058
|
|
|
1,596,576
|
|
|
1,784,401
|
|
|
Professional fees
|
|
|
385,344
|
|
|
336,446
|
|
|
827,198
|
|
|
1,002,947
|
|
|
Research, development, trials and studies
|
|
|
922,999
|
|
|
1,006,049
|
|
|
3,050,038
|
|
|
2,454,615
|
|
|
General and administrative expenses
|
|
|
1,433,611
|
|
|
1,380,449
|
|
|
5,415,768
|
|
|
4,082,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,125,866
|
|
|
4,969,522
|
|
|
16,900,917
|
|
|
14,911,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,609,537)
|
|
|
(4,208,146)
|
|
|
(14,274,478)
|
|
|
(9,276,085)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(378,587)
|
|
|
(262,008)
|
|
|
(1,323,900)
|
|
|
(797,140)
|
|
|
Change in fair value of derivative liabilities
|
|
|
5,789
|
|
|
689,264
|
|
|
250,349
|
|
|
442,743
|
|
|
Change in fair value of contingent consideration
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,334,932)
|
|
|
Inducement expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,513,371)
|
|
|
Settlement of contingency
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(471,250)
|
|
|
Other
|
|
|
12,076
|
|
|
576
|
|
|
12,331
|
|
|
(529)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(360,722)
|
|
|
427,832
|
|
|
(1,061,220)
|
|
|
(6,674,479)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(4,970,259)
|
|
|
(3,780,314)
|
|
|
(15,335,698)
|
|
|
(15,950,564)
|
|
|
Income tax provision
|
|
|
4,890
|
|
|
4,609
|
|
|
14,670
|
|
|
13,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,975,149)
|
|
|
(3,784,923)
|
|
|
(15,350,368)
|
|
|
(15,964,391)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss to common stockholders
|
|
$
|
(4,975,149)
|
|
$
|
(3,784,923)
|
|
$
|
(15,350,368)
|
|
$
|
(15,977,953)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.05)
|
|
$
|
(0.04)
|
|
$
|
(0.15)
|
|
$
|
(0.20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
104,890,396
|
|
|
91,214,635
|
|
|
102,891,983
|
|
|
78,502,867
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 | ||
|
|
CYTOMEDIX, INC.
(unaudited)
|
|
|
Nine Months Ended
|
|
||||
|
|
|
September 30,
|
|
||||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,350,368)
|
|
$
|
(15,964,391)
|
|
|
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Bad debt expense, net of recoveries
|
|
|
42,775
|
|
|
21,295
|
|
|
Depreciation and amortization
|
|
|
875,084
|
|
|
841,167
|
|
|
Stock-based compensation
|
|
|
537,958
|
|
|
1,847,233
|
|
|
Change in fair value of derivative liabilities
|
|
|
(250,349)
|
|
|
(442,743)
|
|
|
Change in fair value of contingent consideration
|
|
|
—
|
|
|
4,334,932
|
|
|
Settlement of contingency
|
|
|
—
|
|
|
471,250
|
|
|
Amortization of deferred costs
|
|
|
186,931
|
|
|
102,327
|
|
|
Non-cash interest expense - amortization of debt discount
|
|
|
222,282
|
|
|
475,656
|
|
|
Deferred income tax provision
|
|
|
14,670
|
|
|
13,827
|
|
|
Loss (Gain) on disposal of assets
|
|
|
(594,173)
|
|
|
49,494
|
|
|
Effect of amendment to contingent consideration
|
|
|
1,006,159
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
|
|
19,867
|
|
|
—
|
|
|
Effect of issuance of warrants for term loan modification
|
|
|
303,517
|
|
|
—
|
|
|
Inducement expense
|
|
|
—
|
|
|
1,513,371
|
|
|
Change in operating assets and liabilities, net of those acquired:
|
|
|
|
|
|
|
|
|
Accounts and other receivable, net
|
|
|
(441,436)
|
|
|
(121,543)
|
|
|
Inventory
|
|
|
(631,812)
|
|
|
(554,444)
|
|
|
Prepaid expenses and other current assets
|
|
|
(561,095)
|
|
|
111,455
|
|
|
Accounts payable and accrued expenses
|
|
|
2,364,402
|
|
|
715,824
|
|
|
Deferred revenues
|
|
|
4,044,700
|
|
|
(654,721)
|
|
|
Other liabilities
|
|
|
124,212
|
|
|
6,392
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,086,676)
|
|
|
(7,233,619)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property and equipment acquisitions
|
|
|
(600,373)
|
|
|
(1,736,129)
|
|
|
Cash acquired in business combination
|
|
|
—
|
|
|
24,563
|
|
|
Proceeds from sale of equipment
|
|
|
2,139,672
|
|
|
335,077
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,539,299
|
|
|
(1,376,489)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
4,235,797
|
|
|
—
|
|
|
Proceeds from issuance of common stock, net
|
|
|
4,910,237
|
|
|
8,336,925
|
|
|
Redemption of preferred stock
|
|
|
—
|
|
|
(169,986)
|
|
|
Repayment of note payable
|
|
|
(570,000)
|
|
|
—
|
|
|
Proceeds from option and warrant exercises
|
|
|
—
|
|
|
4,066,959
|
|
|
Dividends paid on preferred stock
|
|
|
—
|
|
|
(36,595)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,576,034
|
|
|
12,197,303
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
2,028,657
|
|
|
3,587,195
|
|
|
Cash, beginning of period
|
|
|
2,615,805
|
|
|
2,246,050
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
4,644,462
|
|
$
|
5,833,245
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 | ||
|
|
CYTOMEDIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Description of Business
Cytomedix, Inc. (“Cytomedix,” the “Company,” “we,” “us,” or “our”) is a regenerative therapies company marketing and developing products within the U.S. and internationally. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (from self) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long term recovery in complex chronic conditions with significant unmet medical needs.
Our current commercial offerings consist of point of care technologies for the safe and efficient separation of autologous blood and bone marrow to produce platelet based therapies or cell concentrates. Today, we have two distinct platelet rich plasma (“PRP”) devices, the AutoloGel System for wound care and the Angel concentrated Platelet Rich Plasma (“cPRP”) System for orthopedics markets. Our sales are predominantly (approximately
87
%) in the United States, where we sell our products through direct sales representatives. Growth drivers in the U.S. include Medicare coverage for the treatment of chronic wounds under a National Coverage Determination when registry data is collected under Coverage with Evidence Development (“CED”), and a worldwide distribution and licensing agreement that allows our partner to promote the Angel System for all uses other than wound care.
Basis of Presentation and Significant Accounting Policies
The unaudited financial statements included herein are presented on a condensed consolidated basis and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly state such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.
The year-end balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America.
These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2013.
Basic and Diluted Loss Per Share
We compute basic and diluted net loss per common share using the weighted-average number of shares of common stock outstanding during the period. During periods of net losses, shares associated with outstanding stock options, stock warrants, convertible preferred stock, and convertible debt are not included because the inclusion would be anti-dilutive. The total numbers of such shares excluded from the calculation of diluted net loss per common share were
28,207,642
for the nine months ended September 30, 2013, and
19,164,126
for the nine months ended September 30, 2012.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired in business combinations. The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year. The Company will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the Company below its carrying value.
| 4 | ||
|
|
Indefinite lived intangible assets consist of in-process research and development (IPR&D) acquired in the acquisition of Aldagen. The acquired IPR&D consists of specific cell populations (that are related to a specific indication) and the use of the cell populations in treating particular medical conditions. The Company evaluates its indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis on October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, the Company would recognize an impairment loss in the amount of that excess.
Identifiable intangible assets with finite lives consist of trademarks, technology (including patents), and customer relationships acquired in business combinations. These intangibles are amortized using the straight-line method over their estimated useful lives. The Company reviews its finite-lived intangible assets for potential impairment when circumstances indicate that the carrying amount of assets may not be recoverable.
The Company believes the adoption of Accounting Standards Updates issued but not yet adopted will not have a material impact to our results of operations or financial position.
Arthrex Distributor and License Agreement
On August 7, 2013, the Company entered into a Distributor and License Agreement (the “Arthrex Agreement”) with Arthrex, Inc., a privately held Florida based company (“Arthrex”). Under the terms of the Arthrex Agreement, Arthrex will obtain the exclusive rights to sell, distribute, and service the Company’s Angel Concentrated Platelet System and ActivAt (“Products”), throughout the world, for all uses other than chronic wound care. The Company granted Arthrex a limited license to use the Company’s intellectual property as part of enabling Arthrex to sell the Products. Arthrex will purchase Products from the Company to distribute and service at certain purchase prices, which may be changed after an initial period. Arthrex has the right, on written notice to the Company, to assume responsibility for the manufacture and supply of the Products, either by assuming the Company’s existing manufacturing and supply agreements or by entering into new manufacturing and supply agreements. Arthrex will also pay a certain royalty rate based upon volume of the Products sold. The exclusive nature of Arthrex rights to sell, distribute and service the Products is subject certain existing supply and distribution agreements such that Arthrex may instruct the Company to terminate or not renew any of such agreements. In addition, Arthrex’s rights to sell, distribute and service the Products is not exclusive in the non-surgical dermal and non-surgical aesthetics markets. In connection with the execution of the Arthrex Agreement, Arthrex agreed to pay the Company a nonrefundable upfront payment of $
5
million. The term of the Arthrex Agreement is five years, automatically renewable for an additional three-year period unless Arthrex gives the Company a termination notice at least one year in advance of the end of the initial five-year period. The Arthrex Agreement contains other terms and provisions that are customary to the agreements of this nature. The foregoing description of the Arthrex Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Arthrex Agreement.
Immediately following the execution of the Arthrex Agreement, the Company, at the request of Arthrex, agreed to temporarily provide certain services to Arthrex during a transition period (“Transition Services”). These Transition Services primarily involve customer service, sales order fulfillment, customer billing and collections, and technical support for the Products. For these services, Arthrex will pay the Company an agreed upon fee. The Transition Services period is expected to conclude by the end of 2013.
Midcap Consent and First Amendment to Security Agreement
In connection with the Arthrex licensing engagement, on August 7, 2013, the Company entered into Consent and First Amendment to Security Agreement (the “Amendment to Credit Agreement”) with MidCap Funding III, LLC, as a lender and administrative agent for the lenders (“Agent”) amending that Credit and Security Agreement, dated as of February 13, 2013, by and among the Company and the Agent and the Lenders party thereto (the “Original Credit Agreement”). Under the terms of the Amendment to the Credit Agreement, the Agent consented, among other things, to the Company’s entering the Arthrex Agreement. In addition, the parties amended the Credit Agreement to terminate the Company’s ability to borrow an additional $
3
million, reducing the loan amount from $
7.5
million to $
4.5
million, $4.5 million of which has been extended to the Company to date. The Company makes monthly payments under the credit facility in the amount of $
150,000
.
| 5 | ||
|
|
Finally, the Company granted to the Agent a first priority security interest in the royalty payments payable to the Company pursuant to the Arthrex Agreement. The Amendment to Credit Agreement contains other terms and provisions that are customary to the agreements of this nature. The foregoing description of the Amendment to Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Amendment to Credit Agreement.
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value.
Short-term Financial Instruments
The inputs used in measuring the fair value of cash and short-term investments are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of the Company’s funds. The fair value of other short-term financial instruments (primarily accounts receivable and accounts payable and accrued expenses) approximate their carrying values because of their short-term nature.
Other Financial Instruments
The Company has segregated its financial assets and liabilities that are measured at fair value into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Company has no non-financial assets and liabilities that are measured at fair value.
The carrying amounts of the liabilities measured at fair value are as follows:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
—
|
|
$
|
—
|
|
$
|
358,339
|
|
$
|
358,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total measured at fair value
|
|
$
|
—
|
|
$
|
—
|
|
$
|
358,339
|
|
$
|
358,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
—
|
|
$
|
—
|
|
$
|
780,960
|
|
$
|
780,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total measured at fair value
|
|
$
|
—
|
|
$
|
—
|
|
$
|
780,960
|
|
$
|
780,960
|
|
The liabilities measured at fair value in the above table are included with “derivative and other liabilities” in the accompanying consolidated balance sheets.
The following table sets forth a summary of changes in the fair value of Level 3 liabilities for the nine months ended September 30, 2013:
|
Description
|
|
Balance at
December 31, 2012 |
|
Established in
2012 |
|
Modification
of Convertible Debt Agreement |
|
Conversion to
Common Stock |
|
Change in
Fair Value |
|
Effect of
Extinguishment of Debt |
|
Balance at
September 30, 2013 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
780,960
|
|
$
|
—
|
|
$
|
250,361
|
|
$
|
(244,477)
|
|
$
|
(250,349)
|
|
$
|
(178,156)
|
|
$
|
358,339
|
|
| 6 | ||
|
|
Gains and losses in the fair value of derivative instruments are classified as the “change in the fair value of derivative instruments” in the accompanying consolidated statements of operations.
The fair value of the embedded conversion options is determined based on the Black-Scholes option pricing model, and includes the use of unobservable inputs such as the expected term, anticipated volatility and expected dividends. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the embedded conversion options. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
In July and November 2011, we issued convertible notes that contained embedded conversion options which met the criteria for derivative liabilities. The fair value of the conversion options, at September 30, 2013, approximates $
465,000
.
In October 2012, the Company purchased a Certificate of Deposit (“CD”) from its commercial bank in the amount of $
53,000
. This CD bears interest at an annual rate of
0.10
% and matures on
February 24, 2014
. The $53,000 carrying value of the CD approximates its fair value. This CD collateralizes the Letter of Credit described in Commitment and Contingencies (see Note 18).
Product sales consist of the following:
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
||||||||
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from U.S. product sales
|
|
$
|
2,754,438
|
|
$
|
1,448,451
|
|
$
|
6,592,163
|
|
$
|
4,461,469
|
|
|
Revenue from non-U.S. product sales
|
|
|
171,533
|
|
|
254,860
|
|
|
949,711
|
|
|
742,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from product sales
|
|
$
|
2,925,971
|
|
$
|
1,703,311
|
|
$
|
7,541,874
|
|
$
|
5,203,675
|
|
Accounts receivable, net consisted of the following:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
Trade receivables
|
|
$
|
1,058,544
|
|
$
|
1,133,400
|
|
|
Other receivables
|
|
|
1,138,532
|
|
|
643,051
|
|
|
|
|
|
2,197,076
|
|
|
1,776,451
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for doubtful accounts
|
|
|
(64,673)
|
|
|
(42,709)
|
|
|
|
|
$
|
2,132,403
|
|
$
|
1,733,742
|
|
Other receivables consist primarily of the cost of raw materials needed to manufacture the Angel products that are sourced by the Company and immediately resold, at cost, to the contract manufacturer.
| 7 | ||
|
|
The carrying amounts of inventories are as follows:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
70,886
|
|
$
|
79,090
|
|
|
Finished goods
|
|
|
1,731,023
|
|
|
1,091,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,801,909
|
|
$
|
1,170,097
|
|
As a result of the Arthrex Agreement discussed in Note 3, Angel centrifuges are now classified as “Inventory” in the consolidated balance sheets, whereas they were previously classified as “Property and equipment”.
Prepaid expenses and other current assets consisted of the following:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
58,999
|
|
$
|
61,519
|
|
|
Prepaid fees and rent
|
|
|
94,041
|
|
|
186,407
|
|
|
Deposits and advances
|
|
|
588,870
|
|
$
|
409,604
|
|
|
Prepaid royalties
|
|
|
755,207
|
|
|
6,250
|
|
|
Other Current Assets
|
|
|
127,107
|
|
|
73,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,624,224
|
|
$
|
737,445
|
|
Prepaid royalties is a result of a payment made, to a holder of a security interest in patents, for the termination and release of the security interest. The prepayment will be amortized to cost of sales over the life of the patents which expire November 2019. Amortization expense, related to the prepayment, of approximately $
71,000
was recorded to cost of sales for the nine months ended September 30, 2013.
Property and equipment consists of the following:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
1,128,357
|
|
$
|
3,033,792
|
|
|
Office equipment
|
|
|
86,001
|
|
|
87,163
|
|
|
Manufacturing equipment
|
|
|
307,971
|
|
|
303,143
|
|
|
Leasehold improvements
|
|
|
390,911
|
|
|
390,911
|
|
|
|
|
|
1,913,240
|
|
|
3,815,009
|
|
|
Less accumulated depreciation
|
|
|
(1,018,619)
|
|
|
(1,374,928)
|
|
|
|
|
$
|
894,621
|
|
$
|
2,440,081
|
|
As a result of the Arthrex Agreement discussed in Note 3, Angel centrifuges are now classified as “Inventory” in the consolidated balance sheets, whereas they were previously classified as “Property and equipment”.
For the nine months ended September 30, 2013, we recorded depreciation expense of approximately $
600,300
with $
285,000
reported as cost of sales, $
70,100
to general and administrative expenses, and $
245,200
to research, development, trials and studies. Amortization of leasehold improvements is included in accumulated depreciation.
| 8 | ||
|
|
Goodwill
Goodwill represents the purchase price of acquisitions in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities. Amounts allocated to goodwill are tax deductible in all relevant jurisdictions.
As a result of the Company’s acquisition of Aldagen in February 2012, the Company recorded goodwill of approximately $
422,000
. Prior to the acquisition of Aldagen, the Company had goodwill of approximately $
707,000
as a result of the acquisition of the Angel business in April 2010.
The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year. The Company will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the Company below its carrying value.
During 2013, planned enrollment in the Company’s Phase 2 clinical trial for ALDH-401 began experiencing patient enrollment delays.
The delay has resulted in extended time to enroll and added costs associated with the delay.
On September 17, 2013, Cytomedix announced its decision to become a more commercially focused company and reorganize its research and development activities. The plan includes a strategic reorganization of its research and development operations that involve the ALDH-401trial and ALDH Bright Cell platform, intention to proceed with trial enrollment through the end of 2013 with an enrollment goal of 50 patients, and pursuit of strategic partnerships to continue the trial beyond 2013 (“Announcement”). This Announcement identified several indicators of a potential impairment of intangible assets acquired in the Aldagen acquisition; as such, the Company felt it necessary to perform an impairment analysis on its goodwill as of September 30, 2013.
U.S. GAAP provides for a two-step process for measuring for impairment of goodwill.
Step 1 of the impairment process is to determine if the fair value of the reporting unit exceeds its carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary.
The Company’s goodwill is contained in its sole operating segment and reporting unit. Based on its assessment that the fair value of the reporting unit (determined with reference to its quoted market cap) exceeded its carrying value at September 30, 2013, the Company determined that goodwill was not impaired. Accordingly, the Step Two analysis is not applicable.
Identifiable Intangible Assets
Cytomedix’s identifiable intangible assets consist of trademarks, technology (including patents), customer relationships, and in-process research and development. These assets were a result of the Angel business and Aldagen acquisitions.
The carrying value of those intangible assets, and the associated amortization, were as follows:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
2,310,000
|
|
$
|
2,310,000
|
|
|
Technology
|
|
|
2,355,000
|
|
|
2,355,000
|
|
|
Customer relationships
|
|
|
708,000
|
|
|
708,000
|
|
|
In-process research and development
|
|
|
29,585,000
|
|
|
29,585,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,958,000
|
|
$
|
34,958,000
|
|
|
Less accumulated amortization
|
|
|
(1,097,463)
|
|
|
(822,713)
|
|
|
|
|
$
|
33,860,537
|
|
$
|
34,135,287
|
|
| 9 | ||
|
|
Definite-lived intangible assets
The Company's intangible assets that have definite lives are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i. e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. The Company periodically reevaluates the useful lives for these intangible assets to determine whether events and circumstances warrant a revision in their remaining useful lives.
As a result of the September 17, 2013 announcement discussed above, the Company believed an impairment assessment of the Aldagen-related Trademarks and Trademark, as of September 30, 2013, was warranted. The Company performed a quantitative assessment and identified driving factors used in the original valuation of the Trademarks and Tradename, including the projected revenue stream and discount factor that may have changed. The Company considered the impact of such changes to the
undiscounted future cash flows used to value the Trademarks and Tradename, and concluded that the changes to the driving factors that management was able to quantify did not have a significant impact to the undiscounted future cash flows. The Company realizes that, in addition to the projected revenue stream and discount factor,
other additional factors may have changed whose financial impacts are currently unknown, but may become more clear as strategic discussions proceed over the next few months. The Company expects that before the end of the year there will be additional clarity regarding the process and its impacts to the recoverability of the Trademarks and Tradename asset.
As a result, management concludes that the fair value of the Trademarks and Tradename definite-lived intangible asset is not less than its carrying value of approximately $1.7 million and therefore it is not impaired as of September 30, 2013.
Indefinite-lived intangible assets
The Company evaluates its indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis on October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, the Company would recognize an impairment loss in the amount of that excess. The Company's sole indefinite-lived intangible asset is its in-process research and development (“IPR&D”) acquired in connection with its acquisition of Aldagen in 2012. The IPR&D asset consists of its ALDH bright cell platform.
The Company is currently conducting (i) a Phase 2 clinical trial for this technology in ischemic stroke, (ii) a Phase 1/2 clinical trial in critical limb ischemia that is being funded by the National Institutes of Health, and (iii) a Phase 1 clinical trial in grade IV malignant glioma following surgery that is funded by Duke University.
As a result of the September 17, 2013 announcement discussed above, the Company believed an impairment assessment of the IPR&D, as of September 30, 2013, was warranted.
The Company performed a quantitative assessment and identified driving factors used in the original valuation of the IPR&D, including the projected non-diagnostic revenues and expenses, clinical trial expenses, commercial revenue
stream and discount factor, that may have changed.
The changes to driving factors that management was able to quantify (including delayed revenue stream generation and increased clinical trial costs) were offset by the impacts on the model of the passage of time (i.e., the clinical trial delay approximates the passage of time). The Company realizes that, in addition to the delayed revenue stream generation and increased clinical trial costs, other additional factors may have changed whose financial impacts are currently unknown, but may become more clear as strategic discussions proceed over the next few months. The Company expects that before the end of the year there will be additional clarity regarding the process and its impacts to the recoverability of the IPR&D asset.
| 10 | ||
|
|
Amortization expense of approximately $
117,700
was recorded to cost of sales and approximately $
157,000
was recorded to general and administrative expense for the nine months ended September 30, 2013. Amortization expense for the remainder of 2013 is expected to be approximately $
91,600
.
Annual amortization expense based on our existing intangible assets and their estimated useful lives is expected to be approximately:
|
2014
|
|
366,500
|
|
|
2015
|
|
366,500
|
|
|
2016
|
|
366,500
|
|
|
2017
|
|
366,500
|
|
|
2018
|
|
366,500
|
|
|
Thereafter
|
|
2,718,600
|
|
Accounts payable and accrued expenses consisted of the following:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
3,043,250
|
|
$
|
1,434,166
|
|
|
Accrued compensation and benefits
|
|
|
1,044,808
|
|
|
833,141
|
|
|
Accrued professional fees
|
|
|
175,950
|
|
|
156,205
|
|
|
Accrued interest
|
|
|
1,875
|
|
|
750
|
|
|
Other payables
|
|
|
910,890
|
|
|
388,109
|
|
|
|
|
$
|
5,176,773
|
|
$
|
2,812,371
|
|
Other payables include approximately $
467,000
due to Arthrex for payments collected on Angel
sales made by Cytomedix, on behalf of Arthrex, during the transitions services period (see Note 3 for additional details).
Deferred revenue consists of prepaid licensing revenue of approximately $
1,900,000
, as a result of the Arthrex Agreement, and deferred sales of approximately $
2,100,000
from the purchase of Angel centrifuges and disposables by Arthrex that are warehoused by the Company for fulfillment of orders during the Transition Services period. Revenue related to the purchase of Angel centrifuges and disposables during the Transition Services period are recognized upon delivery to the point of sale. Revenue related to prepaid licensing is recognized on a straight-line basis over
5
years, the term of the Arthrex Agreement. Approximately $
67,000
of revenue related to the prepaid license was recognized for the nine months ended September 30, 2013.
Derivative and other liabilities consisted of the following:
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
Derivative liability, long-term portion
|
|
|
358,338
|
|
$
|
780,960
|
|
|
Long-term portion of convertible debt, net of unamortized discount
|
|
|
264,483
|
|
|
462,815
|
|
|
Deferred rent
|
|
|
129,499
|
|
|
58,005
|
|
|
Deferred tax liability
|
|
|
64,670
|
|
|
50,000
|
|
|
Interest payable
|
|
|
39,764
|
|
|
33,379
|
|
|
Conditional grant payable
|
|
|
30,000
|
|
|
30,000
|
|
|
Accrued term loan fee
|
|
|
26,333
|
|
|
—
|
|
|
|
|
$
|
913,087
|
|
$
|
1,415,159
|
|
4% Convertible Notes
On
July 15, 2011
, Cytomedix issued $
1.3
million of its 4% Convertible Notes (the “July 4% Convertible Notes”) to an unaffiliated third party. The July 4% Convertible Notes mature on
May 23, 2016
and bear a one-time interest charge of
4
% due on maturity.
The July 4% Convertible Notes (plus accrued interest) convert at the option of the unaffiliated third party, in whole or in part and from time to time, into shares of the Company’s Common stock at a conversion rate equal to (i) the lesser of $0.80 per share or (ii) 80% of the average of the three lowest closing prices of the Company’s Common stock for the previous 20 trading days prior to conversion (subject to a “floor” price of $0.25 per share).
At September 30, 2013, approximately $
465,000
face amount of the July 4% Convertible Notes remained and were convertible into approximately
1.5
million shares of Common stock at a conversion price of $
0.31
per share.
| 11 | ||
|
|
On
November 18, 2011
, Cytomedix issued $
0.5
million of its 4% Convertible Notes (the “November 4% Convertible Notes”) to an unaffiliated third party.
The November 4% Convertible Notes mature on
May 23, 2016
and bear a one-time interest charge of 4% due on maturity. The November 4% Convertible Notes (plus accrued interest) convert at the option of the holder, in whole or in part and from time to time, into shares of the Company’s Common stock at a conversion rate equal to 80% of the average of the three lowest closing prices of the Company’s common stock for the previous 20 trading days prior to conversion (subject to a “floor” price of $0.25 per share).
At September 30, 2013, no unpaid balance remained of the November 4% Convertible Notes.
The unaffiliated third party has the option to provide additional funding of up to $
1.0
million on substantially the same terms; however, the Company may elect to cancel such notes, in its sole discretion, with no penalty.
The conversion option embedded in the July and November 4% Convertible Notes is accounted for as a derivative liability, and resulted in the creation at issuance of a discount to the carrying amount of the debt, totaling $
1.8
million, which is being amortized as additional interest expense using the straight-line method over the term of the July and November 4% Convertible Notes (the Company determined that using the straight-line method of amortization did not yield a materially different amortization schedule than the effective interest method). The embedded conversion option is recorded at fair value and is marked to market at each period, with the resulting change in fair value being reflected as “change in fair value of derivative liabilities” in the accompanying condensed consolidated statements of operations.
On February 19, 2013, the Company and the holder of these notes, agreed, in consideration of the subordination of the rights and remedies under these notes to that of another party, to amend the notes to extend the maturity date to May 23, 2016. Also, as part of the consideration, the Company repaid approximately $
0.3
million of the principal of the note. The amendments were accounted for as a partial “extinguishment” and a partial “modification” of the notes. The partial extinguishment resulted in the immediate expensing of approximately $
54,000
of new fees and expenses and $
54,000
of the increase in the fair value of the embedded conversion option. The partial modification resulted in the deferral of approximately $
46,000
of new fees and expenses and $
197,000
of the increase in the fair value of the embedded conversion option (as additional debt discount).
12% Interest Only Note
On
April 28, 2011
, the Company borrowed $
2.1
million pursuant to a secured promissory note that matures
November 19, 2016
. The note accrues interest at a rate of
12
% per annum, and requires interest-only payments each quarter commencing
September 30, 2011
, with the then outstanding principal due on the maturity date. The note may be accelerated by the lender if Cytomedix defaults in the performance of the terms of the promissory note, if the representations and warranties made by us in the note are materially incorrect, or if we undergo a bankruptcy event. The note is secured by our Angel assets.
In connection with the issuance of the secured promissory note, the Company issued the lender a warrant to purchase up to
1,000,000
shares at an exercise price of $
0.50
per share vesting as follows: (a)
666,667
shares upon issuance of the note, (b)
83,333
shares if the note has not been prepaid by the first anniversary of its issuance, (c)
116,667
shares if the note has not been prepaid by the second anniversary of its issuance, and (d)
133,333
shares if the note has not been prepaid by the third anniversary of its issuance.
Of the $
2,100,000
due under the note, our payment obligations with respect to $
1,400,000
under the note were guaranteed by certain insiders, affiliates, and shareholders of the Company, including Mr. David Jorden, one of the Company’s directors. In connection with this guarantee, the Company issued the guarantors warrants to purchase an aggregate of up to
1,500,000
shares, on a pro rata basis based on the amount of the guarantee, at an exercise price of $
0.50
per share vesting as follows: (a)
833,333
shares upon issuance of the note, (b)
166,667
shares if the note has not been prepaid by the first anniversary of its issuance, (c)
233,333
shares if the note has not been prepaid by the second anniversary of its issuance, and (d)
266,667
shares if the note has not been prepaid by the third anniversary of its issuance.
The warrants issued to the lender and the guarantors were valued at approximately $
546,000
, were recorded as deferred debt issuance costs, and are being amortized to interest expense on a straight-line basis over the guarantee period. The Company determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method.
| 12 | ||
|
|
On February 19, 2013, The Company and the holder of the note, in consideration for subordination of its security interest under the note to that of another party, agreed to amend the note. In the amendment, the Company agreed to extend the maturity date of the note to November 19, 2016. In addition, the parties agreed to amend the vesting schedule on the warrants issued by the Company in April 2011 such that the remaining
250,000
warrant shares are exercisable immediately and to issue the holder a new warrant to purchase up to
266,666
shares at an exercise price of $
0.70
per share vesting as follows: (i)
133,333
shares may be exercised only if the note has not been paid by the fourth anniversary of its issuance, and (ii) the remaining
133,333
shares may be exercised only if the note has not been paid by the fifth anniversary of its issuance.
The Company also: (i) amended the warrant vesting schedule on the guarantors’ warrants issued by the Company in April 2011 such that the remaining
500,000
warrant shares are exercisable immediately and (ii) granted new warrants to the guarantors to acquire up to
533,334
shares of the Company’s common stock pursuant to warrants at the exercise price of $
0.70
per share, vesting as follows: (i)
266,667
warrant shares may be exercised only if the JP Trust Note has not been prepaid by the fourth anniversary of its issuance, and (ii) the remaining
266,667
shares may be exercised only if the note has not been paid by the fifth anniversary of its issuance.
The amendment was accounted for as a “modification.” Accordingly, the warrants issued to the lender as a result of the amendment (valued at approximately $
152,000
) were recorded as deferred debt issuance costs, and are being amortized to interest expense on a straight-line basis over the guarantee period. The Company determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method. The warrants issued to the guarantors as a result of the amendment were valued at approximately $
304,000
and were recorded as interest expense in the first quarter of 2013.
Term Loan
On February 19, 2013, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with an unaffiliated third party that provides for an aggregate term loan commitments of $
7.5
million. The Company received the first tranche of $
4.5
million on February 27, 2013.
The term loan will mature on August 19, 2016, and will be repaid on a straight-line amortization basis, with the first twelve months being an interest only period and commencing on the thirteenth month. The principal on both the first tranche and, if applicable, on the second tranche, will be amortized in equal monthly amounts through the maturity date.
In connection with the foregoing loan facility, the Company issued the lender a seven-year warrant to purchase
1,079,137
shares of the Company’s common stock at the warrant exercise price of $
0.70
per share. The exercise price and the number of shares issuable upon exercise of the warrant is subject to standard anti-dilution adjustments and contains a cashless exercise provision.
Interest on the outstanding balance of the term loan is payable monthly in arrears at an annual rate of the one-month London Interbank Offered Rate
(LIBOR), plus 8.0%
, subject to a
LIBOR floor of 3%
, and is calculated on the basis of the actual number of days elapsed in a 360 day year. In the event the term loan is prepaid by the Company prior to the end of its term, the Company will be required to pay to the lender a fee equal to an amount determined by multiplying the outstanding amount on the loan by
5
% in the first year,
3
% in the second year and
1
% after that.
Amounts borrowed under the Credit Agreement are secured by a first priority security interest on all existing and after-acquired assets of the Company, including the intellectual property of the Company and its subsidiaries.
The Credit Agreement contains events of default and remedies customary for loan transactions of this sort including, among others, those related to a default in the payment of principal or interest, a material inaccuracy of a representation or warranty, a default with regard to performance of certain covenants, a material adverse change (as defined in the Credit Agreement) occurs, and certain change of control events. In addition, the failure to consummate the Capital Raise Event constitutes an event of default under the Credit Agreement. The Company would also be in default under the Credit Agreement in the event of certain withdrawals, recalls, adverse test results or enforcement actions with respect to the Company’s products. Upon the occurrence of a default, in some cases following a notice and cure period, lender may accelerate the maturity of the loans and require the full and immediate repayment of all borrowings under the Credit Agreement. The Credit Agreement also contains financial and customary negative covenants, including with respect to the Company’s ability to sell, lease, transfer, assign, grant a security interest in or otherwise dispose of its assets except in the ordinary course of business, or incur additional indebtedness.
| 13 | ||
|
|
The warrants issued to the lender were valued at approximately $
568,000
, were recorded as a debt discount, and are being amortized to interest expense over the term of the loan. The Company determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method. The warrants are classified in equity.
On August 7, 2013, the Company and MidCap amended the terms of the Credit Agreement. Under the terms of the amendment to the Credit Agreement, the Agent consented, among other things, to the Company’s entering the Arthrex Agreement. In addition, the parties amended the Credit Agreement to terminate the Company’s ability to borrow an additional $
3
million, reducing the loan amount from $
7.5
million to $
4.5
million, $4.5 of which has been extended to the Company to date. The Company and MidCap also agreed to a revised monthly payment amortization schedule such that in the event that the Company raises cash proceeds of at least $
500,000
before September 1, 2013 in a public or private offering of its equity securities, then, commencing on September 1, 2013, and continuing thereafter, the Company has agreed to make monthly payments under the credit facility in the amount of $
125,000
, provided, however, if no such subsequent equity event takes place by September 1, 2013, the monthly payments under the credit facility will be in the amount of $
150,000
. No such subsequent equity event took place by September 1, 2013, and the Company is required to make monthly payments under the credit facility in the amount of $
150,000
.
Finally, the Company granted to the Agent a first priority security interest in the royalty payments payable to the Company pursuant to the Arthrex Agreement. The Amendment to Credit Agreement contains other terms and provisions that are customary to the agreements of this nature. The foregoing description of the Amendment to Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Amendment to Credit Agreement.
The Company accounts for income taxes using the asset and liability approach. This approach requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of the Company’s assets and liabilities. For interim periods, the Company recognizes a provision (benefit) for income taxes based on an estimated annual effective tax rate expected for the entire year. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company’s policy is to recognize interest and penalties on uncertain tax positions as a component of income tax expense.
The Company issued
11,382,093
shares of Common stock during the nine months ended September 30, 2013. The following table lists the sources of and the proceeds from those issuances:
| 14 | ||
|
|
|
Source
|
|
# of Shares
|
|
Total
Proceeds |
|
||
|
|
|
|
|
|
|
|
|
|
Sale of shares pursuant to registered direct offering
|
|
|
9,090,911
|
|
$
|
5,000,001
|
|
|
Sale of shares pursuant to October 2010 equity
purchase agreement |
|
|
450,000
|
|
$
|
303,000
|
|
|
Sale of shares pursuant to February 2013 equity
purchase agreement |
|
|
150,000
|
|
$
|
58,500
|
|
|
Issuance of shares in lieu of cash for fees incurred
pursuant to February 2013 equity purchase agreement |
|
|
376,463
|
|
$
|
—
|
|
|
Issuance of shares for conversion of 4% Convertible Notes
|
|
|
1,000,219
|
|
$
|
—
|
|
|
Issuance of shares for release of security interest in patents
|
|
|
250,000
|
|
$
|
—
|
|
|
Issuance of shares to Class 4A Equity shareholder
pursuant to June 2002 Reorganization Plan |
|
|
27,000
|
|
$
|
—
|
|
|
Issuance of shares in lieu of cash for consultants
|
|
|
37,500
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
11,382,093
|
|
$
|
5,361,501
|
|
The following table summarizes the stock options granted by the Company during the three and nine months ended September 30, 2013. These options were granted to employees, board members and a consultant under the Company’s Long-Term Incentive Plan.
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
September 30, 2013
|
|
September 30, 2013
|
|
||||||||
|
Options Granted
|
|
Exercise Price
|
|
Options Granted
|
|
Exercise Price
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
$
|
0.46
|
|
|
1,028,000
|
|
|
$0.45 - $0.53
|
|
During the nine months ended September 30, 2013,
229,060
stock options were forfeited by contract due to the termination of the underlying service arrangement.
No dividends were declared or paid on the Company’s Common stock in any of the periods discussed in this report.
| 15 | ||
|
|
The Company had the following outstanding warrants and options:
|
|
|
# Outstanding
|
|
||||
|
Equity Instrument
|
|
September 30, 2013
|
|
December 31, 2012
|
|
||
|
|
|
|
|
|
|
|
|
|
Fitch/Coleman Warrants
(1)
|
|
|
975,000
|
|
|
975,000
|
|
|
August 2009 Warrants
(2)
|
|
|
1,070,916
|
|
|
1,070,916
|
|
|
April 2010 Warrants
(3)
|
|
|
1,295,138
|
|
|
1,295,138
|
|
|
October 2010 Warrants
(4)
|
|
|
1,488,839
|
|
|
1,488,839
|
|
|
Guarantor 2011 Warrants
(5)
|
|
|
916,665
|
|
|
916,665
|
|
|
February 2012 Inducement Warrants
(6)
|
|
|
1,180,547
|
|
|
1,180,547
|
|
|
February 2012 Aldagen Warrants
(7)
|
|
|
2,115,596
|
|
|
2,115,596
|
|
|
February 2013 MidCap Warrants
(8)
|
|
|
1,079,137
|
|
|
—
|
|
|
February 2013 Subordination Warrants
(9)
|
|
|
800,000
|
|
|
—
|
|
|
February 2013 Worden Warrants
(10)
|
|
|
250,000
|
|
|
—
|
|
|
February 2013 RDO Warrants
(11)
|
|
|
6,363,638
|
|
|
—
|
|
|
February 2013 PA Warrants
(12)
|
|
|
136,364
|
|
|
—
|
|
|
Other warrants
(13)
|
|
|
200,000
|
|
|
200,000
|
|
|
Options issued under the Long-Term Incentive Plan
(14)
|
|
|
8,665,893
|
|
|
7,866,953
|
|
|
(1)
|
These warrants were issued in connection with the August 2, 2007 Term Sheet Agreement and Shareholders’ Agreement with the Company’s then outside patent counsel, Fitch Even Tabin & Flannery and The Coleman Law Firm, and have a
7.5
year term. The strike prices on the warrants are:
325,000
at $
1.25
(Group A);
325,000
at $
1.50
(Group B); and
325,000
at $
1.75
(Group C). The Company may call up to 100% of these warrants, provided that the closing stock price is at or above the following call prices for ten consecutive trading days: Group A — $
4
/share; Group B — $
5
/share; Group C — $
6
/share. If the Company exercises its right to call, it shall provide at least 45 days notice for one-half of the warrants subject to the call and at least 90 days notice for the remainder of the warrants subject to the call.
|
|
|
|
|
(2)
|
These warrants were issued in connection with the August 2009 financing, are voluntarily exercisable at $
0.51
per share and expire in February 2014. These amounts reflect adjustments for an additional
420,896
warrants due to anti-dilutive provisions. These warrants were previously accounted for as a derivative liability through January 28, 2011. At that time, they were modified to remove non-standard anti-dilution clauses and the associated derivative liability and related deferred financing costs were reclassified to APIC.
|
|
|
|
|
(3)
|
These warrants were issued in connection with the April 2010 Series D preferred stock offering, are voluntarily exercisable at $
0.54
per share and expire on
April 9, 2015
.
|
|
|
|
|
(4)
|
These warrants were issued in connection with the October 2010 financing. They have an exercise price of $
0.60
and expire on
April 7, 2016
. These warrants were previously accounted for as a derivative liability through January 28, 2011. At that time, they were modified to remove non-standard anti-dilution clauses and the associated derivative liability and related deferred financing costs were reclassified to APIC.
|
|
|
|
|
(5)
|
These warrants were issued pursuant to the Guaranty Agreements executed in connection with the Promissory Note issued in April 2011. These warrants have an exercise price of $
0.50
per share and expire on
April 28, 2016
.
|
|
|
|
|
(6)
|
These warrants were issued in connection with the February 2012 warrant exercise agreements executed with certain existing Cytomedix warrant holders. These warrants have an exercise price of $
1.42
per share and expire on
December 31, 2014
.
|
|
|
|
|
(7)
|
These warrants were issued in February 2012 in connection with the warrant exchange agreements between Cytomedix and various warrant holders of Aldagen. These warrants have an exercise price of $
1.42
per share and expire on
December 31, 2014
.
|
| 16 | ||
|
|
|
(8)
|
These warrants were issued in connection with the February 2013 financing. They are voluntarily exercisable, have an exercise price of $
0.70
per share and expire on
February 19, 2020
.
|
|
|
|
|
(9)
|
These warrants were issued in connection with the February 2013 financing, have an exercise price of $
0.70
per share, and expire on
February 19, 2018
. They are only exercisable if the JPNT Note remains outstanding on or after 04-28-2015 (50% of total) and 04-15-2016 (remainder).
|
|
|
|
|
(10)
|
These warrants were issued in connection with the February 2013 financing. They are voluntarily exercisable, have an exercise price of $
0.70
per share, and expire on
February 19, 2020
.
|
|
|
|
|
(11)
|
These warrants were issued in connection with the February 2013 registered direct offering. They are voluntarily exercisable, have an exercise price of $
0.75
per share, and expire on
February 22, 2018
.
|
|
|
|
|
(12)
|
These warrants were issued to the placement agent in connection with the February 2013 registered direct offering. They are exercisable on or after August 21, 2013, have an exercise price of $
0.66
per share, and expire on
February 22, 2018
.
|
|
|
|
|
(13)
|
These warrants were issued to a consultant in exchange for services provided. They are voluntarily exercisable, have an exercise price of $
1.50
per share, and expire on
February 24, 2014
. There is no call provision associated with these warrants.
|
|
|
|
|
(14)
|
These options were issued under the Company’s shareholder approved Long-Term Incentive Plan.
|
Lincoln Park Transaction
On February 18, 2013, Cytomedix entered into a purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $
15
million in shares of the Company’s common stock (“Common Stock”), subject to certain limitations, from time to time, over the 30-month period commencing on the date that a registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed. The Company may direct Lincoln Park every other business day, at its sole discretion and subject to certain conditions, to purchase up to
150,000
shares of Common Stock in regular purchases, increasing to amounts of up to
200,000
shares depending upon the closing sale price of the Common Stock. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the Common Stock is not below $
1.00
per share. The purchase price of shares of Common Stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales (or over a period of up to 12 business days leading up to such time), but in no event will shares be sold to Lincoln Park on a day the Common Stock closing price is less than the floor price of $
0.45
per share, subject to adjustment. The Company’s sales of shares of Common Stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than
9.99
% of the then outstanding shares of the Common Stock.
In connection with the Purchase Agreement, the Company issued to Lincoln Park
375,000
shares of Common Stock and is required to issue up to
375,000
additional shares of Common Stock pro rata as the Company requires Lincoln Park to purchase the Company’s shares under the Purchase Agreement over the term of the agreement. Lincoln Park represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and the Company sold the securities in reliance upon an exemption from registration contained in Section 4(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the Common Stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. There are no trading volume requirements or restrictions under the Purchase Agreement. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares.
| 17 | ||
|
|
Common Stock and Warrant Registered Offering
On February 19, 2013, the Company entered into securities purchase agreements with certain institutional accredited investors, including certain current shareholders of the Company, to raise gross proceeds of $
5,000,000
, before placement agent’s fees and other offering expenses, in a registered offering. The Company will issue to the investors units of the Company’s securities consisting, in the aggregate, of
9,090,911
shares of the Company’s common stock and five-year warrants to purchase
6,363,638
shares of common stock. The purchase price paid by investors was $
0.55
for each unit. Each warrant is immediately exercisable at $
0.75
per share on or after February 22, 2013 and is subject to transfer restrictions, including among others, compliance with the state securities laws. The closing of the offering took place on February 22, 2013. Proceeds from the transaction will be used for general corporate and working capital purposes. The warrants are classified in equity.
Pursuant to the terms of the Placement Agent Agreement, the Company has agreed to pay an aggregate cash fee in the amount of $
350,000
(the “Placement Fee”). The Company has also agreed to reimburse up to $
52,000
for expenses incurred by the placement agent in connection with the offering. In addition, the Company granted to the placement agent warrants to purchase
136,364
shares of our common stock. The warrants will have the same terms as the investor warrants in this offering, except that the exercise price will be
120
% of the exercise price of the investor warrants and may also be exercised on a cashless basis.
The offering was made pursuant to a shelf registration statement on
Form S-3 (SEC File No. 333-183704, the base prospectus originally filed with the SEC on August 31, 2012, as subsequently amended and as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on February 20, 2013).
The securities purchase agreements contain representations, covenants and other provisions customary for the agreements of this nature. In addition, such agreements provide for certain “piggy-back” registrations rights with respect to the Company’s securities (including shares to be issued upon warrant exercises) purchased in the offering by investors that are affiliates of the Company, such that the Company agreed, to the extent such affiliate investors are not able to resell such securities without restriction, to include such securities in its future registration statements, subject to applicable limitations. Also, to the extent that such securities have been not registered at the time the Company is required to file a registration statement in connection with the final milestone event relating to the February 2012 Aldagen acquisition, the affiliate investors will have the right to include such securities in such registration statement.
In connection with this offering, the Company and the Maryland Venture Fund (Maryland Department of Business and Economic Development), an investor in the above referenced offering (“MVF”), in compliance with MVF’s investment policies, agreed to execute a certain Stock Repurchase Agreement which requires the Company to repurchase the MVF’s investment, at MVF’s option, upon certain events outside of the Company’s control; provided, however, that in the event that, at the time of either such event the Company’s securities are listed on a national securities exchange, the foregoing repurchase will not be triggered. The common shares issued to MVF are classified as “contingently redeemable common shares” in the accompanying condensed consolidated balance sheet. The value of the warrants and offering expenses allocable to the contingently redeemable common shares was not material.
Release of the Worden Security Interest in the Licensed Patents
On February 19, 2013, the Company and Charles E. Worden Sr., an individual holder of security interest in patents pursuant to the Substitute Royalty Agreement, dated November 4, 2001 (the “SRA”), executed an Amendment to the SRA (the “SRA Amendment”) for the purposes of terminating and releasing the security interest and the reversionary interest under the terms of the SRA in exchange for the following consideration: (i) a one-time cash payment of $
500,000
(to replace all future minimum monthly royalty payments), (ii) issuance of 250,000 shares of the Company’s common stock (the “Worden Shares”), and (iii) grant of the right to acquire up to
250,000
shares of the Company’s common stock pursuant to a seven-year warrant with the exercise price of $
0.70
per share (the “Worden Warrant”). In addition, under the terms of the Amendment, Mr. Worden’s future annual royalty stream limitation was increased from $
600,000
to $
625,000
. The exercise price and the number of shares issuable upon exercise of the Worden Warrant is subject to standard anti-dilution provisions. The Worden Warrants contain provisions that are customary for the instruments of this nature, including, among others, a cashless exercise provision. The warrants are classified as equity.
| 18 | ||
|
|
Mr. Worden is an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act), and the Company therefore sold the Worden Shares and the Worden Warrant in reliance upon an exemption from registration contained in Section 4(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
JP Nevada Trust Note Amendment
On February 19, 2013, the Company and its wholly-owned subsidiary, Cytomedix Acquisition Company, LLC, the holder of the April 28, 2011 $
2.1
million secured promissory note (the “JP Trust Note”), JP’s Nevada Trust (the “Lender”), agreed, in consideration for subordination of its security interest under the JP Trust Note to that of MidCap pursuant to the terms of the Subordination Agreement, to amend the JP Trust Note to (i) extend the maturity date of such note to November 19, 2016 and (ii) expand the Lender’s second lien security interest under the Note to include the assets of the Company and Aldagen, Inc., the Company’s wholly-owned subsidiary, in addition to the previously secured assets of Cytomedix Acquisition Company, LLC. The parties also agreed to amend the vesting schedule on the Lender’s warrants issued by the Company in April 2011 such that the remaining
250,000
warrant shares are exercisable immediately. Finally, the Company agreed to issue the Lender a new warrant to purchase up to
266,666
shares at an exercise price of $
0.70
per share vesting as follows: (i)
133,333
shares may be exercised only if the JP Trust Note has not been paid by the fourth anniversary of its issuance, and (ii) the remaining
133,333
shares may be exercised only if the JP Trust Note has not been paid by the fifth anniversary of its issuance.
As disclosed in the Company’s Current Report on Form 8-K relating to the original issuance of the JP Trust Note, the Company’s payment obligations with respect to $
1.4
million under the JP Trust Note were guaranteed by certain insiders, affiliates, and shareholders of the Company, including David E. Jorden, Chairman of the Board of the Company (the “Guarantors”). In light of the foregoing changes to the Lender’s warrant vesting schedule and issuance of new warrants the Lender, as described above, the disinterested members of the Board also: (i) reviewed and approved amendments to the warrant vesting schedule on the Guarantors’ warrants (including those held by Mr. Jorden) issued by the Company in April 2011 such that the remaining
500,000
warrant shares are exercisable immediately and (ii) granted the right to the Guarantors to acquire up to
533,334
shares of the Company’s common stock pursuant to warrants at the exercise price of $
0.70
per share, vesting as follows: (i)
266,667
warrant shares may be exercised only if the JP Trust Note has not been prepaid by the fourth anniversary of its issuance, and (ii) the remaining
266,667
shares may be exercised only if the JP Trust Note has not been paid by the fifth anniversary of its issuance (including
107,143
of the previously issued warrants held by Mr. Jorden, which will now vest immediately, and (i)
57,143
of his warrant shares may be exercised only if the JP Trust Note has not been paid by the fourth anniversary of its issuance, and (ii) the remaining
57,143
shares may be exercised only if the JP Trust Note has not been paid by the fifth anniversary of its issuance).
The warrant was sold in a transaction exempt from registration under the Securities Act of 1933, in reliance on Section 4(2) thereof. The Lender and each of the Guarantors are “accredited investors” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act), and the Company sold the securities in reliance upon an exemption from registration contained in Section 4(2) and Rule 506 under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
JMJ Financial Note Amendment and Subordination
On February 19, 2013, the Company and JMJ Financial (“JMJ”), the holder of certain convertible promissory notes issued by the Company (together, the “JMJ Notes”), agreed, in consideration of the subordination of JMJ’s rights and remedies under the JMJ Note to that of MidCap pursuant to the terms of the certain Subordination Agreement (the “JMJ Subordination Agreement”), to amend the JMJ Notes to extend the maturity date of the JMJ Notes to the later of (i) three years from the effective date of such notes or (ii) the date that is one business day following the date the MidCap loan is paid in full. In addition, JMJ converted $
100,000
of the outstanding balance on one of the JMJ Notes into shares of the Company’s common stock and the Company remitted a payment in the amount of $
370,000
to partially satisfy one of the JMJ Notes.
| 19 | ||
|
|
Non-cash
investing and financing
transactions for the nine months ended September 30, 2013 include:
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debt to common stock
|
|
$
|
260,420
|
|
|
Common Stock issued for committed equity financing facility
|
|
|
204,015
|
|
|
Warrants issued for loan modification
|
|
|
151,758
|
|
|
Warrants issued for term loan
|
|
|
568,324
|
|
|
Common stock and warrants issued for release of security interest in patents
|
|
|
325,693
|
|
|
Common stock issued for professional services
|
|
|
17,850
|
|
|
Common stock issued for settlement of contingency
|
|
|
39,150
|
|
Under the Company’s plan of reorganization upon emergence from bankruptcy in July 2002, the Series A Preferred stock and the dividends accrued thereon that existed prior to emergence from bankruptcy were to be exchanged into one share of new Common stock for every five shares of Series A Preferred stock held as of the date of emergence from bankruptcy.
This exchange was contingent on the Company’s attaining aggregate gross revenues for four consecutive quarters of at least $10,000,000 and if met would result in the issuance of 325,000 shares of the Company’s Common stock.
The Company reached such aggregate revenue levels as of the end of the quarter ended June 30, 2012 and, as a result, expensed approximately $
471,000
related to the resolution of the contingency. The expense amount, classified as other expenses in the accompanying condensed consolidated statement of operations, represents the fair value of
325,000
shares of the Company’s Common stock to be issued to former Series A Preferred Stock holders. The Common stock issuable is classified as equity.
Aldagen’s former investors have the right to receive up to
20,309,723
shares of the Company’s common stock, contingent upon the achievement of certain milestones related to the current ALD-401 Phase 2 clinical trial. In February 2013, the Company and former Aldagen shareholders modified the terms of the contingent consideration. As a result of the amendment, approximately $
1,006,000
was recognized as operating expense with the offset to equity.
In conjunction with its FDA clearance, the Company agreed to conduct a post-market surveillance study to further analyze the safety profile of bovine thrombin as used in the AutoloGel TM System. This study was estimated to cost between $
500,000
and $
700,000
over a period of several years, which began in the third quarter of 2008. As of September 30, 2013, approximately $
368,000
had been incurred. Since the inception of this study, the Company has enrolled 120 patients, noting no adverse events. Based on the additional positive safety data, the Company has suspended further enrollment in this study pending further discussion with the FDA.
In July 2009, in satisfaction of a new Maryland law pertaining to Wholesale Distributor Permits, the Company established a Letter of Credit, in the amount of $
50,000
, naming the Maryland Board of Pharmacy as the beneficiary. This Letter of Credit serves as security for the performance by the Company of its obligations under applicable Maryland law regarding this permit and is collateralized by a Certificate of Deposit (“CD”) purchased from the Company’s commercial bank. The CD bears interest at an annual rate of
0.10
% and matures on February 24, 2014.
In connection with this offering, the Company and the MVF, in compliance with MVF’s investment policies, agreed to execute a certain Stock Repurchase Agreement which requires the Company to repurchase the MVF’s investment, at MVF’s option, upon certain events outside of the Company’s control; provided, however, that in the event that, at the time of either such event the Company’s securities are listed on a national securities exchange, the foregoing repurchase will not be triggered. The common shares issued to MVF are classified as “contingently redeemable common shares” in the accompanying condensed consolidated balance sheet. The value of the warrants and offering expenses allocable to the contingently redeemable common shares was not material. Upon the termination of the stock repurchase agreement or the sale of the stock by MVF, the temporary equity will be re-classed to permanent equity.
| 20 | ||
|
|
The Company’s primary office and warehouse facilities are located in Gaithersburg, Maryland, and comprise approximately
7,200
square feet. This facility falls under two leases with monthly rent, including our share of certain annual operating costs and taxes, at approximately $
6,000
and $
4,000
per month with the leases expiring December 2013 and August 2017, respectively. The Company also leases a
16,300
square foot facility located in Durham, North Carolina. This facility falls under one lease with monthly rent, including our share of certain annual operating costs and taxes, at approximately $
20,000
per month with the lease expiring December 31, 2018.
| 21 | ||
|
|
This Quarterly Report on Form 10-Q contains forward-looking statements regarding Cytomedix, Inc. (“Cytomedix,” the “Company,” “we,” “us,” or “our”) and our business, financial condition, results of operations and prospects. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. 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 us, 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 our 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, our 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 we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.
Many factors could cause actual results to differ materially from our forward looking statements. Other unknown, unidentified or unpredictable factors could materially and adversely impact our future results. You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report, as well as the audited financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and as updated in our subsequent SEC filings. The Company undertakes no obligation to update the forward-looking statements contained in this report to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may occur as part of its ongoing periodic reports filed with the SEC. Given these uncertainties, the reader is cautioned not to place undue reliance on such statements.
Description of the Business
Corporate Overview
Cytomedix is a regenerative therapies company marketing and developing products within the U.S. and internationally. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (from self) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long term recovery in complex chronic conditions with significant unmet medical needs.
Our current commercial offerings consist of point of care technologies for the safe and efficient separation of autologous blood and bone marrow to produce platelet based therapies or cell concentrates. Today, we have two distinct platelet rich plasma (“PRP”) devices, the AutoloGel System for wound care and the Angel concentrated Platelet Rich Plasma (“cPRP”) System for orthopedics markets. Our sales are predominantly (approximately 87%) in the United States, where we sell our products through direct sales representatives. Growth drivers in the U.S. include Medicare coverage for the treatment of chronic wounds under a National Coverage Determination when registry data is collected under Coverage with Evidence Development (“CED”), and a worldwide distribution and licensing agreement that allows our partner to promote the Angel System for all uses other than wound care.
Our principal offices are located at 209 Perry Parkway, Suite 7, Gaithersburg, MD 20877 and our telephone number is (240) 499-2680. Our website address is http://www.cytomedix.com. Information contained on our website is not deemed part of this report.
| 22 | ||
|
|
The AutoloGel
TM
System
The AutoloGel System is a point of care device for the production of a platelet based bioactive wound treatment derived from a small sample of the patient’s own blood. AutoloGel is cleared by the FDA for use on exuding wounds and is currently marketed in the $3.4 billion U.S. chronic wound market. The most significant growth driver for AutoloGel is the 2012 National Coverage Determination from the Centers for Medicare and Medicaid Services (“CMS”) and thereby reversing a twenty year old non-coverage decision for autologous blood products used in wound care. Using the patient’s own platelets as a therapeutic agent, AutoloGel harnesses the body’s natural healing processes to deliver growth factors, chemokines and cytokines known to promote angiogenesis and to regulate cell growth and the formation of new tissue. Once applied to the prepared wound bed, the biologically active platelet gel can restore the balance in the wound environment to transform a non-healing wound to a wound that heals naturally. There have been nine peer-reviewed scientific and clinical publications demonstrating the effectiveness of AutoloGel in the management of chronic wounds since the device and gel was cleared by the FDA in 2007.
Medicare reimbursement involves three steps; coverage, assignment of eligible reimbursement codes and in many cases an associated fee schedule to stipulate the amount of reimbursement.
On October 4, 2011, based on a significant volume of supportive evidence of AutoloGel, CMS accepted a formal request by Cytomedix to reopen and revise Section 270.3 of the "Medicare NCD Manual", which addresses Autologous Blood-Derived Products for Chronic Non- Healing Wounds. Subsequently, a National Coverage Determination for autologous PRP with data collection as a condition of coverage was issued by CMS in August 2012. Since 1992, the CMS had maintained a national non-coverage determination for autologous blood derived products. This severely restricted the commercial opportunities for growing AutoloGel sales. On March 1, 2013, CMS approved four data collection protocols submitted by the Company.
On June 10, 2013, CMS established HCPCS Code
G0460 (Autologous PRP for ulcers)
1
for payment effective July 1, 2013
2
for the treatment of chronic non-healing diabetic, venous and/or pressure wounds only in the context of an approved clinical trial. This determination permits data collection with reimbursement.
In the July 2013 quarterly update of Ambulatory Payment Classification (APC) assignments, CMS mapped G0460 to APC 0013, Level II Debridement and Destruction, with a payment rate of $71.54 per treatment. On September 6, 2013, Cytomedix communicated to CMS that this payment level was unsustainable for HOPDs because no PRP product can be produced for this amount or less. Following the Company’s submission of its comments on the proposed CMS rules and conclusion of the public comment period, Cytomedix is currently awaiting approval of the recommendation for CMS to permanently reassign HCPCS Code G0460 from APC 0013 to APC 0135. CMS is expected to announce final regulations on or about the last week of November 2013 and the coding and reimbursement regulations will take effect on January 1, 2014. This reassignment aligns G0460 to other procedures that have clinical and resource homogeneity, and will provide appropriate reimbursement to hospitals so that Medicare patients can participate in the AutoloGel CED studies and receive this treatment for complex, chronic, non-healing wounds.
We continue to make progress on a next generation AutoloGel PRP Preparation device, enhancing the separation of blood components to provide the added convenience and effectiveness that treating clinicians are looking for at the point of care. Importantly, the new device allows for the whole blood collection and the separation of the platelet rich plasma to be accomplished with a single specially designed closed syringe system that maintains an aseptic environment. This streamlines the process and improves safety and ease-of-use. The sterilization studies are complete and we expect to file a 510(k) application with the FDA upon the completion of platelet characterization and validation studies.
The Company is currently pursuing potential partnerships and commercial agreements for the product with interested parties.
Angel Product Line
The Angel cPRP System, acquired from Sorin USA, Inc. (“Sorin”) in April 2010, is designed for single patient use at the point of care, and provides a simple yet flexible means for producing quality PRP and platelet poor plasma (“PPP”) from whole blood or bone marrow. The Angel cPRP System is a multi-functional cell separation device which produces concentrated platelet rich plasma for use in the operating room and clinic and is used in a range of orthopedic and cardiovascular indications. Similar to the AutoloGel System, the Angel System is a point of care device for the production of a concentrated, aseptic platelet-based bioactive therapy derived from a small sample of the patient’s own blood. The resulting cPRP is applied at the site of injury to promote healing. Market growth and adoption of the technology is driven by a rapidly expanding base of scientific and clinical literature supporting its use and reports in the popular press of athletes benefitting from treatment. PRP is one of the fastest growing segments in the $1.7 billion U.S. orthobiologics market. An additional indication from the FDA for processing bone marrow and additional sales resources is expected to contribute to the sales growth of Angel. The addition of an indication to process bone marrow, based on a 510(k) clearance from FDA achieved in 2012, should provide a safe alternative to bone morphogenic protein (“BMP”) solutions used in orthopedic surgery.
|
|
|
1
Autologous platelet rich plasma for chronic wounds/ulcers, including phlebotomy, centrifugation, and all other preparatory procedures, administration and dressings, per treatment
2
Accessed at
http://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/downloads/R2720CP.pdf
, as of July 29, 2013.
| 23 | ||
|
|
We have grown worldwide sales of Angel steadily since acquiring the product line in April 2010.
In November 2012, we obtained a second 510(k) clearance for our Angel cPRP System for processing a mixture of blood and bone marrow aspirate. The 510(k) clearance for bone marrow aspirate processing increases our ability to support and advance markets within personalized regenerative medicine. Samples of bone marrow aspirate are routinely collected using a needle to obtain a small amount of the soft sponge like fluid found inside of bones. Aspirated bone marrow is frequently used with bone grafting procedures to treat conditions associated with bone loss and delayed union and nonunion fractures. In the U.S., approximately 400,000 spinal fusion procedures are performed each year and the application of bone marrow or bone marrow concentrates has been the historical gold standard. Concentrated PRP produced from blood and bone marrow may be used in up to 90% of spinal fusion procedures. The biologics market associated with spinal fusion procedures is approximately $700 million annually.
The Angel product line also includes ancillary products such as phlebotomy and applicator supplies, and activAT®. ActivAT is designed to produce autologous thrombin serum from platelet poor plasma and is sold exclusively in Europe and Canada, where it provides a safe alternative to bovine-derived products.
On August 7, 2013, the Company entered into a Distributor and License Agreement (the “Arthrex Agreement”) with Arthrex, Inc., a privately held Florida based company (“Arthrex”). Under the terms of the Arthrex Agreement, Arthrex will obtain the exclusive rights to sell, distribute, and service the Company’s Angel Concentrated Platelet System and ActivAt (“Products”), throughout the world, for all uses other than chronic wound care. The Company granted Arthrex a limited license to use the Company’s intellectual property as part of enabling Arthrex to sell the Products. Arthrex will purchase Products from the Company to distribute and service at certain purchase prices, which may be changed after an initial period. Arthrex will also pay the Company a certain royalty rate based upon volume of the Products sold. The exclusive nature of Arthrex’s rights to sell, distribute and service the Products is subject certain existing supply and distribution agreements such that Arthrex may instruct the Company to terminate or not renew any of such agreements. In addition, Arthrex’s rights to sell, distribute and service the Products is not exclusive in the non-surgical dermal and non-surgical aesthetics markets.
The Company believes that partnering this product with an organization with greater commercial resources will translate into faster sales growth and a valuable long-term royalty stream.
ALDH
br
Cell Technology
The ALDH
br
(“Bright Cell”) technology is a novel approach to cell-based regenerative medicine with potential clinical indications in large markets with significant unmet medical needs such as peripheral arterial disease and ischemic stroke. The Bright Cell technology is unique in that it utilizes an intracellular enzyme marker to facilitate fractionation of essential regenerative cells from a patient’s bone marrow. This core technology was originally licensed by Aldagen from Duke University and Johns Hopkins University. The proprietary bone marrow fractionation process identifies and isolates active stem and progenitor cells expressing high levels of the enzyme aldehyde dehydrogenase, or ALDH, which is a key enzyme involved in the regulation of gene activities associated with cell proliferation and differentiation. These autologous, selected biologically instructive cells have the potential to promote the repair and regeneration of multiple types of cells and tissues, including the growth of new blood vessels, or angiogenesis, which is critical to the generation of healthy tissue. We acquired the Bright Cell technology with the acquisition of Aldagen in February 2012.
| 24 | ||
|
|
Results of Operations
Certain numbers in this section have been rounded for ease of analysis.
Product sales continued along a steady growth trend, with total product sales in excess of $7.5 million in the first nine months of 2013.
Commencing in the third quarter of 2013 and beyond, we expect sales of Angel centrifuges and disposable products to decline following our licensing arrangement with Arthrex.
We expect the impact of these pass through sales to be offset by an increase in related royalty revenue.
Our revenues will be insufficient to cover our operating expenses in the near term. Operating expenses primarily consist of employee compensation, professional fees, consulting expenses, clinical trial costs, and other general business expenses such as insurance, travel related expenses, and sales and marketing related items. Operating expenses have risen to support the continuing growth of product sales, our substantial efforts with regard to Medicare reimbursement for AutoloGel, and the more recent ALD-401 phase II clinical trial involving patients with ischemic stroke. The Company began plans to reorganize its research and development activities to reduce costs and refocus its efforts on the commercial wound care market. However, we expect losses to continue for the foreseeable future.
Comparison of Operating Results for the Three-Month Period Ended September 30, 2013 and 2012
Revenues
Revenues increased $1,607,000 (91%) to $3,366,000 comparing the three months ended September 30, 2013 to the same period last year. The increase was primarily due to a one-time, non-recurring sale of $1,294,000 for existing, placed Angel centrifuges to Arthrex made pursuant to the terms and provisions of the Arthrex Agreement. The Company’s product sales, excluding the sale of existing Angel centrifuges to Arthrex, decreased $72,000. The decrease in disposable sales was primarily due to a reduction in Angel average selling price, partially offset by an increase in sales volume. Under the Arthrex Agreement, the contractual selling price of products is significantly lower than our historical average selling price. In addition to product sales, we recognized an increase of $188,000 in royalty revenue, $129,000 in transition services revenue, and $67,000 in license fee revenue from the Arthrex Agreement. Arthrex has agreed to pay the Company a service fee to provide certain services during a transition period. These services include customer service and order fulfillment and is expected to end prior to the end of 2013 (“Transitions Services Period”).
Gross Profit
Gross profit decreased $245,000 (32%) to $516,000 comparing the three months ended September 30, 2013 to the same period last year. The decrease was primarily due to the sale of disposable products and centrifuges under the Arthrex Agreement. Although the cost of our products has remained constant, under the agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price.
In addition and consistent with the applicable accounting rules, the sale price of existing Angel centrifuges and the related cost of sale, under the Arthrex Agreement, were recorded at book value resulting in a zero-margin transaction.
This is offset by an increase in gross profit from license fee, royalty, and other revenue.
Overall gross margin decreased to 15% from 43% for the three months ended September 30, 2013 as compared to the same period last year. The decrease was primarily due to the sale of products under the Arthrex Agreement. Although the cost of our products has remained relatively constant, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price.
In addition and consistent with the applicable accounting rules, the sale price of existing Angel centrifuges and the related cost of sales under the Arthrex Agreement, were recorded at book value resulting in a zero-margin transaction.
This was offset by the gross margin realized from license fee, royalty, and other revenue. Additionally, gross margin on product sales decreased to 4% from 42%. Cash gross margin on product sales decreased to 7% from 52%. Cash gross margin is a non-GAAP financial measure, most directly comparable to the U.S. GAAP measure of gross margin, and should not be considered as an alternative thereto. Cytomedix defines cash gross margin as gross margin exclusive of patent and royalty amortization and depreciation expense, and it is a significant performance metric used by management to indicate cash profitability on product sales.
| 25 | ||
|
|
The following table discloses the profitability of product sales:
|
|
|
Three Months Ended September 30,
|
|
|
|||||||||||||
|
|
|
2013
|
|
|
2012
(1)
|
|
|
||||||||||
|
|
|
Pre-license
(1)
|
|
|
Post-license
|
|
|
Total
|
|
|
Total
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
911,000
|
|
|
$
|
2,015,000
|
|
|
$
|
2,926,000
|
|
|
|
1,703,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COGS
|
|
|
597,000
|
|
|
|
2,220,000
|
|
|
|
2,817,000
|
|
|
|
992,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/(Loss)
|
|
|
314,000
|
|
|
|
(205,000)
|
|
|
|
109,000
|
|
|
|
711,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
55,000
|
|
|
|
45,000
|
|
|
|
100,000
|
|
|
|
168,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash gross profit/(loss)
|
|
$
|
369,000
|
|
|
$
|
(160,000)
|
|
|
$
|
209,000
|
|
|
$
|
879,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
34
|
%
|
|
|
-10
|
%
|
|
|
4
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash gross margin
|
|
|
41
|
%
|
|
|
-8
|
%
|
|
|
7
|
%
|
|
|
52
|
%
|
|
(1)
Product
sales prior to the execution of the Arthrex Agreement on August 7, 2013.
Gross margin on Pre-license sales decreased primarily due to Angel machine refurbishment costs of $31,000, royalty amortization of $30,000 related to an upfront payment made in 2013 for the termination and release of a security interest in related AutoloGel patents, and $20,000 in medical device taxes which took effect in 2013.
Gross margin on Post-license Angel sales realized a negative margin primarily due to Angel machine refurbishment costs of $72,000, medical device taxes of $62,000 which took effect in 2013, and logistical costs related to the fulfillment of sales during the Transition Services Period.
Operating Expenses
Operating expenses increased $156,000 (3%) to $5,126,000 comparing the three months ended September 30, 2013 to the same period last year. A discussion of the various components of operating expenses follows below.
Salaries and Wages
Salaries and wages increased $222,000 (13%) to $1,968,000 comparing the three months ended September 30, 2013 to the same period last year. The increase was primarily due to additional employees to support increased operational activity and $139,000 of reorganization charges.
Consulting Expenses
Consulting expenses decreased $85,000 (17%) to $416,000 comparing the three months ended September 30, 2013 to the same periods last year. The decrease was primarily due to a decrease in stock-based compensation expense for options issued to consultants in 2012 related to the Aldagen acquisition.
Professional Fees
Professional fees increased $49,000 (15%) to $385,000 comparing the three months ended September 30, 2013 to the same period last year. The increase was primarily due to an increase in costs related to various clinical matters.
Research, Development, Trials and Studies
Research, development, trials and studies expenses decreased $83,000 (8%) to $923,000 comparing the three months ended September 30, 2013 to the same period last year. The decrease was primarily due to lower costs of $116,000 for manufacturing and design fees related to the revision of an Angel disposable product and $79,000 related to the development of additional Angel indications, offset by increased costs of $83,000 for the development of our CED protocols, and $36,000 related to the sourcing and testing of Angel centrifuge replacement components.
| 26 | ||
|
|
General and Administrative Expenses
General and administrative expenses increased $53,000 (4%) to $1,434,000 comparing the three month ended September 30, 2013 to the same period last year. The increase was primarily due to higher employee benefit costs and marketing expenses related to Autologel, offset by a decrease in investor services and stock-based compensation expense.
Other Income and Expense
Other income, net decreased $789,000 (184%) to an expense of $361,000 comparing the three months ended September 30, 2013 to the same period last year. The increase was primarily due to a $683,000 non-cash charge for the change in the fair value of derivative liabilities and a $117,000 net increase in interest expense and debt issuance fees related to various financing activities in 2013.
Comparison of Operating Results for the Nine-Month Period Ended September 30, 2013 and 2012
Revenues
Revenues decreased $354,000 (4%) to $8,107,000 comparing the nine months ended September 30, 2013 to the same period last year. This was primarily due to a decrease in license fee revenue of $3,155,000, offset by increased product sales of approximately $2,338,000, royalties of $267,000, and service revenue of $129,000.
In 2012, we recognized $3,155,000 in license fee revenue related to an option agreement with a top 20 global pharmaceutical company. Increased sales were primarily due to an increase in Angel sales of approximately $2,448,000, or 52%.
Pursuant to the terms and provisions
of the Arthrex Agreement, we recorded a one-time, non-recurring sale of $1,294,000 for existing, placed Angel centrifuges sold to Arthrex.
The Company’s product sales, excluding the sale of existing Angel centrifuges to Arthrex, increased $1,044,000. This was primarily attributable to an increase of $1,199,000 in Angel sales, offset by a decrease of $72,000 in Autologel sales and $38,000 in other sales.
Gross Profit
Gross profit decreased $3,009,000 (53%) to $2,626,000 comparing the nine months ended September 30, 2013 to the same period last year. The decrease was primarily due to approximately $3,155,000 in license fee revenue recognized in 2012 (which had no associated cost), associated with an option agreement with a top 20 global pharmaceutical company. In addition, profit on product sales decreased $286,000. This was offset by increased profit from royalties and transition service fees.
Overall gross margin decreased to 32% from 67% for the nine months ended September 30, 2013 as compared to the same period last year. The decrease was primarily due to the license fee recorded in 2012 that had no associated cost of revenue, in addition to the sale of product under the Arthrex Agreement. Although the cost of our products has remained relatively constant, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price.
In addition and consistent with the applicable accounting rules, the sale price of existing Angel centrifuges and the related cost of sales under the Arthrex Agreement, were recorded at book value resulting in a zero-margin transaction.
This was offset by the gross margin realized from license fee, royalty, and other revenue. Additionally, gross margin on product sales decreased to 28% from 46%. Cash gross margin on product sales decreased to 34% from 54%. Cash gross margin is a non-GAAP financial measure, most directly comparable to the U.S. GAAP measure of gross margin, and should not be considered as an alternative thereto. Cytomedix defines cash gross margin as gross margin exclusive of patent and royalty amortization and depreciation expense, and it is a significant performance metric used by management to indicate cash profitability on product sales.
| 27 | ||
|
|
The following table discloses the profitability of product sales:
|
|
|
Nine Months Ended September 30,
|
|
|
|||||||||||||
|
|
|
2013
|
|
|
2012
(1)
|
|
|
||||||||||
|
|
|
Pre-license
(1)
|
|
|
Post-license
|
|
|
Total
|
|
|
Total
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
5,527,000
|
|
|
$
|
2,015,000
|
|
|
$
|
7,542,000
|
|
|
|
5,204,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COGS
|
|
|
3,219,000
|
|
|
|
2,220,000
|
|
|
|
5,439,000
|
|
|
|
2,816,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/(Loss)
|
|
|
2,308,000
|
|
|
|
(205,000)
|
|
|
|
2,103,000
|
|
|
|
2,388,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
402,000
|
|
|
|
45,000
|
|
|
|
447,000
|
|
|
|
420,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash gross profit/(loss)
|
|
$
|
2,710,000
|
|
|
$
|
(160,000)
|
|
|
$
|
2,550,000
|
|
|
$
|
2,808,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
42
|
%
|
|
|
-10
|
%
|
|
|
28
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash gross margin
|
|
|
49
|
%
|
|
|
-8
|
%
|
|
|
34
|
%
|
|
|
54
|
%
|
|
(1)
Product
sales prior to the execution of the Arthrex Agreement on August 7, 2013.
Gross margin on Pre-license Angel sales decreased primarily due to Angel machine refurbishment costs of $201,000, royalty amortization of $70,000 related to an upfront payment made in 2013 for the termination and release of a security interest in the related AutoloGel patents, and medical device taxes of $86,000 which took effect in 2013.
Gross margin on Post-license Angel sales realized a negative margin primarily due to Angel machine refurbishment costs of $72,000,
medical device taxes of $61,000 which took effect in 2013, and logistical costs related to the fulfillment of sales during the Transition Services Period.
Operating Expenses
Operating expenses increased $1,990,000 (13%) to $16,901,000 comparing the nine months ended September 30, 2013 to the same period last year. A discussion of the various components of operating expenses follows below.
Salaries and Wages
Salaries and wages increased $425,000 (8%) to $6,011,000 comparing the nine months ended September 30, 2013 to the same period last year. The increase was primarily due to increased head-count as a result of the Aldagen acquisition in February 2012 and additional employees to support increased operational activity. In addition, severance charges of approximately $186,000 were recorded related to the separation of a former Company executive and $139,000 in expense related to reorganization charges. This was offset by a lower bonus expense accrual of $178,000 and decreased stock-based compensation expense of approximately $808,000 related to the 2012 Aldagen acquisition.
Consulting Expenses
Consulting expenses decreased $188,000 (11%) to $1,597,000 comparing the nine months ended September 30, 2013 to the same period last year. The decrease was primarily due to a decrease in stock-based compensation expense for options issued to consultants in 2012 related to the Aldagen acquisition, in addition to decreases in consulting expense associated with finance and quality assurance matters.
This was offset by an increase in expenses related to the management, promotion, and roll-out of the CED protocols and CMS reimbursement matters.
Professional Fees
Professional fees decreased $176,000 (18%) to $827,000 comparing the nine months ended September 30, 2013 to the same period last year. The decrease was primarily due to legal and accounting costs related to the Aldagen acquisition in the first quarter of 2012, offset by increased costs related to various other legal matters primarily related to financing activities.
| 28 | ||
|
|
Research, Development, Trials and Studies
Research, development, trials and studies expenses increased $595,000 (24%) to $3,050,000 comparing the nine months ended September 30, 2013, to the same period last year. The increase was primarily due to increased costs of $507,000 related to the ALD-401 Phase II trial along with increased costs of $131,000 related to one-time charges for the sourcing and testing of Angel centrifuge replacement components and $83,000 for the development of our CED protocol. This was offset by a decrease of $79,000 related to the development of additional Angel indications and $45,000 for manufacturing and design fees related to the revision of an Angel disposable product.
General and Administrative Expenses
General and administrative expenses increased $1,333,000 (33%) to $5,416,000 comparing the nine months ended September 30, 2013, to the same period last year. The increase was primarily due to a non-cash charge of $1,006,000 recognized due to the effect of the amendment to the contingent consideration associated with the Aldagen acquisition. In addition, there were increases of $157,000 in higher personnel placement fees, $122,000 in employee benefit costs due to additional employees, $101,000 in higher travel, $110,000 in higher marketing expenses, and $70,000 in franchise tax expense. These were primarily offset by a decrease of $216,000 in stock-based compensation expense and $73,000 in investor services.
Other Income and Expense
Other expense, net decreased $5,613,000 (84%) to $1,061,000 comparing the nine months ended September 30, 2013, to the same period last year. The decrease was primarily due to approximately $4,335,000 in non-cash charges recognized in 2012 due to the increase in the fair value of the contingent consideration resulting from the change in the Company’s stock price. Approximately $1,500,000 in non-cash inducement expense incurred in 2012 associated with common stock issued to compensate Series D preferred stockholders for forgone preferred dividend payments due to the early conversion of preferred stock incentive warrants issued in exchange for the early exercise of existing warrants and $471,000 in expense due to the resolution of the Series A Preferred stock contingency that was recognized in 2012 also contributed to the decrease. Additionally, there was a $527,000 net increase in interest expense and debt issuance fees related to various financing activities in 2013 and a $192,000 non-cash charge for the change in the fair value of derivative liabilities.
Liquidity and Capital Resources
Since inception we have incurred, and continue to incur significant losses from operations. For the nine months ended September 30, 2013, we have incurred a net loss from operations of approximately $15.4 million and an accumulated deficit at September 30, 2013 of $86.3 million. We had working capital at September 30, 2013 of
$1.0 million as compared to working capital of $5.9 million at September 30, 2012.
Historically, we have financed our operations through a combination of the sale of debt, equity and equity-linked securities, licensing, royalty, and product revenues. The Company’s commercial products and royalties have generated approximately $10.0 million in revenue per year on a run-rate basis,
however future products and royalty revenues will be impacted by our licensing arrangement with Arthrex.
The Company needs to sustain and grow these sales to meet its business objectives and satisfy its cash requirements. We have been dependent upon capital infusions to meet our short and long-term cash needs. If we continue to incur negative cash flow from sources of operating activities for longer than expected, our ability to continue as a going concern could be in substantial doubt and we will require additional funds through debt facilities, and/or public or private equity or debt financings to continue operations. The Company will still need to access the capital markets in the near future in order to continue to fund future operations; otherwise, it will need to significantly curtail or potentially cease its operations altogether. There is no guarantee that any such additional financing will be available on terms satisfactory to the Company or at all. Any future additional capital will likely result in dilution to our current shareholders, which may be substantial. We cannot provide any assurance that we will be able to obtain the capital we require on a timely basis or on terms acceptable to us.
At September 30, 2013, we had approximately $4.6 million of cash.
| 29 | ||
|
|
As previously disclosed, in February 2013, we completed a financing plan that was comprised of several elements.
On February 18, 2013, we entered into a purchase agreement, together with a registration rights agreement, with Lincoln Park Capital, LLC (“LPC”). Under this agreement, we have the right to sell to and LPC is obligated to purchase up to $15 million in shares of our common stock, subject to certain limitations, from time to time, over the 30-month period commencing in July 2013. Given the parameters within which the Company may draw down from LPC, there is no assurance that the amounts available from LPC will be sufficient to fund our future operational cash flow needs. To date, we have raised approximately $59 thousand under the terms of the purchase agreement.
In addition, on February 19, 2013, in addition to a Credit and Security Agreement with Midcap Financial LLC, as described below, we entered into securities purchase agreements with certain institutional accredited investors and raised gross proceeds of $5 million, before placement agent’s fees and other offering expenses, in a registered offering pursuant to a shelf registration statement on Form S-3 (SEC File No. 333-183704, the base prospectus originally filed with the SEC on August 31, 2012, as subsequently amended and as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on February 20, 2013). Proceeds from the offering were used for general corporate and working capital purposes.
Also on February 19, 2013, we entered into a Credit and Security Agreement (the “Credit Agreement”) with Midcap Financial LLC (“Midcap”), that provides for the originally contemplated term loan commitments of $7.5 million, $4.5 million of which we received on February 27, 2013. As originally contemplated, the second tranche of $3.0 million was going to be advanced to the Company, at the Company’s discretion, upon satisfaction of the certain previously disclosed conditions. However, in order to complete the Arthrex licensing engagement (as discussed below) and the Distributor and License Agreement in connection therewith, on August 7, 2013, we entered into the Amendment to Credit Agreement with MidCap, under which MidCap consented, among other things, to the Company’s entering the Arthrex agreement. In addition, the parties amended the Credit Agreement to terminate the Company’s ability to borrow an additional $3 million.
The Company and MidCap also agreed to a revised monthly payment amortization schedule such that in the event that the Company raises cash proceeds of at least $500,000 before September 1, 2013 in a public or private offering of its equity securities, then, commencing on September 1, 2013, and continuing thereafter, the Company has agreed to make monthly payments under the credit facility in the amount of $125,000, provided, however, if no such subsequent equity event takes place by September 1, 2013, the monthly payments under the credit facility will be in the amount of $150,000. Since no subsequent equity event took place by September 1, 2013, and the Company is required to make monthly payments under the credit facility in the amount of $150,000. Finally, the Company granted to MidCap a first priority security interest in the royalty payments payable to the Company pursuant to the Arthrex agreement.
If significant amounts of capital infusion are not available to the Company from future strategic partnerships or under the Lincoln Park agreement, additional funding will be required for the Company to pursue all elements of its strategic plan. Specific programs that may require additional funding include, without limitation, continued investment in the sales, marketing, distribution, and customer service areas, further expansion into the international markets, significant new product development or modifications, and pursuit of other opportunities. We would likely raise such additional capital through the issuance of our equity or equity-linked securities, which may result in significant additional dilution to our investors. The Company’s ability to raise additional capital is dependent on, among other things, the state of the financial markets at the time of any proposed offering. To secure funding through strategic partnerships, it may be necessary to partner one or more of our technologies at an earlier stage of development, which could cause the Company to share a greater portion of the potential future economic value of those programs with its partners. There is no assurance that additional funding, through any of the aforementioned means, will be available on acceptable terms, or at all. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations could be materially negatively impacted,
and the Company will need to appropriately curtail or potentially cease its operations altogether.
| 30 | ||
|
|
Net cash provided by (used in) operating, investing, and financing activities for the nine months ended September 30, 2013 and 2012 were as follows:
|
|
|
September 30,
|
|
September 30,
|
|
||
|
|
|
2013
|
|
2012
|
|
||
|
|
|
(in millions)
|
|
||||
|
|
|
|
|
|
|
|
|
|
Cash flows used in operating activities
|
|
$
|
(8.1)
|
|
$
|
(7.2)
|
|
|
Cash flows provided by (used in) investing activities
|
|
$
|
1.5
|
|
$
|
(1.4)
|
|
|
Cash flows provided by financing activities
|
|
$
|
8.6
|
|
$
|
12.2
|
|
Operating Activities
Cash used in operating activities in 2013 of $8.1 million primarily reflects our net loss of $15.4 million adjusted by a (i) $4.9 million increase for changes in assets and liabilities, (ii) $1.0 million increase due to the non-cash effect of the amendment to the contingent consideration, (iii) $0.9 million increase for depreciation and amortization, (iv) $0.5 increase for stock-based compensation, (v) $0.3 million increase due to the non-cash effect of the issuance of warrants for the term loan modification, (vi) $0.3 million decrease for change in derivative liabilities, and (vii) $0.6 million gain on disposal of assets. The $4.9 million increase for changes in assets and liabilities, in part reflects a net $4.0 million increase in deferred revenue for pre-paid license fees and Angel products under the Arthrex Agreement.
Cash used in operating activities in 2012 of $7.2 million primarily reflects our net loss of $16.0 million adjusted by a (i) $4.3 million increase for change in contingent consideration relating to the Aldagen acquisition, (ii) $1.8 million increase for stock-based compensation, (iii) $1.5 million increase for non-cash inducement expense associated with warrant exercise agreements, (iv) $0.8 million increase for depreciation and amortization, (v) $0.5 million increase for settlement of contingency expense, (vi) $0.5 million increase for non-cash interest expense, (vii) $0.5 million decrease for changes in assets and liabilities, and (viii) $0.4 million decrease for change in derivative liabilities. The $0.5 million decrease due to changes in assets and liabilities, in part reflects a net $0.7 million decrease in deferred revenue for revenue recognized relating to the non-refundable exclusivity fees received from a potential global pharmaceutical partner.
Investing Activities
Cash provided by (used in) investing activities in 2013 and 2012 primarily reflects the net activity of purchases and sales of Angel and AutoloGel centrifuge equipment. In 2013, existing Angel centrifuges with a net book value of $1.3 million were sold under the Arthrex Agreement.
Financing Activities
In 2013, we raised $5.0 million, before placement agent fees and offering expenses, through the issuance of common stock and received $4.5 million from a term loan. This was offset by $0.3 million in debt issuance costs, a $0.3 million cash repayment of our convertible debt, and $0.3 million in principal payments towards our term loan.
In 2012, we raised $8.3 million through the issuance of common stock ($5.0 million of which was sold to existing Aldagen investors, concurrent with the acquisition of Aldagen), and received $4.1 million from warrant exercises. This was offset by a $0.2 million cash payment for the redemption of Series A and B Convertible Preferred Stock and the satisfaction of accrued but unpaid dividends thereon.
Off Balance Sheet Arrangements
As of September 30, 2013 we had no off-balance sheet arrangements.
| 31 | ||
|
|
Contractual Obligations
The following are our contractual obligations:
|
|
|
Payments due by December 31,
|
|
|||||||||||||||||||
|
Contractual obligations at September 30, 2013
|
|
Total
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Thereafter
|
|
|||||||
|
|
|
(in thousands)
|
|
|||||||||||||||||||
|
Long-Term debt (1)
|
|
$
|
7,859
|
|
$
|
632
|
|
$
|
2,398
|
|
$
|
2,197
|
|
$
|
2,631
|
|
$
|
-
|
|
$
|
-
|
|
|
Operating leases
|
|
|
1,556
|
|
|
180
|
|
|
288
|
|
|
288
|
|
|
288
|
|
|
272
|
|
|
240
|
|
|
Purchase obligations
|
|
|
453
|
|
|
150
|
|
|
303
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
$
|
9,868
|
|
$
|
962
|
|
$
|
2,989
|
|
$
|
2,485
|
|
$
|
2,919
|
|
$
|
272
|
|
$
|
240
|
|
(1) Includes interest expense.
In addition to the obligations above, at September 30, 2013, we have approximately $465,000 of convertible debt. We are not certain as to when the amount will be settled.
Critical Accounting Policies
In preparing our condensed consolidated financial statements, we make estimates and assumptions that can have a significant impact on our financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations. For further information on our critical and other significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2012.
Basic and Diluted Loss Per Share
We compute basic and diluted net loss per common share using the weighted-average number of shares of common stock outstanding during the period. During periods of net losses, shares associated with outstanding stock options, stock warrants, convertible preferred stock, and convertible debt are not included because the inclusion would be anti-dilutive (i.e., would reduce the net loss per share). The total numbers of such shares excluded from the calculation of diluted net loss per common share were 28,207,642 for the nine months ended September 30, 2013, and 19,164,126 for the nine months ended September 30, 2012.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired in business combinations. The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year. The Company will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the Company below its carrying value.
Indefinite lived intangible assets consist of in-process research and development (IPR&D) acquired in the acquisition of Aldagen. The acquired IPR&D consists of specific cell populations (that are related to a specific indication) and the use of the cell populations in treating particular medical conditions. The Company evaluates its indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis on October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, the Company would recognize an impairment loss in the amount of that excess.
Identifiable intangible assets with finite lives consist of trademarks, technology (including patents), and customer relationships acquired in business combinations. These intangibles are amortized using the straight-line method over their estimated useful lives. The Company reviews its finite-lived intangible assets for potential impairment when circumstances indicate that the carrying amount of assets may not be recoverable.
Fair Value of Financial Instruments
The balance sheets include various financial instruments that are carried at fair value. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:
| 32 | ||
|
|
|
|
•
|
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;
|
|
|
•
|
Level 2, defined as observable inputs other than Level I prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
The Company accounts for derivative instruments under ASC 815,
Accounting for Derivative Instruments and Hedging Activities
, as amended and interpreted. ASC 815 requires that we recognize all derivatives on the balance sheet at fair value. Certain warrants issued in 2009 and prior years meet the definition of derivative liabilities. In October 2010, we executed an equity-linked transaction in which detachable stock purchase warrants were sold; the warrants are accounted for as a derivative liability. In July and November 2011, we issued convertible notes that contained embedded conversion options; the embedded conversion options are accounted for as a derivative liability. We determine the fair value of these derivative liabilities using the Black-Scholes option pricing model. This model determines fair value by requiring the use of estimates that include the contractual term, expected volatility of the Company’s stock price, expected dividends and the risk-free interest rate. Changes in fair value are classified in “other income (expense)” in the consolidated statement of operations.
Recent Accounting Pronouncements
The Company believes the adoption of Accounting Standards Updates issued but not yet adopted will not have a material impact to our results of operations or financial position.
Interest Rate
Market risks related to our operations result primarily from changes in interest rates. Our exposure to market risk for changes in interest rates relates primarily to our term loan payable at an annual rate of the one-month London Interbank Offered Rate (LIBOR), plus 8.0%, subject to a LIBOR floor of 3%. At September 30, 2013, we had a term loan balance of $4.2 million.
Based on our term loan balance as of September 30, 2013, a hypothetical 1% increase in the LIBOR rate would have an insignificant impact on our earnings and cash flows on an annual basis.
Foreign Currency
We have international sales in Europe, Middle East, Canada, and Australia, and, therefore, are subject to foreign currency rate exposure. The majority of our international sales are transacted in U.S. dollars and a portion of sales in Euros. However, because of our international presence, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions. To date, the foreign currency exchange fluctuations have not had a significant impact on our operating results and cash flows given the scope of our foreign denominated transactions.
| 33 | ||
|
|
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. Based on that evaluation, the Certifying Officers concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 34 | ||
|
|
OTHER INFORMATION
At present, the Company is not engaged in or the subject of any material pending legal proceedings.
Except for certain updates set forth below, there are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 18, 2013 for the year ended December 31, 2012 and the Company’s subsequent filings with the SEC.
We May Need Substantial Additional Financing
We may need substantial additional capital to fund our operations. To date, we have relied almost exclusively on financing transactions to fund losses from our operations. Our inability to obtain sufficient additional financing would have a material adverse effect on our ability to implement our business plan and, as a result, could require us to significantly curtail or potentially cease our operations. At December 31, 2012, we had cash and cash equivalents of approximately $2.6 million, total current assets of approximately $6.4 million and total current liabilities of approximately $2.8 million. In February 2013, we received gross proceeds of $9.5 million upon the closing of several financing transactions as described in this and prior public filings of the Company. In addition, on August 7, 2013, we entered into the Distributor and License agreement with Arthrex, Inc. Under the terms of this agreement, Arthrex has obtained the exclusive rights to sell, distribute, and service the Company’s products throughout the world, for all uses other than chronic wound care. Arthrex agreed to pay the Company a nonrefundable upfront payment of $5 million. The term of the Arthrex Agreement is five years, automatically renewable for an additional three-year period unless Arthrex gives the Company a termination notice one year in advance of the initial five-year period.
At September 30, 2013, we had cash and cash equivalents of approximately $4.6 million, total current assets of approximately $10.5 million and total current liabilities of approximately $9.5 million. Based on our current operating plan, we presently believe we have sufficient cash through the end of 2013, but anticipate needing additional capital in 2014. However, our projections could be wrong and we could face unforeseen costs or our revenues could fall short of our projections.
We will need to engage in capital-raising transactions in the near future. Such financing transactions may well cause substantial dilution to our shareholders and could involve the issuance of securities with rights senior to the outstanding shares. Our ability to complete additional financings is dependent on, among other things, the state of the capital markets at the time of any proposed offering, market reception of the Company and the likelihood of the success of its business model, of the offering terms, etc. There is no assurance that we will be able to obtain any such additional capital as we need to finance our efforts, through asset sales, equity or debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet our capital needs and to support our operations. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our revenues and operations and the value of our common stock and common stock equivalents would be materially negatively impacted. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Our Efforts to Secure Medicare Reimbursement May Not be Successful
The AutoloGel 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. As a result, reimbursement is often a determining factor in predicting a product’s success, with some physicians and patients strongly favoring only those products for which they will be reimbursed. On August 2, 2012, CMS issued a final National Coverage Determination (“NCD”) for autologous blood-derived products for chronic non-healing wounds. In the NCD, CMS approved coverage for autologous platelet rich plasma (“PRP”) in patients with diabetic, pressure and/or venous wounds via its Coverage with Evidence Development (“CED”) program. CED is a process through which CMS provides reimbursement coverage for items and services while generating additional clinical data to demonstrate their impact on health outcomes. On June 10, 2013, CMS established HCPCS Code G0460 (Autologous PRP for ulcers) for payment effective July 1, 2013 for the treatment of chronic non-healing diabetic, venous and/or pressure wounds only in the context of an approved clinical trial. This determination permits data collection with reimbursement.
In the July 2013 quarterly update of Ambulatory Payment Classification (APC) assignments, CMS mapped G0460 to APC 0013, Level II Debridement and Destruction, with a payment rate of $71.54 per treatment. On September 6, 2013, Cytomedix communicated to CMS that this payment level was unsustainable for HOPDs because no PRP product can be produced for this amount or less. CMS is expected to announce final regulations on or about the last week of November 2013 and the coding and reimbursement regulations will then take effect on January 1, 2014.
If approved, the reassignment will align G0460 to other procedures that have clinical and resource homogeneity, and will provide appropriate reimbursement to hospitals so that Medicare patients can participate in the AutoloGel CED studies and receive this treatment for complex, chronic, non-healing wounds. There is no assurance that we will ultimately be successful with our current reimbursement strategy and that CMS will assign the economically feasible coding and reimbursement rates to AutoloGel or will determine that the evidence collected under CED is sufficient to provide unrestricted Medicare coverage for autologous PRP. If it is later determined that a new randomized, controlled trial is necessary, it could take substantial additional financial and time investment to complete. We would almost certainly need to obtain additional, outside financing to fund such a trial. In any case, we may never be successful in securing unrestricted Medicare coverage for our products. Additionally, to the extent that CMS does not assign the economically feasible coding and reimbursement rates to AutoloGel, it will severely affect our ability to market it, will have material adverse effect on our business and operations and will cause the Company to reconsider its overall strategy and business model going forward.
The Company did not repurchase any of its equity securities during the nine months ended September 30, 2013. All information regarding the unregistered sales of securities during the nine months ended September 30, 2013 has been previously disclosed in Current Reports on Form 8-K.
None.
Not applicable.
None.
The exhibits listed in the accompanying Exhibit Index are furnished as part of this Report.
| 35 | ||
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
CYTOMEDIX, INC.
|
|
|
|
|
|
|
Date: November 12, 2013
|
By:
|
|
|
|
|
/s/ Martin P. Rosendale
|
|
|
|
Martin P. Rosendale, CEO
|
|
|
|
(Principal Executive Officer)
|
|
Date: November 12, 2013
|
By:
|
|
|
|
|
/s/ Steven A. Shallcross
|
|
|
|
Steven A. Shallcross, CFO
|
|
|
|
(Principal Financial and Accounting Officer)
|
| 36 | ||
|
|
EXHIBIT INDEX
|
Number
|
|
Exhibit Table
|
|
|
|
|
|
2.1
|
|
First Amended Plan of Reorganization with All Technical Amendments (Previously filed on June 28, 2002, as exhibit to Current Report on Form 8-K and incorporated by reference herein).
|
|
2.2
|
|
Amended and Restated Official Exhibits to the First Amended Plan of Reorganization of Cytomedix, Inc. with All Technical Amendments (Previously filed on May 10, 2004, as exhibit to Form 10-QSB for the quarter ended March 31, 2004 and incorporated by reference herein).
|
|
2.3
|
|
Asset Purchase Agreement by and among Sorin Group USA, Inc., Cytomedix Acquisition Company and Cytomedix, Inc, dated as of April 9, 2010 (Previously filed on April 12, 2010 as exhibit to the Current Report on Form 8-K and incorporated by reference herein).
|
|
2.4
|
|
Exchange and Purchase Agreement by and among, Cytomedix, Inc., Aldagen, Inc., a Delaware corporation and Aldagen Holdings, LLC, dated February 8, 2012 (Previously filed on February 9, 2012, as exhibit to Current Report on Form 8-K and incorporated by reference herein).
|
|
3(i)
|
|
Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed on November 7, 2002, as exhibit to Form 10-QSB for quarter ended June 30, 2001 and incorporated by reference herein).
|
|
3(i)(1)
|
|
Amendment to Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed on November 15, 2004, as exhibit to Form 10-QSB for quarter ended September 30, 2004 and incorporated by reference herein).
|
|
3(i)(2)
|
|
Certificate of Amendment to the Certificate of Incorporation (Previously filed on July 1, 2010 as exhibit to the Current Report on Form 8-K and incorporated by reference herein).
|
|
3(i)(3)
|
|
Certificate of Amendment to the Certificate of Incorporation (previously filed on May 21, 2012 as exhibit to the Current Report on Form 8-K and is incorporated by reference herein).
|
|
3(i)(4)
|
|
Certificate of Amendment to the Certificate of Incorporation (previously filed on June 6, 2013 as an exhibit to the Current Report on Form 8-K and is incorporated by reference herein).
|
|
3(ii)
|
|
Restated Bylaws of Cytomedix, Inc. (Previously filed on November 7, 2002, as exhibit to Form 10-QSB for quarter ended June 30, 2001 and incorporated by reference herein).
|
|
4.1
|
|
Form of Warrant (Previously filed on April 12, 2010 as exhibit to the Current Report on Form 8-K and incorporated by reference herein).
|
|
4.2
|
|
Form of Warrant (Previously filed on October 8, 2010 as exhibit to the Current Report on Form 8-K and incorporated by reference herein).
|
|
4.3
|
|
Form of Warrant (Previously filed on May 16, 2011 as exhibit to the Quarterly Report on Form 10-Q and incorporated by reference herein).
|
|
4.4
|
|
Form Warrant (Previously filed on February 9, 2012, as exhibit to Current Report on Form 8-K and incorporated by reference herein).
|
|
4.5
|
|
Form of Investor Warrant (Previously filed on February 20, 2013, as exhibit to Current Report on Form 8-K and incorporated by reference herein).
|
|
4.6
|
|
Form of Warrant (Previously filed on February 20, 2013, as exhibit to Current Report on Form 8-K and incorporated by reference herein).
|
|
10.1
|
|
Distributor and License Agreement with Arthrex, Inc. dated August 7, 2013.
|
|
10.2
|
|
Consent and First Amendment to Security Agreement dated August 7, 2013.
|
|
21
|
|
List of Subsidiaries (Previously filed on March 18, 2013, as exhibit to Annual Report on Form 10-K and incorporated by reference herein).
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act.
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
32.1
|
|
Certificate of Chief Executive Officer pursuant to 18 U. S. C. ss. 1350.
|
|
32.2
|
|
Certificate of Chief Financial Officer pursuant to 18 U. S. C. ss. 1350.
|
|
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.
CAL
|
|
XBRL Taxonomy Calculation Linkbase Document
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
| 37 | ||
|
|
TABLE OF CONTENTS
Part IItem 1. Financial StatementsNote 1 Business and PresentationNote 2 Recent Accounting PronouncementsNote 3 Arthrex Distributor and License Agreement and Related MattersNote 4 Fair Value MeasurementsNote 5 Geographic InformationNote 6 Accounts and Other ReceivablesNote 7 InventoryNote 8 Prepaid Expenses and Other Current AssetsNote 9 Property and EquipmentNote 10 Goodwill and Identifiable Intangible AssetsNote 11 Accounts Payable and Accrued ExpensesNote 12 Deferred RevenueNote 13 Derivative and Other LiabilitiesNote 14 DebtNote 15 Income TaxesNote 16 Capital Stock ActivityNote 17 Supplemental Cash Flow Disclosures Non-cash Investing and Financing TransactionsNote 18 Commitments and ContingenciesItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits