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CMXI > SEC Filings for CMXI > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for CYTOMEDIX INC


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

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, 20132 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.

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 ALDHbr ("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.

On September 17, 2013, the Company announced its decision to begin a strategic reorganization of its research and development operations that involve the RECOVER-Stroke trial and ALDH Bright Cell platform. As part of this initiative, the Company's ongoing financial support of the current RECOVER-Stroke trial and the underlying ALDH Bright Cell technology will be substantially concluded as of year-end 2013. The Company is exploring a range of strategic options for continuing its clinical programs beyond 2013, which options may include, among others, technology transfer, spinout, licensing or other similar transactions involving the underlying technology. The Company's present intention is to proceed with enrollment in the trial through 2013 year end with an enrollment goal of 50 patients. As of October 2013, enrollment is currently at 44 patients. Depending on the success of the Company's efforts to pursue strategic options for continuing its clinical programs, the Company may determine to conclude the study beyond December 31 and unblind the study data upon the availability of the primary efficacy endpoint from all subjects.

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.

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.

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.

The following table discloses the profitability of product sales:

                                                         Nine Months Ended September 30,
. . .
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