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CMXI > SEC Filings for CMXI > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Annual Report

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. The discussion in this section regarding the Company's business and operations includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," or "continue," or the negative thereof or other variations thereof or comparable terminology. You are cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section and elsewhere in this Annual Report. The Company assumes no obligation to update any such forward-looking statements. The following should be read in conjunction with the audited financial statements and the notes thereto included elsewhere herein. Certain numbers in this section have been rounded for ease of analysis.

Corporate Overview

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. We currently have a growing commercial operation, and a robust clinical pipeline representing a logical extension of our commercial technologies in the evolving field of regenerative medicine.

Our current commercial offerings are centered on our point of care platform technologies for the safe and efficient separation of blood and bone marrow to produce platelet based therapies or cell concentrates. Today, we market and sell two distinct platelet rich plasma (PRP) technologies, the AutoloGel System for wound care and the Angel concentrated Platelet Rich Plasma (cPRP) Sytem in orthopedic and cardiovascular markets. Our sales are predominantly (approximately 85% in the United States, where we sell our products through a combination of direct sales representatives and independent sales agents. Commercial growth drivers in the U.S. include Medicare coverage for Autologel for the treatment of chronic wounds under a national coverage decision allowing coverage with evidence development (CED), and the patient driven private pay PRP business in orthopedics and aesthetics. In Europe, the Middle East, Canada, and Australia we have a network of experienced distributors covering key markets.

Our clinical pipeline includes the ALDHbr cell-based therapies ("Bright Cells"), acquired through the February 2012 acquisition of Aldagen, Inc., a privately held biopharmaceutical company and the expansion of the Angel System for use in other clinical indications. Cytomedix has a strong and growing patent portfolio intended to drive value by facilitating and protecting leading market positions for our commercial products, attracting strategic partners, and generating revenue via out-licensing agreements.

Although our revenues have increased, they still remain insufficient to cover our operating expenses. Operating expenses primarily consist of employee compensation, professional fees, consulting expenses, and other general business expenses such as insurance, travel expenses, and sales and marketing related items.

With the acquisition of Aldagen, Inc., our operating expenses will be further increased at least through 2013, after which, upon success with certain clinical efforts, we would expect to be in a position to partner the Aldagen Bright Cell technology for further development.

For a detailed discussion of the most recent events please refer to Item 1 of this Annual Report.

Comparison of Years Ended December 31, 2012 and 2011 (rounded to nearest thousand)

Revenues increased $3,317,000 (46%) to $10,564,000, comparing the year ended December 31, 2012, to the previous year. The increase was mostly due to higher product sales of $1,339,000, with $743,000 of the increase due to non-US product sales, and higher license fee revenue of $1,809,000. The increased product


sales were primarily due to an increase in Angel sales of $1,117,000 or 20%. AutoloGel sales increased 44% to $554,000. License fee revenue was a result of exclusivity fee payments recognized with respect to an option agreement with a top 20 global pharmaceutical company.

Gross Profit

Gross profit increased $2,129,000 (47%) to $6,650,000, comparing the year ended December 31, 2012, to the previous year. The increase was primarily due to higher license fee revenue of $1,809,000 associated with the exclusivity fee payments discussed above, as well as increased profit on product sales.

Gross margin increased to 63% from 62% comparing the year ended December 31, 2012, to the previous year. The increase was primarily due to the increase in license fee revenue recognized, which had no associated cost of revenue. Gross margin on product sales decreased to 46% from 54% comparing December 31, 2012, to the previous year. The decrease was primarily due to sales on lower margin products, specifically Angel machines and disposables sold to non-US distributors, which made up a more significant portion of the product mix.

Operating Expenses

Operating expenses increased $11,510,000 (143%) to $19,544,000, comparing the year ended December 31, 2012, to the previous year. A discussion of the various components of Operating expenses follows below.

Salaries and Wages

Salaries and wages increased $4,255,000 (149%) to $7,107,000, comparing the year ended December 31, 2012, to the previous year. The increases were primarily due to increased stock-based compensation expense and additional employees as a result of the Aldagen acquisition, in addition to increased bonus expense.

Consulting Expenses

Consulting expenses increased $927,000 (69%) to $2,276,000, comparing the year ended December 31, 2012, to the previous year. The increase was primarily due to consulting expenses related to the Aldagen acquisition and expense associated with the development of our European distribution channel activities.

Professional Fees

Professional fees increased $403,000 (51%) to $1,190,000, comparing the year ended December 31, 2012, to the previous year. The increase was primarily due to legal costs related to the Aldagen acquisition and costs related to the option agreement with a top 20 pharmaceutical company which was terminated in August 2012, in addition to increased costs related to patents and regulatory filings.

Research, Development, Trials and Studies

Trials and studies expenses increased $3,288,000 (3,350%) to $3,386,000, comparing the year ended December 31, 2012, to the previous year. The increases were primarily due to research and development costs related to the ALD-401 Phase 2 clinical trial.

General and Administrative Expenses

General and administrative expenses increased $2,636,000 (89%) to $5,585,000, comparing the year ended December 31, 2012, to the previous year. The increase was primarily due to higher stock based compensation due to additional members of the board of directors, rent, employee benefits, franchise tax, and amortization expense as a result of the acquisition of Aldagen. Additionally, travel, marketing, and European services increased as we made further investments in our sales and marketing and distribution efforts.

Other Income (Expense)

Other expense, net totaled $6,885,000 compared to other income, net of $22,000 for the year ended December 31, 2012 and 2011, respectively. The change was primarily due to $4,335,000 related to the increase in the fair value of the contingent consideration related to the Aldagen acquisition, mainly due to the change in our stock price, approximately $1,513,000 in non-cash inducement expense, and $471,000 in settlement expense in 2012 compared to a $577,000 gain on debt restructuring in 2011.


The settlement expense realized was a result of a contingency resolved, in the second quarter of 2012, that resulted in common stock issuable to our pre-bankruptcy Series A Preferred stock holders as outlined in the Company's plan of reorganization in 2002 (see Note 21 to the Consolidated Financial Statements). The non-cash inducement expense is associated with common stock issued to compensate Series D preferred stockholders for forgone preferred dividend payments due to the early conversion of preferred stock and incentive warrants issued in exchange for the early exercise of existing warrants. These are compared to a gain of approximately $577,000 recognized in 2011 related to the Company's renegotiation of the note payable due to Sorin.

Liquidity and Capital Resources

Since inception, we have incurred and continue to incur significant losses from operations. Although our recent acquisition of Aldagen was an all equity transaction, the on-going Phase 2 study and general corporate activities at Aldagen will increase our operational expenditures at least through the end of 2013. Historically, we have financed our operations through a combination of the sale of debt, equity and equity-linked securities, and licensing, royalty, and product revenues. The Company's commercial products are currently generating approximately $8 million in revenue per year on a run-rate basis. The Company needs to sustain and grow these sales to meet its business objectives and satisfy its cash requirements.

At December 31, 2012, we had approximately $2.6 million cash on hand including approximately $1.5 million dedicated for use in the ALD-401 clinical trial and related matters. In February 2013, we entered into several financing transactions, as more fully described below. Based on our beginning cash balances and the funds available as a result of the February 2013 financings, we believe we will have sufficient cash to sustain the Company at least through 2013.

On February 18, 2013, the Company entered into a purchase agreement, together with a registration rights agreement, with Lincoln Park Capital, LLC ("LPC"). Under this agreement, the Company has the right to sell to and LPC is obligated to purchase up to $15 million in shares of the Company's common stock, subject to certain limitations, from time to time, over the 30-month period commencing on the date that a registration statement is declared effective by the SEC and a final prospectus in connection therewith is filed (expected to occur in the second quarter of 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.

On February 19, 2013, the Company entered into securities purchase agreements with certain institutional accredited investors in addition to a Credit and Security Agreement with Midcap Financial LLC.

Through the sales of its equity securities as set forth in the securities purchase agreements, the Company raised gross proceeds of $5,000,000, before placement agent's fees and other offering expenses, in a registered offering. The Company issued to the investors units of the Company's securities consisting, in the aggregate, of 9,090,910 shares of the Company's common stock and five-year warrants to purchase 6,363,637 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 and is subject to transfer restrictions, including among others, compliance with state securities laws. The closing of the offering occurred February 22, 2013. Proceeds from the transaction will be used for general corporate and working capital purposes.

The Midcap Credit and Security Agreement provides for aggregate term loan commitments of $7.5 million. The Company received the first tranche of $4.5 million at closing. The second tranche of $3.0 million may be advanced to the Company, at the Company's discretion, upon satisfaction of the following conditions: (i) if the Company achieves certain performance milestones for 2013 and (ii) raises an amount of not less than $5.0 million in the aggregate from
(a) equity investors, and/or (b) partnership proceeds on or before July 31, 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.


We continue to have exploratory conversations with large companies regarding their interest in our various products and technologies. We will seek to leverage these relationships and this heightened interest to secure further non-dilutive sources of funding.

If significant amounts are not available to the Company from future strategic partnerships or under the LPC 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, completion of the ongoing Phase 2 RECOVER Stroke trial, 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.

Net cash provided by (used in) operating, investing, and financing activities for the year ended December 31, 2012 and 2011 were as follows:

[[Image Removed]]                          [[Image Removed]]       [[Image Removed]]
                                             December 31, 2012      December 31, 2011
                                                          (in millions)
Cash flows used in operating activities    $         (11.4 )       $         (4.2 )
Cash flows used in investing activities    $          (1.6 )       $            -
Cash flows provided by financing           $          13.4         $          5.8

Operating Activities

Cash used in operating activities in 2012 of $11.4 million primarily reflects our net loss of $20.0 million adjusted by a (i) $4.3 million increase for change in the fair value of contingent consideration relating to the Aldagen acquisition, (ii) $2.0 million increase for stock-based compensation, (iii) $1.5 million increase for non-cash inducement expense associated with warrant exercise agreements, (iv) $1.5 million decrease for changes in assets and liabilities, (v) $1.2 million increase for depreciation and amortization primarily as a result of the Aldagen acquisition, (vi) $0.6 million increase for amortization of deferred costs relating to debt issuances, (vii) $0.5 million increase for settlement of contingency expense, and (viii) $0.5 million decrease for change in derivative liabilities. The $1.5 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.

Cash used in operating activities in 2011 primarily reflects our net loss of $3.5 million adjusted for a (i) net $1.3 million decrease for changes in assets and liabilities, (ii) $0.6 million increase for depreciation and amortization,
(iii) $0.6 million decrease for gain on debt restructuring relating to the Company's renegotiation of the note payable to Sorin, (iv) $0.5 decrease for change in derivative liabilities, (v) $0.5 million increase for amortization of deferred costs relating to debt issuances, and (vi) $0.3 million increase for stock-based compensation.

Investing Activities

Cash used in investing activities in 2012 primarily reflects the net activity of purchases and sales of Angel and AutoloGel centrifuge devices. In order to maintain and expand the sales of our products, we will need to continue to purchase Angel and AutoGel centrifuge devices.

Financing Activities

In 2012, we raised $9.5 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 $4.5 million of which was sold to


LPC), 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.

In 2011, we raised $3.8 million through the sale of common stock ($3.4 million of which was sold to LPC), $2.1 million through the issuance of traditional debt, and $2.4 million through the issuance of convertible debt. These amounts were partly offset by a $2.6 million repayment of the note payable to Sorin.


The Company believes that the rates of inflation in recent years have not had a significant impact on its operations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Critical Accounting Policies

In preparing our consolidated financial statements, we make estimates and assumptions that can have a significant impact on our consolidated 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 consolidated results of operations. For further information on our critical and other accounting policies, see Note 2 to our consolidated financial statements.

Stock-Based Compensation

Under the Company's Long Term Incentive Plan (the "LTIP"), it grants share-based awards, typically in the form of stock options and stock awards, to eligible employees, directors, and service providers to purchase shares of Common stock. The fair values of these awards are determined on the dates of grant or issuance and are recognized as expense over the requisite service periods.

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes-Merton option-pricing formula. The determination of fair value using this model requires the use of certain estimates and assumptions that affect the reported amount of compensation cost recognized in the Company's Consolidated Statements of Operations. These include estimates of the expected term of the option, expected volatility of the Company's stock price, expected dividends and the risk-free interest rate. These estimates and assumptions are highly subjective and may result in materially different amounts should circumstances change and the Company employ different assumptions in future periods.

For stock options issued during the year ended December 31, 2012 and 2011, the expected term was estimated by using peer company information as Cytomedix's history is limited. Estimated volatility was derived using the Company's historical stock price volatility. No cash dividends have ever been declared or paid on the Company's common stock and currently none is anticipated. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the options.

The Company estimates the fair value of stock awards based on the closing market value of the Company's stock on the date of grant. In certain select cases, the Company has issued stock purchase warrants, outside the LTIP, to service providers in exchange for the performance of consulting or other services. These warrants have generally been immediately vested and expense was recognized equal to the fair value of the warrant on the date of grant using the Black-Scholes option pricing model. The same assumptions (and related risks) as discussed above apply, with the exception of the expected term; for these warrants issued to service providers, the Company estimates that the warrant will be held for the full term.

Business Combinations

The Company accounts for business combinations using the acquisition method. Under this method the Company allocates the purchase price to the assets acquired and liabilities assumed based on their estimated


fair values at the date of acquisition, including intangible assets that arise from contractual or other legal rights or are separable (i.e. capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Determination of fair value is based on certain estimates and assumptions regarding such things as forecasted future revenues and expenses, customer attrition, prevailing royalty rates, required rates of return, etc. The purchase price in excess of the fair value of the net assets and liabilities is recorded as goodwill.

Revenue Recognition

The Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured.

Sales of products

The Company provides for the sale of its products, including disposable processing sets and supplies to customers. Revenue from sales products is recognized upon shipment of products to the customers. The Company does not maintain a reserve for returned products as in the past those returns have not been material.

Usage or leasing of blood separation equipment

Also, as a result of the acquisition of the Angelฎ business in 2010, the Company acquired various multiple element revenue arrangements that combine the (i) usage or leasing of blood separation processing equipment, (ii) maintenance of processing equipment, and (iii) purchase of disposable processing sets and supplies. Under these arrangements, the total arrangement consideration is allocated to the various elements based on their relative estimated selling prices. The usage of the blood separation processing equipment is accounted for as an operating lease; since customer payments are contingent upon the customer ordering new products, rental income is recorded following the contingent rental method when rental income is earned and collectability is reasonably assured. The sale of disposable processing sets and supplies and maintenance are deemed a combined unit of accounting; since (a) any consideration for disposable processing sets and supplies and maintenance is contingent upon the customer ordering additional disposable processing sets and supplies and (b) both the disposable products and maintenance services are provided over the same term, the Company recognizes revenue for this combined unit of accounting following the contingent revenue method at the time disposable products are delivered based on prices contained in the agreement. Rental income is currently less than 10% of total revenue and the Company therefore does not make separate disclosure in the statement of operations.

Licenses and royalties

Percentage-based fees on licensee sales of covered products are generally recorded as products are sold by licensees and are reflected as "Royalties" in the Consolidated Statements of Operations.

Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.

Option Agreement with a global pharmaceutical company

In October 2011, the Company entered into an option agreement with a top 20 global pharmaceutical company granting the potential partner an exclusive option period through June 30, 2012 regarding U.S. supply and distribution of the AutoloGel System. In exchange for this period of exclusivity, we have received non-refundable fees totaling $4.5 million. The revenue for these non-refundable fees is recognized, on a straight-line basis, over the exclusive option period based on the relative selling price, with the remaining balance recognized at the expiration of the option period. In August 2012, the parties agreed to the early termination of the August 30, 2012 exclusivity period and ceased further negotiations concerning a distribution agreement; accordingly, all fees have been recognized.


Valuation of Goodwill

Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired in business combinations. The Company is required to perform a review for impairment of goodwill in accordance with FASB ASC 350, Intangibles - Goodwill and Other. Goodwill is considered to be impaired if it is determined that the carrying value of the Company exceeds its fair value. The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. Examples of such events or circumstances include:

• a significant adverse change in legal factors or in the business climate;

• a significant decline in Cytomedix's stock price or the stock price of comparable companies;

• a significant decline in the Company's projected revenue or cash flows;

• an adverse action or assessment by a regulator;

• unanticipated competition;

• a loss of key personnel;

• a more-likely-than-not expectation that the Company will be sold or . . .

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