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CMXI > SEC Filings for CMXI > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for CYTOMEDIX INC

Form 10-Q for CYTOMEDIX INC


14-Aug-2014

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, 2013 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, Inc. ("Cytomedix," the "Company," "we," "us," or "our") is a regenerative therapies company marketing 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 AutoloGelŪ System for wound care and the AngelŪ concentrated Platelet Rich Plasma ("cPRP") System for orthopedics markets. Our sales are predominantly in the United States, where we sell our products through direct sales representatives and distributors. Since August 8, 2013, Arthrex accounted for 100% of our Angel sales. This customer's receivable balance at June 30, 2014 represented approximately 83% of the Company's total accounts and other receivables. There were no other customers that represented a concentration in either revenue or receivables at June 30, 2014 or 2013, respectively.

Our 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 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 CMS reopened and revised 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. 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) 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. On December 2, 2013 CMS designated that this code be paid at a national average rate of $411 per treatment encounter under the Hospital Outpatient Prospective Payment System ("HOPPS"). We anticipate that this payment decision will significantly expand the reimbursement coverage for AutoloGel and allow healthcare providers in the outpatient setting to treat a broad patient population that includes those with diabetic foot ulcers, pressure ulcers and venous ulcers. In the final rule, CMS also made it clear that this payment level will be reviewed annually, allowing for the incorporation of resource utilization data collected throughout 2014 to potentially change future payment decisions. In a related decision to control Medicare spending for wound care, CMS finalized rules that will package the payment for various skin substitute products into the payment for the associated clinical procedures. When fully implemented, these revised payment amounts and procedures are expected to enhance the economic value proposition of AutoloGel in the market for advanced wound care therapies. In addition, CMS issued the final payment rules for the Medicare Physician Fee Schedule ("MPFS"), directing Medicare Administrative Contractors ("MACs"), to set the payment rates for claims for AutoloGel based on charges submitted by physician offices. The MACs will determine these payments through the use of invoices and other documentation provided by physician offices. This payment level is consistent with the proposed rule announced by CMS in July this year. These rules took effect January 1, 2014.

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 will continue to pursue 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.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 U.S. biologics market associated with spinal fusion procedures is estimated to be 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.

We have grown worldwide sales of Angel steadily since acquiring the product line in April 2010 and we expect that worldwide sales of Angel will continue to grow under the Arthrex 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 obtained 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 purchases Products from the Company to distribute and service at certain purchase prices, which may be changed after an initial period. Arthrex pays 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.

ALDH br Cell Technology

The ALDHbr ("Bright Cell") technology is a novel approach to cell-based regenerative medicine. 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. We acquired the Bright Cell technology with the acquisition of Aldagen in February 2012.

In September 2013, the Company announced its decision to begin a strategic reorganization of its research and development operations that involved the RECOVER-Stroke trial and ALDH Bright Cell platform. In January 2014, the Company completed enrollment in the Phase 2 RECOVER-stroke trial after concluding through a resizing analysis that it was adequately powered at 48 patients. In May 2014, we announced preliminary efficacy and safety results of our RECOVER-Stroke Phase 2 clinical trial in patients with neurological damage arising from ischemic stroke and treated with ALD-401. Observed improvements in the primary endpoint (mean modified Rankin Score or mRS) of the trial were not clinically or statistically significant. In light of this outcome, we discontinued further funding of the ALD-401 development program and closed our R&D Facility in Durham, NC. This decision to close down the facility was consistent with the Company's ongoing realignment of its commercial operations to focus on the wound care market and is expected to result in annual savings of approximately $4 million. The Company performed an assessment of its tradename, IPR&D and Goodwill, as of June 30, 2014, as a result of recent events and changes in circumstances surrounding ALD-401 and concluded that the fair value of the Aldagen tradename and its IPR&D was impaired. (See Note 8 - Fair Value Measurement in theNotes to Condensed Consolidated Financial Statements for additional details.)

We continue to conduct a Phase 1/2 clinical trial in critical limb ischemia (PACE) that is being funded by the National Institutes of Health and a Phase 1 clinical trial in grade IV malignant glioma following surgery that is funded by Duke University.

Results of Operations

Certain numbers in this section have been rounded for ease of analysis.

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. We expect our operating expenses to increase as a result of various commercial efforts with regard to Medicare reimbursement for AutoloGel. The Company restructured 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 June 30, 2014 and 2013

Revenue and Gross Profit

Revenues decreased $98,000 (4%) to $2,326,000 comparing the three months ended June 30, 2014 to the same period last year. The decrease was due to lower product sales of approximately $512,000 offset by an increase in royalty revenue of $313,000 and license fee revenue of $101,000. The decrease in product sales was primarily due to a reduction in Angel average selling price under the terms of the Arthrex Agreement.

Gross profit decreased $637,000 (60%) to $429,000 comparing the three months ended June 30, 2014 to the same period last year. The decrease was primarily due to the sale of Angel disposable products and centrifuges under the Arthrex Agreement. Under the agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price. The decrease in Angel product gross profit was partially offset by an increase in gross profit from Angel related license fees and royalty revenue.

Overall gross margin decreased to 18% from 44% for the three months ended June 30, 2014 as compared to the same period last year. The decrease was primarily due to the sale of Angel products under the Arthrex Agreement. Under the Arthrex Agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price, therefore, the corresponding gross margin is also lower. This was offset by the gross margin realized from license fees and royalty revenue primarily related to the Arthrex Agreement. Additionally, gross margin on product sales decreased to 0% from 43%.

The following table discloses the profitability of product sales:

                                    Three Months Ended June 30,
                             AutoloGel                       Angel
                        2014          2013           2014            2013

Sales                 $ 120,000     $ 110,000     $ 1,731,000     $ 2,253,000

COGS                     91,000        74,000       1,762,000       1,281,000

Gross profit/(Loss)      29,000        36,000         (31,000 )       972,000

Gross margin                24%           33%             -2%             43%

AutoloGel sales increased $10,000 and gross profit decreased $7,000 comparing the three months ended June 30, 2014 to the same period last year. The decrease in gross profit was primarily due to higher depreciation expense. Gross margin decreased due to increased depreciation expense.

Angel sales decreased $522,000 while gross profit decreased $1,003,000 comparing the three months ended June 30, 2014 to the same period last year. The decrease was primarily due to the sale of Angel disposable products and centrifuges under the Arthrex Agreement. Sales and gross profit decreased since, under the Arthrex agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price, therefore, the corresponding gross margin is also lower. In addition, Angel disposable costs increased and we recognized $17,000 in Angel centrifuge warranty and refurbishment expenses.

Operating Expenses

Operating expenses increased $4,524,000 (79%) to $10,251,000 comparing the three months ended June 30, 2014 to the same period last year. A discussion of the various components of operating expenses follows.

Salaries and Wages

Salaries and wages increased $543,000 (27%) to $2,588,000 comparing the three months ended June 30, 2014 to the same period last year. The increase was primarily due to accrued severance expense of $506,000 which was primarily a result of the closing of our research and development facility related to the ALD-401 clinical trial, as well as, increased stock based compensation expense of $199,000 as a result of options granted during the three months ended June 30, 2014 These were partially offset by a decrease in salaries of $82,000 due to fewer employees and lower sales commissions of $96,000.

Consulting Expenses

Consulting expenses decreased $314,000 (48%) to $333,000 comparing the three months ended June 30, 2014 to the same period last year. The decrease was primarily due to lower expenses related to the ALD-401 clinical trials, Angel product development, and international sales consulting offset by increased consulting expense related to the management, promotion, and roll-out of CED protocols and CMS reimbursement matters.

Professional Fees

Professional fees increased $76,000 (24%) to $393,000 comparing the three months ended June 30, 2014 to the same period last year. The increase was primarily due to higher legal fees related to financing, employment, and intellectual property matters primarily offset by lower accounting fees related to financial reporting matters.

Research, Development, Trials and Studies

Research, development, trials and studies expenses decreased $268,000 (22%) to $958,000 comparing the three months ended June 30, 2014 to the same period last year. The decrease was primarily due to lower ALD-401clinical trial related costs of $763,000 and $74,000 in lower Angel product development expenses. These were primarily offset by increased CED development costs of $559,000.

General and Administrative Expenses

General and administrative expenses decreased $197,000 (13%) to $1,295,000 comparing the three month ended June 30, 2014 to the same period last year. The decrease was primarily due to lower franchise tax of $128,000, as a result of a refund of prior year taxes, travel expense of $48,000, sales commission to independent representatives of $38,000, and stock-based compensation of $46,000 partially offset by higher benefit expense of $31,000 and marketing expense of $48,000.

Impairment of Trademarks and IPR&D

As a result of our decision to discontinue further funding of the ALD-401 development program during the three months ended June 30, 2014, we recognized an impairment charge of approximately $3,659,000 to our in-process research and development asset and $1,025,000 to our trademarks.

Other Income and Expense

Other expense, net increased $1,123,000 (304%) to $1,494,000 comparing the three months ended June 30, 2014 to the same period last year. The increase was primarily due to a $954,000 increase in non-cash charges related to an increase in the fair value of derivative liabilities related to convertible debt. In addition, the interest expense increase was primarily due to the accelerated amortization of deferred issuance costs related to the non-cash interest of $230,000 from the amortization of deferred issuance costs primarily related to the extinguishment of debt which was partially offset by lower non-cash interest of $74,000 due to the amortization of debt discount.

Comparison of Operating Results for the Six-Month Period Ended June 30, 2014 and 2013

Revenue and Gross Profit

Revenues decreased $569,000 (12%) to $4,172,000 comparing the six months ended June 30, 2014 to the same period last year. The decrease was primarily due to lower product sales of approximately $1,342,000 offset by an increase in royalty revenue of $571,000 and license fee revenue of $201,000. The decrease in product sales was primarily due to a reduction in Angel average selling price under the terms of the Arthrex Agreement.

Gross profit decreased $1,289,000 (61%) to $821,000 comparing the six months ended June 30, 2014 to the same period last year. The decrease was primarily due to the sale of Angel disposable products and centrifuges under the Arthrex Agreement. Under the agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price. The decrease in Angel product gross profit was partially offset by an increase in gross profit from Angel related license fees and royalty revenue.

Overall gross margin decreased to 20% from 45% for the six months ended June 30, 2014 as compared to the same period last year. The decrease was primarily due to the sale of Angel products under the Arthrex Agreement. Under the Arthrex Agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price, therefore, the corresponding gross margin is also lower. This was partially offset by the gross margin realized from license fees and royalty revenue related to the Arthrex Agreement.

The following table discloses the profitability of product sales:

                                     Six Months Ended June 30,
                             AutoloGel                       Angel
                        2014          2013           2014            2013

Sales                 $ 285,000     $ 248,000     $ 2,989,000     $ 4,368,000

COGS                    179,000       128,000       3,083,000       2,494,000

Gross profit/(Loss)     106,000       120,000         (94,000 )     1,874,000

Gross margin                37%           48%             -3%             43%

AutoloGel sales increased $37,000 while gross profit decreased $14,000 comparing the six months ended June 30, 2014 to the same period last year. The decrease in gross profit was primarily due to cost of sales related to royalty expense amortization that began March 2013 and higher depreciation expense. The royalty expense is related to the release of the Worden security interest in AutoloGel patents to Cytomedix.

Angel sales decreased $1,379,000 while gross profit decreased $1,968,000 comparing the six months ended June 30, 2014 to the same period last year. The decrease was primarily due to the sale of Angel disposable products and centrifuges under the Arthrex Agreement. Sales and gross profit decreased since, under the Arthrex agreement, the contractual selling price of Angel products to Arthrex is significantly lower than our historical average selling price. In addition, Angel disposable costs increased and we recognized $66,000 in Angel centrifuge warranty and refurbishment expenses.

Operating Expenses

Operating expenses increased $3,519,000 (30%) to $15,294,000 comparing the six months ended June 30, 2014 to the same period last year. A discussion of the various components of operating expenses follows below.

Salaries and Wages

Salaries and wages increased $227,000 (6%) to $4,270,000 comparing the six months ended June 30, 2014 to the same period last year. The increase was primarily due to accrued severance expense of $498,000 which was primarily a result of the closing of our research and development facility related to the ALD-401 clinical trial. In addition, stock based compensation expense increased $159,000 due to options granted during the six months ended June 30, 2014. These were partially offset by a decrease in salaries of $294,000 due to fewer employees and lower sales commissions of $134,000.

Consulting Expenses

Consulting expenses decreased $11,000 (1%) to $1,170,000 comparing the six . . .

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