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Gross Profit
Gross profit rose $159,000 (17%) to $1,093,000 comparing the year ended December 31, 2007, to the same period in the previous year. For the same periods, gross margins rose to 56% from 48%. The increase in gross profits is attributable to improved margins. Gross margins on royalties improved due to reduced contingent legal fees pursuant to the Company’s agreement with its patent counsel reached on August 2, 2007 (see Note 4 to the Financial Statements for a further discussion of this agreement). Gross margins on product sales improved due to a shift in mix to higher margin items as the Company de-emphasized the sale of its lower margin reagent
products as it continued to seek marketing clearance from the FDA.
Royalties from the licensing agreements with DePuy Spine, Inc., inclusive of the amortization of deferred revenue associated with the initial deposit of $750,000, generates a gross margin of approximately 20%. The Company expects gross margins generated from all other licensing agreements to approximate 90%.
Operating Expenses
Operating expenses rose $1,608,000 (33%) to $6,446,000 comparing the year ended December 31, 2007, to the same period in the previous year. A discussion of the various components of Operating expenses follows below.
Salaries and Wages
Salaries and wages fell $529,000 (24%) to $1,634,000 comparing the year ended December 31, 2007, to the same period in the previous year. The decrease was primarily due to lower non-cash equity-based compensation ($382,000) due to the completion of the service period in 2006 for certain grants and fewer employees.
Consulting Expenses
Consulting expenses rose $22,000 (10%) to $244,000 comparing the year ended December 31, 2007, to the same period in the previous year. The increase was primarily due to non-cash equity-based compensation expenses associated with the modification of some consultant warrants ($45,000), partially offset by a reduction in the overall reduction in use of outside consultants.
Consulting Expenses-Related Party
Consulting expenses-related party fell $35,000 (100%) to zero comparing the year ended December 31, 2007, to the same period in the previous year. The decrease was due to the expiration of the consulting agreement with BDR, Inc.
Professional Fees
Professional fees rose $2,166,000 (283%) to $2,929,000 comparing the year ended December 31, 2007, to the same period in the previous year. Professional fees consist primarily of legal and accounting services.
The increase was primarily due to non-cash equity-based compensation ($1,721,000) to the Company’s patent counsel in exchange for a waiver of future contingent legal fee obligations on existing license agreements (see Note 4 to the Financial Statements for a further discussion of this agreement) and additional audit fees ($307,000) in 2007 related to the Company’s financial restatements filed with the SEC in November 2007.
Clinical Trial Related Expenses
Clinical trial related expenses fell $62,000 (100%) to zero comparing the year ended December 31, 2007, to the same period in the previous year. The Company completed the active phase of the trial in 2005, incurred only limited expenses associated with the close-out of the trial in 2006, and incurred no expenses in 2007. The Company does not expect to incur any future expenditures related to this trial. However, the Company does plan to conduct a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost approximately $500,000 over the next few years.
General and Administrative Expenses
General and administrative expenses rose $12,000 (1%) to $1,638,000 comparing the year ended December 31, 2007, to the same period in the previous year. Increases in investor services, AMEX filing fees,
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and non-cash equity-based compensation to Directors was mostly offset by decreases in bad debt, depreciation, marketing, and travel related expenses. Beginning in 2007, the Company began to reflect royalty fees owed to Charles Worden in the General and administrative expenses line as it was determined that Mr. Worden was no longer considered a related party.
Other Income
Other income fell $1,581,000 (83%) to $315,000 comparing the year ended December 31, 2007, to the same period in the previous year. The decrease was primarily due to decreased settlement income ($1,636,000) as the Company had reached significant settlements in 2006 with Company’s who were infringing its patents. This decrease was partially offset by increased interest income ($52,000) on cash invested in institutional money market accounts.
Comparison of Years Ended December 31, 2006 and 2005
Revenues
Revenues rose $434,000 (29%) to $1,948,000 comparing the year ended December 31, 2006, to the same period in the previous year. Revenues are normally generated from two sources: the sale of disposable kits and reagents and royalties received from licensing activities. In the third quarter of 2006, the Company also recognized $117,000 in revenue related to comprehensive wound services provided for a government agency under a limited term contract. This service revenue is not expected to continue. The increase was attributable to increased royalties of $496,000 and increased sales of $117,000 related to the services mentioned above, partially offset by
a $179,000 decrease in product sales. Increases in royalties were due to six new license agreements entered into during 2005. Product sales decreased primarily due to decreased sales to nursing homes, government agencies, and Medicaid customers.
Gross Profit
Gross profit rose $300,000 (47%) to $934,000 comparing the year ended December 31, 2006, to the same period in the previous year. For the same periods, gross margins rose to 48% from 42%. The increase in gross profits is primarily attributable to the licensing agreements entered into after March 31, 2005 which carry a greater gross margin than previously existing licensing agreements. Royalties from the licensing agreements with DePuy Spine, Inc., inclusive of the amortization of deferred revenue associated with the initial deposit of $750,000, generates a gross margin of approximately 20%. The Company expects gross margins generated from all other
licensing agreements to be in the range of 50 – 70%.
Operating Expenses
Operating expenses fell $3,144,000 (39%) to $4,838,000 comparing the year ended December 31, 2006, to the same period in the previous year. A discussion of the various components of Operating expenses follows below.
Salaries and Wages
Salaries and wages fell $649,000 (23%) to $2,163,000 comparing the year ended December 31, 2006, to the same period in the previous year. The decrease was primarily due to lower non-cash equity-based compensation ($648,000) and fewer employees.
Consulting and Related Party Consulting Expenses
Consulting expenses fell $170,000 (43%) to $222,000 comparing the year ended December 31, 2006, to the same period in the previous year. The decrease was primarily due to lower non-cash equity-based compensation ($152,000) and the overall reduction in use of outside consultants.
Professional Fees
Professional fees fell $255,000 (25%) to $764,000 comparing the year ended December 31, 2006, to the same period in the previous year. Professional fees consist primarily of legal and accounting services. The decrease was primarily due to decreases in patent litigation related expenditures ($315,000) due to the successful completion of several patent infringement actions in 2005, decreases in fees to securities and general counsel
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attorneys ($90,000) due primarily to reduced current period activity related to the Company’s listing on the American Stock Exchange, and decreases in accounting fees ($55,000), partially offset by increases in audit fees ($75,000) driven by compliance with Section 404 of the Sarbanes-Oxley Act and increased attorneys fees ($175,000) related to the appeal of the FDA’s decision regarding the Company’s 510(k) Premarket Notification for AutoloGel
TM
System.
Clinical Trial Related Expenses
Clinical trial related expenses fell $1,527,000 (96%) to $62,000 comparing the year ended December 31, 2006, to the same period in the previous year. The Company completed the active phase of the trial in 2005 and in the first two quarters of 2006 incurred only limited expenses associated with the close out of the trial.
General and Administrative Expenses
General and administrative expenses fell $544,000 (26%) to $1,551,000 comparing the year ended December 31, 2006, to the same period in the previous year. The decrease was due primarily to decreases in equity-based compensation ($297,000), travel related expenditures ($163,000), AMEX filing fees ($52,000), investor services ($43,000), and depreciation of fixed assets ($35,000), partially offset by increases in marketing related activities ($30,000).
Other Income/Expenses
Other income rose $954,000 (101%) to $1,896,000 comparing the year ended December 31, 2006, to the same period in the previous year. The increase was primarily due to increased interest income ($143,000) as a result of higher interest rates and larger cash balances, increased patent settlement income ($600,000, net), and a one time charge ($228,000) in 2005 recorded for the issuance of 65,000 shares of the Company’s Common stock in return for a full settlement and release of all claims from a lawsuit brought against the Company relating to its emergence from bankruptcy.
Contractual Obligations
The Company had the following contractual obligations as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
Less Than 1 Year
|
|
1 – 3
Years
|
|
4 – 5
Years
|
|
More Than
5 Years
|
|
Operating Leases
|
|
$
|
38,369
|
|
|
$
|
38,369
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other Liabilities
(1)
|
|
|
66,800
|
|
|
|
47,400
|
|
|
|
19,400
|
|
|
|
—
|
|
|
|
—
|
|
|
Purchase Obligations
(2)
|
|
|
50,039
|
|
|
|
50,039
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
155,208
|
|
|
$
|
135,808
|
|
|
$
|
19,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Amounts reflect royalty fees payable associated with settlement agreements. Amounts less than one year are included in the “Accounts payable and accrued expenses” line of the Balance Sheet.
|
|
|
(2)
|
Amount reflects remaining commitment under a purchase order for centrifuges.
|
In addition, the Company has committed to conduct a post-market surveillance study per its understanding reached with the FDA, estimated to cost approximately $500,000 over the next few years. Although there is currently no contractual obligation to expend these funds, the Company fully expects to conduct this study.
Liquidity and Capital Resources
The Company’s operating revenues do not cover the costs of its operations. The cash position of the Company at December 31, 2007 was approximately $5,136,000. The Company believes that it will have adequate cash on hand to fund operations for the next twelve months, based on the current level of licensing revenues and operating expenditures. However, additional cash may be required if operating revenues do not materialize or the cost of operations increases. The Company has certain warrants that are currently callable (subject to certain requirements including a minimum per share price of $4.50) at an aggregate exercise price of approximately
$1.1 million.
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The Company has no material commitments for capital expenditures except for a commitment to purchase a minimum number of centrifuges in the first nine months of 2008 totaling approximately $50,000. However, the Company does plan to conduct a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost approximately $500,000 over the next few years.
Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. All working capital required to implement the Company’s business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company. There can be no assurance that the Company will be able to raise additional capital if and when needed, and, even if needed capital is raised, there can be no assurance that the Company will achieve its strategic goals. To continue its operations and complete the implementation of its current business plan, the Company will likely require additional long-term
financing. There are no assurances that such financing will be available, or if available, it will be on terms acceptable to the Company. Any financing may result in significant dilution.
Prospects for the Future
Cytomedix’s success is directly dependent on the success of the AutoloGel
TM
System, and the Company believes that AutoloGel
TM
has a reasonable chance for success in the marketplace. First and foremost, the Company believes that, based on the results of the Company’s clinical trial and other historical data as well as the results of a pharmaco-economic study, the AutoloGel
TM
System has higher healing rates for diabetic foot ulcers and is more cost effective than most other wound treatments. Additionally, based on other data and experience, the Company believes that AutoloGel
TM
offers similar
clinical and cost advantages when used to treat other chronic and open cutaneous wounds. The Company owns the patents on the process for utilizing platelet gel for treating damaged tissue and wound healing, which is the basis of its license agreements, through 2009 and for the specific formulation of AutoloGel
TM
, which it believes provides several competitive advantages, and which patents expire in 2019.
The Company’s recent obtainment of FDA clearance for its AutoloGel
TM
System has increased the prospects for success. A key restriction on the Company’s ability to market AutoloGel
TM
for its intended use has been removed and the Company has launched its product in the first quarter of 2008.
However, the recent CMS decision to continue its non-coverage of autologous blood-derived products when used on chronic wounds is a setback to the Company’s overall strategy. While this decision will not have an impact on the Company’s current sales and marketing strategy which targets the non-reimbursement sensitive market, it does limit, for an indefinite amount of time, the Company’s ability to access the broader market for its products.
Inflation
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
Valuation of Goodwill
The Company is required to perform a review for impairment of goodwill in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). Goodwill is considered to be impaired if it is determined that the carrying value of the Company exceeds its fair value. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. Examples of such events or circumstances include:
|
|
•
|
a significant adverse change in legal factors or in the business climate;
|
|
|
•
|
a significant decline in Cytomedix’s stock price or the stock price of comparable companies;
|
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|
|
•
|
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 otherwise disposed of.
|
Assessing the impairment of goodwill requires that the Company make assumptions and judgments regarding the fair value of its net assets. The Company completed its most recent annual evaluation for impairment of goodwill as of December 31, 2007 and determined that no goodwill impairment existed. This evaluation was primarily based on the Market and Income Approaches. These approaches utilize information such as values of similar publicly traded companies, recent acquisitions of companies, arms’-length transactions in the Company’s stock, and forecasted revenues and cash flows of the Company.
There is no guarantee that future changes in the overall market or factors specific to the Company will not result in an impairment of goodwill, and a resulting a material impairment charge will not be recorded. Goodwill totaled approximately $2.0 million at December 31, 2007.
Stock-Based Compensation
Under the Company’s Long Term Incentive Plan (the “LTIP”), it grants share-based awards to eligible employees and directors to purchase shares of common stock. The benefits provided by this plans qualify as share-based compensation under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires the recognition of compensation expense based on estimated fair values determined on the date of grant for all share-based awards granted, modified or cancelled as of January 1, 2006 (the effective date). Prior to the effective date, the Company
recorded compensation for share-based awards under the LTIP in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its related interpretations and adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Stock-Based Compensation” (“SFAS 123”). APB 25 required expense to be recorded for options granted with an exercise price lower than the fair market value of the Company’s Common stock on the date of grant.
The Company adopted SFAS No. 123R as of January 1, 2006, using the modified prospective application. Under this method, all equity-based compensation awarded after the adoption date has been determined under the fair value provisions of SFAS No. 123R. Additionally, for all equity-based compensation awarded prior to the adoption date, compensation for the portion of awards for which the requisite service is performed after the adoption date is recognized as service is rendered.
For the year ended December 31, 2007, the Company recognized $350,000 of compensation expense for stock options granted under the LTIP. At December 31, 2007, there was $200,000 remaining in unrecognized compensation cost related to stock options under the LTIP which is expected to be recognized over a weighted average period of 1.5 years.
The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes option-pricing method (Black-Scholes method), which was also used for the pro-forma information required to be disclosed under SFAS 123. The determination of fair value using this model requires the use of certain estimates and assumptions that affect the reported amount of share-based compensation cost recognized in the Company’s Statements of Operations. These include estimates of the expected term of share-based awards, 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 employs different assumptions in its application of SFAS 123R in future periods.
For share-based awards issued during the year ended December 31, 2007, the expected term was estimated by using peer company information as 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, as any future earnings are expected to be used in
22
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the development and expansion of the business or for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of the Board of Directors and will depend upon the Company’s results of operations, financial condition, financial covenants, tax laws and other factors as the Board of Directors, in its discretion, deems relevant. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
In certain select cases, the Company has issued warrants, outside the LTIP, to service providers in exchange for the performance of consulting or other services. These warrants have generally been immediately vesting and expense was recognized equal to the fair value of the warrant on the date of grant using the Black-Scholes model. The same assumptions (and related risks) as discussed above apply, with the exception of the expected term. For these warrants issued to service providers, the Company estimates that the warrant will be held for the full term. For the year ended December 31, 2007, the Company recognized $1,014,000 of compensation expense
for warrants issued to service providers. At December 31, 2007, there was $92,000 remaining in unrecognized compensation cost related to unvested warrants which is expected to be recognized in 2008, subject to revaluation upon vesting per EITF 96-18 “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Lump-sum Payments from Settlement Agreements
Under certain agreements, Cytomedix has been entitled to receive lump sum payments. If the lump sum payment is deemed to be an inducement to enter into an agreement, and is applicable to some future period, then this amount is recorded as deferred revenue and amortized to revenue on a straight line basis over the course of the agreement. If the lump-sum payment is deemed to be in settlement of prior infringement of Cytomedix’s patents by the other party, then the lump sum, net of any associated fees, is recorded as non-operating income at its present value and reflected in the Patent litigation settlements, net line of the Statements of
Operations.
The determination of whether a lump sum is associated with prior infringement or is part of an inducement to enter an agreement requires judgment by the Company. A number of factors must be considered including evidence of prior sales by the other party, nature of negotiations and/or court proceedings, accounting treatment by the other party. Each agreement requires a unique assessment to determine the true nature of the lump sum payment. Further, any future lump sums deemed a settlement of past infringement will be reflected in Operating Income.
In 2007, the Company recorded $11,000 (net of associated costs) in non-operating income associated with infringement settlements and added an additional $250,000 to deferred revenues to be recognized as revenue through November 2009.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB agreed to delay the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The
Company is currently evaluating the effect that the adoption of SFAS 157 will have on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its results of operations and financial position.
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In December 2007, FASB issued SFAS No. 160 (“SFAS 160”), Interests in Consolidated Financial Statements — an amendment of ARB No. 51, which impacts the accounting for minority interest in the consolidated financial statements of filers. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial position. However, the adoption of SFAS 160 is not expected to have a material impact on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 141R (“SFAS 141R”), Business Combinations, which impacts the accounting for business combinations. The statement requires changes in the measurement of assets and liabilities required in favor of a fair value method consistent with the guidance provided in SFAS 157 (see above). Additionally, the statement requires a change in accounting for certain acquisition related expenses and business adjustments which no longer are considered part of the purchase price. Adoption of this standard is required for fiscal years beginning after December 15, 2008. Early adoption of this standard is not permitted. The
statement requires prospective application for all acquisitions after the date of adoption. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial position. However, the adoption of SFAS 141R is not expected to have a material impact on the Company’s financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not enter into financial instruments for speculation or trading purposes. In accordance with the Company’s investment policy, cash is to be invested in bank and institutional money market funds, or in T-Bills or short-term T-Notes. At December 31, 2007, the Company’s cash balance of approximately $5.1 million was maintained primarily in bank and institutional money market accounts. These accounts are sensitive to changes in the general level of interest rates. Based on the Company’s cash balances at December 31, 2007, a 100 basis point increase or decrease in interest rates would have an approximately $51,000 impact on
the Company’s annual interest income and net loss. Actual changes in rates may differ from the hypothetical assumption used in computing this exposure.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cytomedix Inc.
In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Cytomedix, Inc. at December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the year ended December 31, 2007 presents fairly, in all material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
McLean, Virginia
March 25, 2008
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Cytomedix, Inc.
Rockville, Maryland
We have audited the accompanying balance sheet of Cytomedix, Inc. as of December 31, 2006, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2006 and the financial statement schedule appearing under Item 15(a)(2) for 2006 and 2005. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cytomedix, Inc. as of December 31, 2006 and its results of operations, changes in stockholders’ equity and its cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) for the two years ended December 31, 2006 present fairly, in all material respects, the information set forth therein when read in conjuction with the
related financial statements.
L J SOLDINGER ASSOCIATES, LLC
Deer Park, Illinois, USA
February 23, 2007 (except as to Notes 2, 11, 12
and 13, which are as of November 13, 2007)
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CYTOMEDIX, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31,
2006
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,136,446
|
|
|
$
|
4,662,199
|
|
|
Accounts and royalties receivable, net
|
|
|
356,062
|
|
|
|
548,269
|
|
|
Patent settlements receivable, current portion
|
|
|
382,997
|
|
|
|
437,112
|
|
|
Prepaid expenses, inventory, and other current assets
|
|
|
238,148
|
|
|
|
155,356
|
|
|
Total current assets
|
|
|
6,113,653
|
|
|
|
5,802,936
|
|
|
Patent settlements receivable
|
|
|
193,978
|
|
|
|
574,072
|
|
|
Property and equipment, net
|
|
|
20,242
|
|
|
|
11,759
|
|
|
Patents, net
|
|
|
1,672,483
|
|
|
|
1,823,384
|
|
|
Goodwill
|
|
|
2,021,623
|
|
|
|
2,021,623
|
|
|
Total assets
|
|
$
|
10,021,979
|
|
|
$
|
10,233,774
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
948,297
|
|
|
$
|
1,216,135
|
|
|
Deferred revenues, current portion
|
|
|
215,285
|
|
|
|
99,900
|
|
|
Dividends payable on Series A and Series B preferred stock
|
|
|
14,050
|
|
|
|
18,236
|
|
|
Total current liabilities
|
|
|
1,177,632
|
|
|
|
1,334,271
|
|
|
Deferred revenues
|
|
|
197,344
|
|
|
|
191,475
|
|
|
Other liabilities
|
|
|
19,400
|
|
|
|
185,000
|
|
|
Total liabilities
|
|
|
1,394,376
|
|
|
|
1,710,746
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Series A Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2007 and 2006 issued and outstanding – 92,837 and 365,970 shares, respectively, liquidation preference of $92,837 and $365,970, respectively
|
|
|
9
|
|
|
|
37
|
|
|
Series B Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2007 and 2006 issued and outstanding – 85,405 and 83,431 shares, respectively, liquidation preference of $85,405 and $83,431, respectively
|
|
|
9
|
|
|
|
8
|
|
|
Series C Convertible preferred stock; $.0001 par value, authorized 1,000,000 shares; 2007 and 2006 issued and outstanding – 0.0 shares
|
|
|
—
|
|
|
|
—
|
|
|
Common stock; $.0001 par value, authorized 65,000,000 shares; 2007 issued and outstanding – 31,926,788 shares; 2006 issued and outstanding – 28,987,670 shares
|
|
|
3,193
|
|
|
|
2,899
|
|
|
Subscriptions receivable
|
|
|
—
|
|
|
|
(620,000
|
)
|
|
Additional paid-in capital
|
|
|
40,026,574
|
|
|
|
35,471,569
|
|
|
Accumulated deficit
|
|
|
(31,402,182
|
)
|
|
|
(26,331,485
|
)
|
|
Total stockholders' equity
|
|
|
8,627,603
|
|
|
|
8,523,028
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
10,021,979
|
|
|
$
|
10,233,774
|
|
The accompanying notes are an integral part of these financial statements.
27
TABLE OF CONTENTS
CYTOMEDIX, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
61,009
|
|
|
$
|
204,525
|
|
|
$
|
266,876
|
|
|
Royalties
|
|
|
1,882,269
|
|
|
|
1,743,630
|
|
|
|
1,247,549
|
|
|
Total revenues
|
|
|
1,943,278
|
|
|
|
1,948,155
|
|
|
|
1,514,425
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
5,864
|
|
|
|
94,258
|
|
|
|
115,956
|
|
|
Cost of royalties
|
|
|
844,421
|
|
|
|
920,327
|
|
|
|
765,368
|
|
|
Total cost of revenues
|
|
|
850,285
|
|
|
|
1,014,585
|
|
|
|
881,324
|
|
|
Gross profit
|
|
|
1,092,993
|
|
|
|
933,570
|
|
|
|
633,101
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
1,634,471
|
|
|
|
2,163,275
|
|
|
|
2,812,073
|
|
|
Consulting expenses
|
|
|
243,951
|
|
|
|
186,964
|
|
|
|
206,181
|
|
|
Consulting expenses – related party
|
|
|
—
|
|
|
|
35,000
|
|
|
|
185,764
|
|
|
Professional fees
|
|
|
2,929,412
|
|
|
|
763,912
|
|
|
|
1,018,779
|
|
|
Royalty expenses – related party
|
|
|
—
|
|
|
|
75,000
|
|
|
|
75,000
|
|
|
Clinical trial related expenses
|
|
|
—
|
|
|
|
62,052
|
|
|
|
1,588,916
|
|
|
General and administrative expenses
|
|
|
1,638,156
|
|
|
|
1,551,386
|
|
|
|
2,095,001
|
|
|
Total operating expenses
|
|
|
6,445,990
|
|
|
|
4,837,589
|
|
|
|
7,981,714
|
|
|
Loss from operations
|
|
|
(5,352,997
|
)
|
|
|
(3,904,019
|
)
|
|
|
(7,348,613
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
296,880
|
|
|
|
244,595
|
|
|
|
101,564
|
|
|
Contract settlement and other gain (expense)
|
|
|
7,078
|
|
|
|
4,406
|
|
|
|
(206,159
|
)
|
|
Patent litigation settlements, net
|
|
|
11,170
|
|
|
|
1,647,307
|
|
|
|
1,047,244
|
|
|
Total other income
|
|
|
315,128
|
|
|
|
1,896,308
|
|
|
|
942,649
|
|
|
Loss before provision for income taxes
|
|
|
(5,037,869
|
)
|
|
|
(2,007,711
|
)
|
|
|
(6,405,964
|
)
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net loss
|
|
|
(5,037,869
|
)
|
|
|
(2,007,711
|
)
|
|
|
(6,405,964
|
)
|
Preferred dividend on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
26,121
|
|
|
|
29,052
|
|
|
|
43,769
|
|
|
Series B preferred stock
|
|
|
6,707
|
|
|
|
7,131
|
|
|
|
18,882
|
|
|
Series C preferred stock
|
|
|
—
|
|
|
|
178
|
|
|
|
22,251
|
|
|
Net loss to common stockholders
|
|
$
|
(5,070,697
|
)
|
|
$
|
(2,044,072
|
)
|
|
$
|
(6,490,866
|
)
|
Loss per common share –
Basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.27
|
)
|
Weighted average shares outstanding –
Basic and diluted
|
|
|
29,822,574
|
|
|
|
27,470,781
|
|
|
|
24,428,653
|
|
The accompanying notes are an integral part of these financial statements.
28
TABLE OF CONTENTS
CYTOMEDIX, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Deferred
Compensation
|
|
Subscriptions
Receivable
|
|
Accumulated
Deficit
|
|
Total Stockholders Equity
|
|
|
|
Common Stock
|
|
Series A Preferred
|
|
Series B Preferred
|
|
Series C Preferred
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balance at January 1, 2005
|
|
|
21,500,837
|
|
|
$
|
2,151
|
|
|
|
1,575,784
|
|
|
$
|
157
|
|
|
|
1,387,042
|
|
|
$
|
138
|
|
|
|
84
|
|
|
$
|
—
|
|
|
$
|
25,822,088
|
|
|
$
|
(662,775
|
)
|
|
$
|
(831,599
|
)
|
|
$
|
(17,796,547
|
)
|
|
$
|
6,533,613
|
|
|
Receipt of subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
832,465
|
|
|
|
—
|
|
|
|
832,465
|
|
|
Interest earned on subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(866
|
)
|
|
|
—
|
|
|
|
(866
|
)
|
|
Common stock issued upon conversion of Series A stock
|
|
|
418,219
|
|
|
|
42
|
|
|
|
(1,253,046
|
)
|
|
|
(125
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock issued upon conversion of Series B stock
|
|
|
435,380
|
|
|
|
44
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,308,773
|
)
|
|
|
(131
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
87
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock issued upon conversion of Series C stock
|
|
|
839,500
|
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(84
|
)
|
|
|
—
|
|
|
|
(84
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividend issued on Series A and Series B stock (paid in Common stock on those preferred shares converted during the year)
|
|
|
27,871
|
|
|
|
3
|
|
|
|
25,118
|
|
|
|
2
|
|
|
|
6,335
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166,061
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166,067
|
|
Common stock issued upon exercise of
Class A warrants
|
|
|
42,500
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42,496
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42,500
|
|
Common stock issued upon exercise of
Class B warrants
|
|
|
449,233
|
|
|
|
45
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
673,805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
673,850
|
|
|
Common stock issued upon cashless exercise of 94,171 Class B warrants
|
|
|
57,775
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stock issued upon exercise of
Class C-1 warrants
|
|
|
462,900
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
694,304
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
694,350
|
|
Common stock issued upon exercise of
Class C-2 warrants
|
|
|
478,700
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
718,002
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
718,050
|
|
|
Common stock issued upon exercise of Long-term Incentive Plan options
|
|
|
252,000
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367,475
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367,500
|
|
Common stock issued upon exercise of
Unit Offering warrants
|
|
|
250,000
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
374,975
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
375,000
|
|
Common stock issued upon exercise of
other warrants
|
|
|
202,975
|
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
327,955
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
327,975
|
|
|
Common stock issued upon cashless exercise of 958,732 other warrants
|
|
|
667,215
|
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(67
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock issued for settlement of bankruptcy-related lawsuit
|
|
|
65,000
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227,494
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227,500
|
|
|
Common stock issued in lieu of cash for fees earned by executive recruiters
|
|
|
8,673
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
Options granted under the Long-Term Incentive Plan to Management, Board of Directors,
and Advisors
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
193,669
|
|
|
|
(193,669
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Revaluation of options issued to William Allender in connection with severance agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
798,262
|
|
|
|
(798,262
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrants granted to consultants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
476,735
|
|
|
|
(476,735
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of deferred compensation related to options and warrants issued for services rendered by –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,516,954
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,516,954
|
|
|
Other parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
426,562
|
|
|
|
—
|
|
|
|
—
|
|
|
|
426,562
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,490,866
|
)
|
|
|
(6,490,866
|
)
|
|
Balance at December 31, 2005
|
|
|
26,158,778
|
|
|
$
|
2,617
|
|
|
|
347,856
|
|
|
$
|
34
|
|
|
|
84,604
|
|
|
$
|
8
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
30,918,333
|
|
|
$
|
(187,925
|
)
|
|
$
|
—
|
|
|
$
|
(24,287,413
|
)
|
|
$
|
6,445,654
|
|
29
TABLE OF CONTENTS
CYTOMEDIX, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Deferred
Compensation
|
|
Subscriptions
Receivable
|
|
Accumulated
Deficit
|
|
Total Stockholders Equity
|
|
|
|
Common Stock
|
|
Series A Preferred
|
|
Series B Preferred
|
|
Series C Preferred
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Correction of share balance
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,115
|
)
|
|
|
—
|
|
|
|
743
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reclassification pursuant to adoption of
SFAS No. 123R
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(187,925
|
)
|
|
|
187,925
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock issued upon conversion of Series A stock
|
|
|
303
|
|
|
|
—
|
|
|
|
(909
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock issued upon conversion of Series B stock
|
|
|
3,003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,010
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividend issued on Series A and Series B stock
|
|
|
—
|
|
|
|
—
|
|
|
|
28,138
|
|
|
|
3
|
|
|
|
7,094
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,228
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,232
|
|
Common stock issued upon exercise of
Class B warrants
|
|
|
22,500
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,748
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,750
|
|
Common stock issued upon exercise of
Class C-1 warrants
|
|
|
548,900
|
|
|
|
55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
823,295
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
823,350
|
|
Common stock issued upon exercise of
Class C-2 warrants
|
|
|
21,750
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,623
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,625
|
|
|
Common stock issued upon exercise of Long-term Incentive Plan options
|
|
|
79,200
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,800
|
|
Common stock issued upon exercise of
Unit Offering warrants
|
|
|
1,355,166
|
|
|
|
135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,032,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,032,750
|
|
Common stock issued upon exercise of
other warrants
|
|
|
23,070
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,068
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,070
|
|
|
Common stock to be released upon full payment of other warrants exercised
|
|
|
775,000
|
|
|
|
78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
774,922
|
|
|
|
—
|
|
|
|
(697,500
|
)
|
|
|
—
|
|
|
|
77,500
|
|
|
Collections on subscriptions receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77,500
|
|
|
|
—
|
|
|
|
77,500
|
|
|
Expiration of Series C-1 and Unit Offering warrants, payable at $0.01 per called warrant not exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,368
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,368
|
)
|
Stock-based compensation related to options and warrants issued for services rendered
by –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees and Directors
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
743,636
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
743,636
|
|
|
Other parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,601
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,601
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,044,072
|
)
|
|
|
(2,044,072
|
)
|
|
Balance at December 31, 2006
|
|
|
28,987,670
|
|
|
$
|
2,899
|
|
|
|
365,970
|
|
|
$
|
37
|
|
|
|
83,431
|
|
|
$
|
8
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
35,471,569
|
|
|
$
|
—
|
|
|
$
|
(620,000
|
)
|
|
$
|
(26,331,485
|
)
|
|
$
|
8,523,028
|
|
30
TABLE OF CONTENTS
CYTOMEDIX, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Deferred
Compensation
|
|
Subscriptions
Receivable
|
|
Accumulated
Deficit
|
|
Total Stockholders Equity
|
|
|
|
Common Stock
|
|
Series A Preferred
|
|
Series B Preferred
|
|
Series C Preferred
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Common stock issued upon conversion of Series A stock
|
|
|
95,969
|
|
|
|
10
|
|
|
|
(303,301
|
)
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock issued upon conversion of Series B stock
|
|
|
1,624
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,872
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividend issued on Series A and Series B stock
|
|
|
—
|
|
|
|
—
|
|
|
|
30,168
|
|
|
|
3
|
|
|
|
6,846
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,014
|
|
Common stock issued upon exercise of
Class C-2 warrants
|
|
|
105,000
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,489
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,500
|
|
|
Common stock to be released upon full payment of Class C-2 warrants exercised
|
|
|
750,000
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,124,925
|
|
|
|
—
|
|
|
|
(843,750
|
)
|
|
|
—
|
|
|
|
281,250
|
|
|
Common stock issued upon exercise of Long-term Incentive Plan options
|
|
|
72,025
|
|
|
|
7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,993
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,000
|
|
Common stock issued upon exercise of
Unit Offering warrants
|
|
|
12,500
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,749
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,750
|
|
Common stock issued upon exercise of
other warrants
|
|
|
602,000
|
|
|
|
60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
661,940
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
662,000
|
|
|
Common stock issued to outside patent counsel for waiver of future contingent legal fees and satisfaction of existing liabilities
|
|
|
1,300,000
|
|
|
|
130
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,143,870
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,144,000
|
|
|
Proceeds from amendment to terms of consultant warrant agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
Collections on subscriptions receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,463,750
|
|
|
|
—
|
|
|
|
1,463,750
|
|
Stock-based compensation related to options and warrants issued for services rendered by—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees and Directors
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
350,042
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
350,042
|
|
|
Other parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,014,966
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,014,966
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,070,697
|
)
|
|
|
(5,070,697
|
)
|
|
Balance at December 31, 2007
|
|
|
31,926,788
|
|
|
$
|
3,193
|
|
|
|
92,837
|
|
|
$
|
9
|
|
|
|
85,405
|
|
|
$
|
9
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
40,026,574
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(31,402,182
|
)
|
|
$
|
8,627,603
|
|
31
TABLE OF CONTENTS
CYTOMEDIX, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,037,869
|
)
|
|
$
|
(2,007,711
|
)
|
|
$
|
(6,405,964
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
157,927
|
|
|
|
197,194
|
|
|
|
224,274
|
|
Stock-based compensation – consultants and other
|
|
|
1,014,966
|
|
|
|
136,601
|
|
|
|
516,007
|
|
|
Stock-based compensation – employees and directors
|
|
|
350,042
|
|
|
|
743,636
|
|
|
|
1,427,509
|
|
|
Stock issued to outside patent counsel
|
|
|
981,480
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock issued for contract settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
227,500
|
|
|
Stock issued for consulting services
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
Gain on disposal of assets
|
|
|
(1,600
|
)
|
|
|
(4,348
|
)
|
|
|
(16,609
|
)
|
|
Interest earned on stock subscriptions outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
(866
|
)
|
|
Change in current assets
|
|
|
163,530
|
|
|
|
(472,821
|
)
|
|
|
(78,305
|
)
|
|
Change in patent settlements receivable
|
|
|
380,094
|
|
|
|
(542,110
|
)
|
|
|
(31,962
|
)
|
|
Change in accounts payable and accrued expenses
|
|
|
(190,818
|
)
|
|
|
165,659
|
|
|
|
35,294
|
|
|
Change in deferred revenues
|
|
|
121,254
|
|
|
|
(62,270
|
)
|
|
|
(84,138
|
)
|
|
Change in other liabilities
|
|
|
(80,100
|
)
|
|
|
185,000
|
|
|
|
—
|
|
|
Net cash used in operating activities
|
|
|
(2,141,094
|
)
|
|
|
(1,661,170
|
)
|
|
|
(4,152,260
|
)
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(15,509
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from sale of equipment
|
|
|
1,600
|
|
|
|
4,500
|
|
|
|
38,775
|
|
|
Decrease in restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
21,375
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(13,909
|
)
|
|
|
4,500
|
|
|
|
60,150
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common and preferred stock, net
|
|
|
620,000
|
|
|
|
—
|
|
|
|
832,465
|
|
|
Proceeds from option and warrant exercises
|
|
|
1,974,250
|
|
|
|
3,219,345
|
|
|
|
3,199,227
|
|
|
Proceeds from amendment of warrant terms
|
|
|
35,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Payment for expiration of called warrants
|
|
|
—
|
|
|
|
(13,368
|
)
|
|
|
—
|
|
|
Dividends paid
|
|
|
—
|
|
|
|
(11,035
|
)
|
|
|
(90,589
|
)
|
|
Net cash provided by financing activities
|
|
|
2,629,250
|
|
|
|
3,194,942
|
|
|
|
3,941,103
|
|
|
Net increase (decrease) in cash
|
|
|
474,247
|
|
|
|
1,538,272
|
|
|
|
(151,007
|
)
|
|
Cash, beginning of period
|
|
|
4,662,199
|
|
|
|
3,123,927
|
|
|
|
3,274,934
|
|
|
Cash, end of period
|
|
$
|
5,136,446
|
|
|
$
|
4,662,199
|
|
|
$
|
3,123,927
|
|
32
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Description of the Business
Cytomedix is a biotechnology company that develops, sells, and licenses autologous cellular therapies (i.e., therapies using the patient’s own body products), including AutoloGel
TM
, a platelet rich plasma (“PRP”) gel cleared by the Food and Drug Administration (“FDA”) for use on a wide variety of open cutaneous wounds. To create AutoloGel
TM
, the patient’s own platelets and plasma are separated through centrifugation and combined with several reagents. This process releases multiple growth factors from the platelets, creates a fibrin matrix scaffold, and forms a gel that is
topically applied to a wound. Upon topical application, the Company believes that AutoloGel
TM
initiates a reaction that closely mimics the body’s natural healing process. Cytomedix sells its products primarily to health care providers in the United States and licenses its patents to medical device and product suppliers in the United States. The Company was incorporated in the State of Delaware on April 29, 1998, and has its headquarters in Rockville, Maryland.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Certain financial information is based on fresh-start accounting utilized upon the Company’s emergence from bankruptcy in July 2002.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Concentration of Risk
Approximately $1.6 million, $1.5 million and $1.1 million, or 81%, 77%, and 76% of the Company’s revenue in the years ended December 31, 2007, 2006 and 2005 respectively, were generated from royalties from three licensees. By licensee, these percentages were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Company A
|
|
|
26
|
%
|
|
|
28
|
%
|
|
|
42
|
%
|
|
Company B
|
|
|
26
|
%
|
|
|
21
|
%
|
|
|
12
|
%
|
|
Company C
|
|
|
29
|
%
|
|
|
27
|
%
|
|
|
21
|
%
|
Should any of these licensees experience a significant decrease in the sales of products covered by its license agreement with Cytomedix, there may be a material adverse effect on Cytomedix’s results of future operations.
As of December 31, 2007 and 2006, the Company maintained approximately $421,000 and $225,000 respectively, in financial institutions in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance. In addition, approximately $4,115,000 and $3,973,000 held in money market accounts at brokerage firms were in excess of the $500,000 Securitites Investor Protection Corporation (“SIPC”) coverage as of December 31, 2007 and 2006, respectively. These amounts not covered by SIPC were insured by the Company’s brokerage firm through the Customer Asset Protection Company (“CAPCO”). CAPCO would cover losses in the event of
the financial failure and liquidation of the financial institution that houses the Company’s institutional money market investments, however does not ensure against losses due to market fluctuations.
The Company currently has one product that is presently marketed. Significant changes in technology could lead to new products or services that compete with the product offered by the Company. These changes could materially affect the price of the Company’s product or render it obsolete. The Company outsources manufacturing for all the components of its offerings. While the Company utilizes single suppliers for several
33
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
components of the AutoloGel offering, such components are readily available on the open market and therefore no dependency exists. The one exception is a reagent, bovine thrombin, available exclusively through King Pharmaceuticals.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Accounts and Royalties Receivable
Cytomedix generates accounts receivable from the sale of its products. Cytomedix provides for a reserve against receivables for estimated losses that may result from a customer’s inability or unwillingness to pay. The allowance for doubtful accounts is estimated primarily based upon historical write-off percentages, known problem accounts, and current economic conditions. Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are not collectable. Recoveries of previously written-off accounts are recorded when collected. Royalties receivable represent current royalties earned on sales of
covered product by licensees.
Inventory
Inventory is stated at the lower of cost or net realizable value. Inventory consists exclusive of finished goods. Cost is determined on a first-in-first-out (FIFO) basis. The Company’s primary product is a kit, composed of multiple items. Certain items within the kits have shelf lives of approximately two years. The Company also maintains an inventory of reagents that have shelf lives that generally range from 10 months to 2 years. Expired products are segregated and used for demonstration purposes only; the Company maintains a full reserve on expired products.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and is depreciated, using the straight-line method, over their estimated useful lives ranging from three to four years for all assets except for furniture which is depreciated over seven years. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income and expense.
Centrifuges may be sold, leased, or placed at no charge with customers.
Intangible Assets
The Company capitalizes the costs of purchased and internally developed patents. This cost is amortized via the straight-line method over the remaining life of the patents. The Company accounts for finite-lived intangibles under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and therefore reviews the recoverability of long-lived and finite-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. The Company follows the guidance of SFAS No. 142, “Goodwill and Other Intangible Assets,” with regard to its indefinite-lived intangibles. SFAS No. 142
requires that goodwill be assessed at least annually for impairment by applying a fair value based test. This evaluation has been performed for 2007, 2006 and 2005, based on the Market and Income Approaches. In the event these analyses indicate an impairment, the Company would record an impairment loss, if any, based on the fair value of the assets. No impairment of intangible assets was recorded in 2007, 2006 or 2005.
Income Taxes
Deferred income taxes reflect the net tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to
34
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
reverse. No provision for income taxes has been recorded as there are no taxes payable due to the Company’s significant net operating loss carryforwards. Because the Company has determined that the realization of future benefit from the net operating losses is not assured, the Company has reserved for the entire remaining benefit.
As of January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2003 through 2006 tax years. The Company believes that its income tax
filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.
The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items during the periods covered in this report.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended. SAB 101 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) collectibility is reasonably assured.
Revenue from the sale of the Company’s products to distributors and caregivers is recognized upon shipment of product to customer. Revenue from the sale of the Company’s products to patients is recognized upon use of the product on the patient or acknowledgement from a patient’s insurer authorizing treatment, whichever is later. The Company does not maintain a reserve for returned products as, historically, these amounts have been negligible.
Percentage based fees on licensee sales of covered products are generally recorded as products are sold by licensees and are reflected as Revenues in the Royalties line of the Statements of Operations. Under certain agreements, Cytomedix has received lump sum payments. If the lump sum payment is deemed to be an inducement to enter into an agreement, and is applicable to some future period, then this amount is recorded as deferred revenue and amortized to revenue on a straight line basis over the course of the agreement. If the lump-sum payment is deemed to be in settlement of prior infringement of Cytomedix’s patents by the other party, then the
lump sum, net of any associated fees, has been recorded as Other income at its present value and reflected in the Patent litigation settlements, net line of the Statements of Operations. The Company records revenue and settlement income related to its agreement with Perfusion Partners Associates, Inc. (“PPAI”) on the cash basis due to PPAI’s recent emergence from bankruptcy at the time of the agreement.
Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.
Stock-Based Compensation
The Company recorded approximately $2,346,000, $880,000, and $2,206,000 in expense associated with stock-based payments for the years ended December 31, 2007, 2006, and 2005, respectively. The Company from time to time, may issue compensatory stock options to employees, consultants, and other service providers under its Long-Term Incentive Plan (see Note 13). In some cases, it has issued warrants to service providers outside the Long-Term Incentive Plan (see Note 12).
35
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
The Company adopted SFAS No. 123R, “Share-Based Payment,” as of January 1, 2006, using the modified prospective application. Under this method, all equity-based compensation awarded after the adoption date has been determined under the fair value provisions of SFAS No. 123R. Additionally, for all equity-based compensation awarded prior to the adoption date, compensation for the portion of awards for which the requisite service is performed after the adoption date is recognized as service is rendered.
The Company’s policy is to issue new shares of its Common stock when employees or service providers exercise options awarded under its Long-Term Incentive Plan. See Note 13 to the Financial Statements.
As permitted under SFAS No. 123, the Company applied the intrinsic value method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock-based grants to employees and directors in 2005. Under the “intrinsic value” method, an option’s value is the excess of the market price of the underlying stock on the date of grant over the exercise price of the option. No value is attributed to the option if its exercise price is greater than the stock’s market price.
Under the fair value method prescribed by SFAS 123R, the Company recorded $350,000 and $744,000, net of income taxes, in employee and director stock-based compensation for the years ended December 31, 2007 and 2006, respectively. Had compensation expense for the year ended December 31, 2005 been determined under the fair value provisions of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” the Company’s net loss and loss per share to Common shareholders would have differed as follows:
|
|
|
|
|
|
|
2005
|
|
Net loss to common stockholders, as reported
|
|
$
|
(6,490,866
|
)
|
Add:
|
|
|
|
|
|
Stock-based employee compensation expense included in reported net loss determined under APB No. 25, net of related tax effects
|
|
|
540,418
|
|
Deduct:
|
|
|
|
|
|
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
|
|
|
(1,314,437
|
)
|
|
Pro forma net loss
|
|
$
|
(7,264,885
|
)
|
Loss per share:
|
|
|
|
|
|
Basic and diluted – as reported
|
|
$
|
(0.27
|
)
|
|
Basic and diluted – pro forma
|
|
$
|
(0.30
|
)
|
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options would be amortized to expense over the vesting period and additional options may be issued in future years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted-average assumptions used in the model are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Risk free rate
|
|
|
4.86
|
%
|
|
|
4.73
|
%
|
|
|
4.40
|
%
|
|
Expected years until exercise
|
|
|
8.6
|
|
|
|
10.0
|
|
|
|
8.1
|
|
|
Expected stock volatility
|
|
|
111
|
%
|
|
|
113
|
%
|
|
|
114
|
%
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected volatilities are based on historical volatility of the Company’s stock. Due to the Company’s short operating history, it uses peer company data to estimate option exercise and employee termination within the
36
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
valuation model. The expected years until exercise represents the period of time that options are expected to be outstanding and was estimated by using peer company information as Cytomedix’s history is limited. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated that the dividend rate on its Common stock will be zero.
Loss per Share
Loss per share is calculated in accordance with SFAS No. 128, “Earnings Per Share.” Basic loss per share is computed based upon the weighted average number of shares of Common stock outstanding for the period and excludes any potential dilution. Diluted earnings per share reflects potential dilution from the exercise of securities into Common stock. Outstanding options and warrants to purchase Common stock are not included in the computation of diluted earnings per share because the effect of these instruments would be anti-dilutive (i.e. would reduce the loss per share). The Common shares potentially issuable upon the exercise of these
instruments, were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Options
|
|
|
3,294,687
|
|
|
|
3,226,762
|
|
|
|
2,825,727
|
|
|
Warrants
|
|
|
4,385,433
|
|
|
|
4,745,301
|
|
|
|
8,498,988
|
|
|
Series A Preferred Stock
|
|
|
30,946
|
|
|
|
121,990
|
|
|
|
115,580
|
|
|
Series B Preferred Stock
|
|
|
28,468
|
|
|
|
27,810
|
|
|
|
28,458
|
|
|
|
|
|
7,739,534
|
|
|
|
8,121,863
|
|
|
|
11,468,753
|
|
Defined Contribution Plans
The Company sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code covering substantially all full-time U.S. employees. Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal tax regulations. Participants are always fully vested in their contributions. Beginning in 2007, the Company modified its plan and began making employer matching contributions, which also vest immediately. This plan is designated as a “Safe Harbor” plan. During 2007, the Company contributed approximately $39,000 in cash to the plan.
Fair Value of Financial Instruments
The carrying value of current assets and liabilities approximates fair value due to their relatively short maturities.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its results of operations and financial position.
37
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
In December 2007, FASB issued SFAS No. 160 (“SFAS 160”), Interests in Consolidated Financial Statements — an amendment of ARB No. 51, which impacts the accounting for minority interest in the consolidated financial statements of filers. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial position. However, the adoption of SFAS 160 is not expected to have a material impact on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 141R (“SFAS 141R”), Business Combinations, which impacts the accounting for business combinations. The statement requires changes in the measurement of assets and liabilities required in favor of a fair value method consistent with the guidance provided in SFAS 157 (see above). Additionally, the statement requires a change in accounting for certain acquisition related expenses and business adjustments which no longer are considered part of the purchase price. Adoption of this standard is required for fiscal years beginning after December 15, 2008. Early adoption of this standard is not permitted. The
statement requires prospective application for all acquisitions after the date of adoption. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial position. However, the adoption of SFAS 141R is not expected to have a material impact on the Company’s financial statements.
Note 3 — Working Capital
The Company’s operating revenues do not cover the costs of its operations. The cash position of the Company at December 31, 2007 was approximately $5.1 million. The Company believes that it will have adequate cash on hand to fund operations for the year ending December 31, 2008. However, additional cash may be required if operating revenues do not materialize, the cost of operations increases, or if the Company’s efforts to obtain Centers for Medicare and Medicaid Services (“CMS”) coverage for AutoloGel
TM
prove unsuccessful and any resulting change in strategy requires significant short-term funding. The Company has no
material commitments for capital expenditures except for a commitment to purchase a minimum number of centrifuges in the first nine months of 2008 totaling approximately $50,000. Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. All working capital required to implement the Company’s business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company.
Note 4 — Patent Settlement and License Agreements
In 2005, 2006, and 2007 the Company identified and successfully pursued numerous companies that either marketed or sought to market products similar to the AutoloGel
TM
System, that the Company believed were infringing, inducing infringement of, or would infringe its intellectual property rights. Settlements have been achieved and/or licenses have been granted to these companies resulting in a royalty stream for Cytomedix.
38
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 — Patent Settlement and License Agreements – (continued)
A table of the Company’s primary settlement and license agreements, where it serves as licensor, follows below:
|
|
|
|
|
|
|
|
|
|
|
Licensee
|
|
Date of Agreement
|
|
Date of Expiration
(4)
|
|
Lump Sum
(6)
|
|
On-going Royalty Percentage
(2)
|
|
DePuy Spine, Inc.
(1)
|
|
|
3/19/2001
|
|
|
|
11/24/2009
|
|
|
$
|
750,000
|
|
|
|
6.5%
|
|
|
|
|
|
3/4/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medtronic, Inc.
|
|
|
5/1/2005
|
|
|
|
11/24/2009
|
|
|
$
|
680,000
|
|
|
|
7.5% on disposables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% on hardware
|
|
|
Harvest Technologies, Inc.
|
|
|
6/30/2005
|
|
|
|
11/24/2009
|
|
|
$
|
500,000
|
|
|
|
7.5% on disposables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% on hardware
|
|
|
Perfusion Partners and Associates, Inc.
|
|
|
6/26/2005
|
|
|
|
11/24/2009
|
|
|
$
|
250,000
|
(3)
|
|
|
10.0%
|
|
|
COBE Cardiovascular, Inc.
|
|
|
10/7/2005
|
|
|
|
11/24/2009
|
|
|
$
|
45,000
|
|
|
|
7.5% on disposables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% on hardware
|
|
|
SafeBlood Technologies, Inc.
|
|
|
10/12/2005
|
|
|
|
11/24/2009
|
|
|
$
|
50,000
|
(3)
|
|
|
8.0% to 9.0%
|
|
|
Biomet Biologics, Inc.
(5)
|
|
|
5/19/2006
|
|
|
|
11/24/2009
|
|
|
$
|
2,600,000
|
|
|
|
none
|
|
|
CellMedix, Inc.
|
|
|
11/28/2006
|
|
|
|
11/24/2009
|
|
|
$
|
30,000
|
|
|
|
9.5%
|
|
|
Smith and Nephew, Inc.
|
|
|
10/15/2007
|
|
|
|
11/24/2009
|
|
|
$
|
250,000
|
|
|
|
7.5%
|
|
|
|
(1)
|
Cytomedix has two license agreements with DePuy Spine, Inc. The original license agreement was dated March 19, 2001, amended March 3, 2005, and provides for the use of applications under Cytomedix patents in the fields of diagnostic and therapeutic spinal, neurosurgery and orthopedic surgery. The second license agreement is dated March 4, 2005, and applies to all fields not covered in the original license agreement as amended.
|
|
|
(2)
|
Certain minimum royalties may apply to certain agreements and other royalty percentages may apply to future products covered under selected license agreements.
|
|
|
(3)
|
Some of these amounts are payable over a period of time as defined in executed notes payable to Cytomedix.
|
|
|
(4)
|
These dates reflect the expiration of the license in the U.S., which coincides with the expiration of the Knighton Patent in the U.S. In some cases, the licensing agreements applicable to territories outside the U.S. extend to the expiration of the patents in the respective foreign countries.
|
|
|
(5)
|
The Settlement and License Agreement with Biomet Biologics, Inc. (“Biomet”) called for a $2.6 million payout from Biomet to Cytomedix. This payout took the form of $1.4 million payable upon execution of the agreement and $100,000 payable at the end of each of 12 consecutive quarters beginning with the quarter ending September 2006. These payments are not tied to any performance commitments by Cytomedix and are not dependent on Biomet sales.
|
|
|
(6)
|
For DePuy, CellMedix, and Smith and Nephew, the lump sum payments represent up-front fees for the prospective period from contract execution through termination that are in addition to any ongoing royalty percentage. For all other licensees, the up-front fees represent settlements for past patent infringement.
|
Under the terms of the respective agreements, lump sum payments of approximately $1,030,000 representing up-front fees to the Company were received. These up-front fees were recorded as deferred revenue and are being amortized to revenue over the life of the respective licensing agreements.
The Company was also due lump sums totaling $4,125,000 for the discharge of past obligations relating to infringement of the Company’s patents. These settlements are one-time, non-recurring transactions. Amounts
39
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 — Patent Settlement and License Agreements – (continued)
related to these settlements that are payable to the Company over time are reflected as “Patent settlements receivable, current portion” and “Patent settlements receivable” on the Balance Sheet for their current and long-term portions respectively. Associated costs, principally consisting of royalty fees payable upon the collection of such receivables, are reflected in “Accounts payable and accrued expenses” and “Other liabilities” on the Balance Sheet, for their current and long-term portions, respectively. Income related to the settlement of these past obligations, net of associated costs, are reflected as
“Patent litigation settlements, net” on the Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income
|
|
$
|
29,000
|
|
|
$
|
2,479,000
|
|
|
$
|
1,388,000
|
|
|
Costs
|
|
|
(18,000
|
)
|
|
|
(832,000
|
)
|
|
|
(341,000
|
)
|
|
Net settlement income
|
|
$
|
11,000
|
|
|
$
|
1,647,000
|
|
|
$
|
1,047,000
|
|
Due to PPAI’s recent emergence from bankruptcy, the Company records incomes when payments are received from PPAI. As of December 31, 2007, the Company had received and recorded approximately $168,000 of the agreed $250,000 settlement for past obligations from PPAI.
Certain licensees are also required to pay on-going royalties on defined classes of sales. Royalties earned after the effective dates of these agreements, together with the related costs, are included in the Statements of Operations as “Royalties” and “Cost of royalties,” respectively.
The Company has incurred expenses (excluding royalty and contingent legal fees) for patent enforcement actions of approximately $0, $1,000, and $479,000 during 2007, 2006 and 2005, respectively. These fees have primarily been included in Professional fees.
Through August 2, 2007 the Company’s ongoing patent enforcement strategy was being conducted on a full contingency basis by the law firms Fitch, Even, Tabin & Flannery and Robert F. Coleman and Associates under a three party retainer agreement. As of that date, the Company agreed with these firms to issue equity and other compensation in return for a full waiver of all future contingent fees that would be due under this agreement and also agreed to the basic terms of a new retainer agreement. In general, the new agreement provides that Cytomedix may, at its sole discretion, continue to utilize these firms, and may do so on either a contingent
or hourly basis subject to certain limitations contained in the retainer agreement. The Medtronic license agreement was handled under a separate three party retainer agreement, which remains in place.
Note 5 — Royalty Agreements
The Company is party to a Royalty Agreement with Curative Health Services, Inc. Under this agreement as amended, Curative is to receive 92% of licensing receipts from DePuy Spine, Inc. (a division of Johnson & Johnson, Inc.) and 10% of the total other amounts received by the Company in connection with upfront, milestone and other similar payments relating to the Knighton Patent. These costs are reflected in the Cost of royalties line on the Statements of Operations.
The Company is also party to a Royalty Agreement with Mr. Charles Worden. Under this agreement, the Company is to pay Mr. Worden a royalty equal to 5% of product sales, subject to a $6,250 minimum payment per month and a limit of $600,000 during any calendar year. This agreement also provides Mr. Worden with a security interest and lien in the patent as well as a reversionary interest if the Company discontinues substantially all efforts to commercialize the Worden Patent.
40
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 6 — Receivables
Accounts and royalties receivable, net consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Trade receivables
|
|
$
|
157,610
|
|
|
$
|
168,477
|
|
|
Royalty receivables
|
|
|
338,450
|
|
|
|
491,250
|
|
|
Other receivables
|
|
|
231
|
|
|
|
25,393
|
|
|
|
|
|
496,291
|
|
|
|
685,120
|
|
|
Less allowance for doubtful accounts
|
|
|
(140,229
|
)
|
|
|
(136,851
|
)
|
|
|
|
$
|
356,062
|
|
|
$
|
548,269
|
|
Bad debt expense was approximately $3,000, $62,000, and $62,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Patent settlements are one-time, non-recurring transactions negotiated by the Company for the discharge of past obligations pursuant to settlement and licensing agreements with various licensees. Patent settlements receivable are reflected at their net present value and consisted of the following remaining balances due at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Noninterest bearing:
|
|
|
|
|
|
|
|
|
|
Principal remaining, due quarterly through June 2009
|
|
$
|
600,000
|
|
|
$
|
1,100,000
|
|
Less unamortized discount based on imputed interest rate
of 8.25%
|
|
|
(41,036
|
)
|
|
|
(124,786
|
)
|
|
Net
|
|
|
558,964
|
|
|
|
975,214
|
|
|
Interest bearing principal remaining, 8.0% interest rate, due monthly through October 2008
|
|
|
18,011
|
|
|
|
35,970
|
|
|
Total
|
|
|
576,975
|
|
|
|
1,011,184
|
|
|
Current portion
|
|
|
382,997
|
|
|
|
437,112
|
|
|
Long-term portion
|
|
$
|
193,978
|
|
|
$
|
574,072
|
|
Note 7 — Prepaid Expenses, Inventory, and Other Current Assets
Prepaid expenses, other current assets and inventory consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Prepaid insurance
|
|
$
|
121,964
|
|
|
$
|
131,406
|
|
|
Prepaid fees and rent
|
|
|
12,273
|
|
|
|
12,113
|
|
|
Deposits
|
|
|
93,132
|
|
|
|
3,190
|
|
|
Inventory
|
|
|
10,779
|
|
|
|
8,647
|
|
|
|
|
$
|
238,148
|
|
|
$
|
155,356
|
|
41
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 8 — Property and Equipment
Property and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Medical equipment
|
|
$
|
262,994
|
|
|
$
|
279,660
|
|
|
Office equipment
|
|
|
48,088
|
|
|
|
74,559
|
|
|
|
|
|
311,082
|
|
|
|
354,219
|
|
|
Less accumulated depreciation
|
|
|
(290,840
|
)
|
|
|
(342,460
|
)
|
|
|
|
$
|
20,242
|
|
|
$
|
11,759
|
|
Depreciation expense was approximately $7,000, $63,000, and $98,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Note 9 — Intangible Assets
Cytomedix owns eight U.S. patents (including U.S. Patent No. 5,165,938 (the “Knighton Patent”) and U.S. Patent No. 6,303,112 (the “Worden Patent”), various corresponding foreign patents, and various trademarks. The Knighton Patent and Worden Patent expire in November 2009 and February 2019, respectively. Patents and related accumulated amortization at December 31 were as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Patents
|
|
$
|
2,400,000
|
|
|
$
|
2,400,000
|
|
|
Less accumulated amortization
|
|
|
(727,517
|
)
|
|
|
(576,616
|
)
|
|
|
|
$
|
1,672,483
|
|
|
$
|
1,823,384
|
|
Amortization expense was approximately $151,000, $135,000, and $126,000 for the years ended December 31, 2007, 2006 and 2005, respectively. The Company is amortizing the patents over the remaining lives of the patents and the Company expects amortization expense relating to its existing patents to be approximately $151,000 in each of the next five years.
Goodwill represents the excess reorganization value over the amounts allocable to identifiable assets upon the Company’s emergence from bankruptcy in 2002.
Note 10 — Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Trade payables
|
|
$
|
129,798
|
|
|
$
|
252,010
|
|
|
Accrued compensation and benefits
|
|
|
262,902
|
|
|
|
274,000
|
|
|
Accrued professional fees
|
|
|
193,000
|
|
|
|
366,051
|
|
|
Accrued royalty fees
|
|
|
360,300
|
|
|
|
298,000
|
|
|
Other payables
|
|
|
2,297
|
|
|
|
26,074
|
|
|
|
|
$
|
948,297
|
|
|
$
|
1,216,135
|
|
42
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 11 — Income Taxes
Income tax (expense) benefit for the years ended December 31, 2007, 2006 and 2005 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
930,000
|
|
|
|
340,000
|
|
|
|
797,000
|
|
|
State
|
|
|
3,000
|
|
|
|
66,000
|
|
|
|
174,000
|
|
|
Net operating loss carryforward
|
|
|
1,049,000
|
|
|
|
427,000
|
|
|
|
1,643,000
|
|
|
Valuation allowance
|
|
|
(1,982,000
|
)
|
|
|
(833,000
|
)
|
|
|
(2,614,000
|
)
|
|
Total income tax (expense) benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Significant components of Cytomedix’s deferred tax assets and liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
3,662,000
|
|
|
$
|
2,892,000
|
|
|
Other
|
|
|
239,000
|
|
|
|
166,000
|
|
|
Total deferred tax assets
|
|
|
3,901,000
|
|
|
|
3,058,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Amortization of patents
|
|
|
(521,000
|
)
|
|
|
(594,000
|
)
|
|
Other
|
|
|
1,000
|
|
|
|
(16,000
|
)
|
|
Net deferred tax assets
|
|
|
3,381,000
|
|
|
|
2,448,000
|
|
|
Net operating loss carryforwards
|
|
|
8,945,000
|
|
|
|
7,896,000
|
|
|
|
|
|
12,326,000
|
|
|
|
10,344,000
|
|
|
Less valuation allowance
|
|
|
(12,326,000
|
)
|
|
|
(10,344,000
|
)
|
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table presents a reconciliation between the U.S. federal statutory income tax rate and the Company’s effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
U.S. Federal statutory income tax
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State and local income tax benefits
|
|
|
4.0
|
%
|
|
|
6.4
|
%
|
|
|
7.2
|
%
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Nondeductible expenses
|
|
|
0.3
|
%
|
|
|
—
|
|
|
|
(1.4%)
|
|
|
Valuation allowance for deferred income tax assets
|
|
|
(39.3%)
|
|
|
|
(41.4%)
|
|
|
|
(40.8%)
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company had loss carryforwards of approximately $23,980,000 as of December 31, 2007 that may be offset against future taxable income. The carryforwards will expire between 2021 and 2027. Utilization of these carryforwards may be subject to annual limitations based upon previous significant changes in stock
43
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 11 — Income Taxes – (continued)
ownership. Management has determined that realization of this benefit is not assured and accordingly has established a valuation allowance of $12,326,000 and $10,344,000 at December 31, 2007 and 2006, respectively.
As of January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are 2003 through 2006 tax years. The Company believes that its income tax filing
positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.
Note 12 — Capital Stock
The Company has several classes of stock as described below.
Common Stock
Common stock has a par value of $.0001 per share and is limited to a maximum of 65,000,000 shares. It is subordinate to both Series A Convertible Preferred stock and Series B Convertible Preferred stock and to all other classes and series of equity securities of the Company which by their terms rank senior to it, in the event of a liquidation, dissolution, or winding up of the Company or with regard to any other rights, privileges or preferences. Each share of Common stock represents the right to one vote. Holders of Common stock are entitled to receive dividends as may be declared by the Board of Directors, subject to the limitations in the terms of
the Series A and B Convertible Preferred stock described below.
Series A Convertible Preferred Stock
Series A Convertible Preferred stock (“Series A”) has a par value of $.0001 per share and is limited to a maximum of 5,000,000 shares. It has a stated liquidation preference of $1.00 per share and preference over and rank senior to (i) Series B Convertible Preferred stock, (ii) Common stock, and (iii) all other classes and series of equity securities of the Company which by its terms do not rank senior to the Series A stock. The Series A contains a negative covenant prohibiting the Company from granting any security interest in the Company’s patents and/or future royalty streams (“Intellectual Property”). The holders of record
of shares are entitled to receive cumulative dividends at the rate of 8% of the stated liquidation preference amount per share per annum, payable quarterly in arrears. These dividends are prior and in preference to any declaration or payment of any distribution on any outstanding shares of Common stock or any other equity securities of the Company ranking junior as to the payment of dividends. Dividends are to be paid in shares of Series A or, in the sole discretion of the Board of Directors, in cash. Each share of Series A stock shall entitle the holder thereof to vote on all matters voted on by holders of Common stock of the Company voting together as a single class with the other shares entitled to vote.
Each share of Series A stock may be converted into Common stock at a conversion rate equal to 90% of the twenty-day average closing price of the Company’s Common stock, but in no case shall this price be less than $3.00 per share.
The Company may redeem Series A stock for cash at a price per share equal to 104% of the liquidation preference amount plus all accrued but unpaid dividends, by providing proper notice of not less than 10 days nor more than 60 days prior to a redemption date set by the Company.
44
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
Series B Convertible Preferred Stock
Series B Convertible Preferred stock (“Series B”) has a par value of $.0001 per share and is limited to a maximum of 5,000,000 shares. It has a stated liquidation preference of $1.00 per share, is subordinate to the Series A stock, and has preference over and ranks senior to (i) common stock, and (ii) all other classes and series of equity securities of the Company which by its terms do not rank senior to the Series B stock. The Series B contains a negative covenant prohibiting the Company from granting any security interest in the Company’s patents and/or future royalty streams (“Intellectual Property”). The holders of record
of shares are entitled to receive cumulative dividends at the rate of 8% of the stated liquidation preference amount per share per annum, payable quarterly in arrears. These dividends are prior and in preference to any declaration or payment of any distribution on any outstanding shares of Common stock or any other equity securities of the Company ranking junior as to the payment of dividends. Dividends are to be paid in shares of Series B or, in the sole discretion of the Board of Directors, in cash. Each share of Series B stock shall entitle the holder thereof to vote on all matters voted on by holders of Common stock of the Company voting together as a single class with the other shares entitled to vote.
Each share of Series B stock may be converted into Common stock at a conversion rate equal to 90% of the twenty-day average closing price of the Company’s Common stock, but in no case shall this price be less than $3.00 per share. The Company may redeem Series B stock for cash at a price per share equal to 103% of the liquidation preference amount plus all accrued but unpaid dividends, by providing proper notice of not less than 10 days nor more than 60 days prior to a redemption date set by the Company.
Series C Convertible Preferred Stock
Series C Convertible Preferred stock (“Series C”) has a par value of $.0001 per share and is limited to a maximum of 1,000 shares. It has a stated liquidation preference of $10,000 per share, and ranks junior to the Series A regarding distributions upon liquidation of the Company. Series C stock ranks junior to the Series B solely with respect to the priority security interest in the Company’s Intellectual Property. The shares accrued dividends at 6% of the stated liquidation preference amount from the date of issuance and increased to 8% commencing on September 25, 2005, and were payable annually in cash or shares of Common stock at
the option of the Company. The Series C stock ranks pari passu with Series A and Series B with respect to payment of dividends. As of December 31, 2007 and 2006, no Series C remained outstanding.
Warrants and Options
The Company had the following outstanding warrants and options at December 31:
|
|
|
|
|
|
|
|
|
# Outstanding
|
|
Equity Instrument
|
|
December 31, 2007
|
|
December 31,
2006
|
|
C-2 Warrants
(1)
|
|
|
—
|
|
|
|
855,000
|
|
|
D Warrants
(2)
|
|
|
304,033
|
|
|
|
304,033
|
|
|
Unit Warrants
(3)
|
|
|
1,812,500
|
|
|
|
1,825,000
|
|
|
Fitch/Coleman Warrants
(4)
|
|
|
975,000
|
|
|
|
—
|
|
|
Other warrants
(5)
|
|
|
1,293,900
|
|
|
|
1,761,268
|
|
|
Options issued under the Long-Term Incentive Plan
(6)
|
|
|
3,294,687
|
|
|
|
3,226,762
|
|
|
|
(1)
|
These warrants were issued in connection with the Series C stock offering and were voluntarily exercisable at $1.50 per share. As of December 31, 2007 all class C-2 warrants have been exercised.
|
|
|
(2)
|
These warrants were issued in exchange for the voluntary exercise of Outstanding Warrants during the offer period ending May 1, 2006 and are voluntarily exercisable at $3.50 per share, provided that the exercise does not result in the holder owning in excess of 9.9% of the outstanding shares of the Company’s Common stock,
|
45
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
|
|
|
and expire on May 1, 2011. The Company may call up to one hundred percent (100%) of the class D warrants, provided that the Company’s Common stock must have been trading at a closing price greater than $4.50 for a period of at least ten (10) consecutive trading days prior to the date of delivery of the Call Notice, provided that the Registration Statement is then in effect and trading in the Common stock shall not have been suspended by the Securities and Exchange commission or the securities exchange or quotation system on which the Common stock is then listed or traded.
|
|
|
(3)
|
These warrants were issued in connection with the Unit offering (discussed later in this footnote), have a five year term, and are voluntarily exercisable at $1.50 per share, provided that the exercise does not result in the holder owning in excess of 9.999% of the outstanding shares of the Company’s Common stock, and expire on March 31, 2009. They provide for a cashless exercise at the option of the warrant provided that (i) the per share market price of one share of Common stock is greater than the warrant price and (ii) a registration statement for the resale of warrant stock is not in effect.
|
46
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
|
|
(4)
|
These warrants were issued in connection with August 2, 2007 Term Sheet Agreement and Shareholders’ Agreement with the Company’s outside patent counsel, Fitch Even Tabin & Flannery and The Coleman Law Firm, and have a 7.5 year term. The strike price on the warrants will be: 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 25% of the warrants each quarter beginning in the quarter that the subsequent transfer of the stock underlying the warrants is registered and 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. The shares and warrants will be issued pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, within 10 business days after the Company receives all necessary authorizations, including that from the American Stock Exchange.
|
|
|
(5)
|
These warrants were issued to placement agents, consultants, and other professional service providers in exchange for services provided. They have terms ranging from 4 to 10 years with various expiration dates through February 24, 2014 and exercise prices ranging from $1.00 to $6.00. The vesting period typically does not exceed the service period. They are voluntarily exercisable once vested. There is no call provision associated with these warrants.
|
|
|
(6)
|
These options were issued under the Company’s shareholder approved Long-Term Incentive Plan. See Note 13 for a full discussion regarding these options.
|
Activity
The Company issued 2,939,118 shares of Common stock during 2007. The following table lists the sources of and the proceeds from those issuances:
|
|
|
|
|
|
|
Source
|
|
# of Shares
|
|
Total Exercise Price
|
|
Conversion of series A convertible preferred shares
|
|
|
95,969
|
|
|
|
—
|
|
|
Conversion of series B convertible preferred shares
|
|
|
1,624
|
|
|
|
—
|
|
|
Exercise of series C-2 warrants
|
|
|
855,000
|
|
|
$
|
1,282,500
|
|
|
Exercise of unit offering warrants
|
|
|
12,500
|
|
|
$
|
18,750
|
|
|
Exercise of options issued under the Long-Term Incentive Plan
|
|
|
10,000
|
|
|
$
|
11,000
|
|
|
Cashless exercise of 100,000 options issued under the Long-Term Incentive Plan
|
|
|
62,025
|
|
|
$
|
—
|
|
|
Exercise of other warrants
|
|
|
602,000
|
|
|
$
|
662,000
|
|
|
Issuance of shares to patent counsel
|
|
|
1,300,000
|
|
|
|
—
|
|
|
Totals
|
|
|
2,939,118
|
|
|
$
|
1,974,250
|
|
The Company issued 2,828,892 shares of Common stock during 2006. The following table lists the sources of and the proceeds from those issuances:
|
|
|
|
|
|
|
Source
|
|
# of Shares
|
|
Total Exercise Price
|
|
Conversion of series A convertible preferred shares
|
|
|
303
|
|
|
$
|
—
|
|
|
Conversion of series B convertible preferred shares
|
|
|
3,003
|
|
|
$
|
—
|
|
|
Exercise of class B warrants
|
|
|
22,500
|
|
|
$
|
33,750
|
|
|
Exercise of series C-1 warrants
|
|
|
548,900
|
|
|
$
|
823,350
|
|
|
Exercise of series C-2 warrants
|
|
|
21,750
|
|
|
$
|
32,625
|
|
|
Exercise of unit offering warrants
|
|
|
1,355,166
|
|
|
$
|
2,032,750
|
|
|
Exercise of options issued under the Long-Term Incentive Plan
|
|
|
79,200
|
|
|
$
|
118,800
|
|
|
Exercise of other warrants
(1)
|
|
|
798,070
|
|
|
$
|
798,070
|
|
|
Totals
|
|
|
2,828,892
|
|
|
$
|
3,839,345
|
|
|
|
(1)
|
Proceeds include $620,000 in the form of a note receivable. See discussion below.
|
47
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
The Company has used the cash proceeds from these 2006 and 2007 issuances for general corporate purposes. The issuance of shares under the Company’s Long-Term Incentive Plan were registered by the Company’s S-8 filed on November 1, 2004. All other shares were issued in private offerings exempt from registration pursuant to Section 4(2) of the Securities Act.
In 2007, the Company granted 279,925 options to purchase the Company’s Common stock with exercise prices ranging from $0.88 to $1.50 under the Long-Term Incentive Plan (see Note 13).
On October 9, 2007, the Company issued a Call Notice to call all outstanding Series C-2 Warrants. The Series C-2 Warrant holders had until October 30, 2007 to exercise their Series C-2 Warrants. The total number of Series C-2 Warrants called was 855,000 at an exercise price of $1.50 per warrant. All eligible outstanding Series C-2 Warrants were exercised, at a total exercise price of $1,282,500. An amendment to the terms of the Series C-2 Warrant was accepted by a majority of the Series C-2 Warrant holders on October 30, 2007. This amendment allowed the holders of the Series C-2 Warrants the discretion to choose an additional method of exercising the
Warrants. In addition to the Methods of Exercise already provided in Section 2 of the warrants, the amendment allowed holders of the Series C-2 Warrants to exercise them by (i) paying 25% of the total Warrant Price (as defined in the Series C-2 Warrants) for the warrants exercised on or before October 30, 2007 (the “Down Payment”), and (ii) delivering to Cytomedix a promissory note (the “Promissory Note”) and a security agreement (“Security Agreement”) for the remainder of the Warrant Price. The Promissory Note bore an interest rate of 12% per annum and matured on November 30, 2007. Holders representing Warrants to purchase 750,000 shares elected this method of exercise, resulting in Promissory Notes totaling $734,750. All Promissory Notes arising from this Method of Exercise were collateralized by the full number of shares being exercised by the respective holders of the Series C-2 Warrants, and were paid in full as of December 31, 2007.
On October 5, 2007, pursuant to its contract with its investor relations firm, the Company granted The Wall Street Group, Inc. 125,392 warrants to purchase the Company’s Common stock. Of these 34,483 warrants vest immediately, have an exercise price of $2.90, and expire August 31, 2011. The remaining 90,909 warrants vest ratably through August 2008, have an exercise price of $1.10, and expire August 31, 2012.
On September 11, 2007, the Company issued warrants to purchase a total of 9,240 shares of common stock to the designees of System 1 Search, Inc., as partial payment of compensation due under the placement agency agreement between the Company and System 1, Search, Inc., dated December 12, 2004. The warrants vested immediately, have an exercise price of $1.15 per share, and expire on September 11, 2012.
On August 21, 2007, as required by the Certificate of Designation filed with the Delaware Secretary of State, the Company declared a stock dividend on its Series A and B Convertible Preferred shares. This dividend resulted in issuance of 30,168 and 6,846 shares of Series A and B Convertible Preferred stock, respectively.
Effective August 2, 2007, pursuant to a Term Sheet Agreement, a Shareholders’ Agreement, and a Registration Rights Agreement, with the Company’s patent counsel (discussed in Note 5 — Patent Settlement and License Agreements above), the Company paid Fitch, Even, Tabin & Flannery (“Fitch”) and The Coleman Law Firm (“Coleman”) a total of $90,000, and will issue to Fitch and Coleman a total of 1.3 million shares of the Company’s common stock (the “Shares”), and warrants to purchase an additional 975,000 shares of the Company’s common stock (the “Warrants”). The Warrants will
have a 7.5 year term. The strike price on the Warrants will be: 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 25% of the warrants each quarter beginning in the quarter that the subsequent transfer of the stock underlying the warrants is registered and the stock is trading 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. The Shares and Warrants will be issued pursuant to the exemption from registration contained in Section 4(2) of the Securities
48
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
Act of 1933, within 10 business days after the Company receives all necessary authorizations, including that from the American Stock Exchange. Pursuant to the Registration Rights Agreement, the Company filed an S-3 with the SEC on December 3, 2007. AMEX approval for listing was obtained on February 11, 2008. The Company plans to seek effectiveness of its S-3 shortly after filing of this Form 10-K for 2007.
On August 1, 2007, the Company entered into an agreement with HMA Advisors, Inc. (“HMA”), to amend certain terms of HMA's Common Stock Purchase Warrant (the “HMA Warrant”) dated July 29, 2002. As originally issued, the HMA Warrant provided HMA the right to purchase 600,000 shares of common stock at an exercise price of $1.00 per share, with an expiration date of August 7, 2007. In return for the payment of $35,000 and an increase of the exercise price from $1.00 to $1.10 per share, the Company amended the term of the HMA Warrant so that it would expire on the earlier of (i) December 31, 2007 or (ii) thirty (30) days after the date
that the Company publicly announced and/or disseminated the final decision of the Food and Drug Administration's consideration of the Company's appeal of the October 13, 2006 Non-Substantial Equivalence (“NSE”) determination letter. On October 16, 2007, HMA exercised the HMA Warrant.
Pursuant to written resolution effective July 10, 2007, the Board of Directors modified certain options previously granted to Dr. Kshitij Mohan, the Company’s Chairman and CEO, to increase the exercise price from $1.50 to $2.24. The reason for the modification is to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price results in a reduction in value of approximately $18,000, which represents the loss in value of stock options based upon the increase in the exercise price. Pursuant to the written resolution, Dr. Mohan will receive a cash award of approximately $18,000 in 2008.
Pursuant to written resolution effective July 10, 2007, the Board of Directors modified certain options previously granted to Mr. Andrew Maslan, the Company’s CFO, to increase the exercise price from $2.23 to $2.52. The reason for the modification is to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price results in a reduction in value of approximately $250, which represents the loss in value of stock options based upon the increase in the exercise price. Pursuant to the written resolution, Mr. Maslan will receive a cash award of approximately $250 in 2008.
In April 2007, the terms of the Subscription Note from FEQ Investments, Inc. were amended to accelerate a portion ($25,000) of the principal payments and extend the remainder. As amended, the final installment payment of $401,250 is due by December 31, 2007. All other terms of the note remain unchanged and in full force and effect. All principal and interest was paid as of December 31, 2007.
In 2006, the Company granted 480,735 options to purchase the Company’s Common stock with exercise prices ranging from $1.50 to $6.00 under the Long-Term Incentive Plan (see Note 13).
On October 1, 2006, FEQ Investments, Inc. (“FEQI”) exercised 775,000 consultant warrants and simultaneously entered into a Negotiable Term Promissory Note and related Security Agreement (the “Note”) with the Company in the amount of $697,500. The exercise price for these options was $1 per share or a total of $775,000. The Note provides for the exercise proceeds to be delivered to the Company in installment payments ending on February 15, 2007. The Note bears interest on the outstanding balance at 6% per year. The Company holds the stock certificate resulting from the exercise as collateral. The outstanding principal balance of
$620,000 at December 31, 2006, is reflected as an offset to Stockholder’s equity on the Balance Sheet. All principal and interest has been paid to the Company as of December 31, 2007.
On August 30, 2006, as required by the Certificate of Designation filed with the Delaware Secretary of State, the Company declared a stock dividend on its Series A and B Convertible Preferred shares. This dividend resulted in issuance of 27,869 and 7,036 shares of Series A and B Convertible Preferred stock, respectively, and the issuance of 109 shares of Common stock, in lieu of preferred shares, to prior holders of Series A and B Convertible Preferred shares that were converted to Common stock prior to the payment of the preferred dividends.
49
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
On July 31, 2006, the Company’s common stock closed above $3.00 on the American Stock Exchange for the tenth consecutive trading day. As authorized by Section 8 of the Series C-1 Warrants and the Unit Offering Warrants, Cytomedix issued a Call Notice to call all warrants that were eligible and remained outstanding. As a result of an amendment to the terms of the warrant, which was accepted by a majority of the warrantholders, the exercise period was extended, giving the warrantholders until October 20, 2006 to exercise their warrants. The total number of warrants called was 1,605,734 at an exercise price of $1.50 per warrant. Upon expiration of
the exercise period on October 20, 2006, 268,900 warrants had been exercised resulting in proceeds of approximately $403,000 to the Company. The remaining 1,336,834 unexercised warrants expired and were cancelled by the Company. Per the terms of the warrant agreements, the Company remitted $0.01 for each expired warrant, or approximately $13,000 in the aggregate.
In May 2006, the Company paid a cash dividend on Series C Convertible Preferred shares at the rate of six percent per annum, amounting to approximately $11,000. The dividends were calculated based on the number of days the shareholder held the Series C Convertible Preferred shares prior to conversion.
On May 1, 2006, the Company completed a Class D Warrant Offer whereby, for each $7.50 of Outstanding Warrants exercised by warrantholders during the offer period, the Company issued one Class D Warrant which the holder may exercise for one share of Cytomedix Common Stock at an exercise price of $3.50. These Class D Warrants have a five year term and are callable at the Company’s discretion if the closing price of the Company’s Common Stock is at least $4.50 for 10 consecutive trading days and certain other conditions are met. Through this offer, the Company received exercises of Outstanding Warrants totaling approximately $2,280,000 and
issued 304,033 Class D Warrants. These Class D Warrants carry piggyback registration rights and are included on the S-3 filed with the SEC on December 3, 2007.
In 2005, the Company granted 360,595 options to purchase the Company’s Common stock with exercise prices ranging from $1.15 to $4.20 under the Long-Term Incentive Plan (see Note 13).
On August 29, 2005, the Company entered into an agreement with The Wall Street Group, Inc. to provide services to the Company. As compensation for these services the Company agreed to issue a warrant to purchase 30,000 shares of the Company’s Common stock at an exercise price of $6.00. This warrant vested over a one year period and expires in five years.
On July 15, 2005, the Company entered into a Separation Agreement and Release with William L. Allender. Under said Separation Agreement, Mr. Allender agreed to provide consulting services to the Company as needed and to provide for a smooth transition to his successor. The Company agreed to extend the expiration date of Mr. Allender’s options to purchase Common stock and to allow cashless exercise of said options as part of his severance package. The extension of the expiration date of the options resulted in the Company recording approximately $798,000 of compensation expense in 2005.
In June 2005, the Company paid a cash dividend on Series C Convertible Preferred shares at the rate of 6% per annum, amounting to approximately $91,000. The dividends were calculated based on the number of days the shareholder held the Series C Convertible Preferred shares prior to conversion.
On June 30, 2005, as required by the Certificate of Designation filed with the Delaware Secretary of State, the Company declared a stock dividend on its Series A and B Convertible Preferred shares. This dividend resulted in the issuance of 25,685 and 6,323 shares of Series A and B Convertible Preferred shares respectively, and the issuance of 27,249 shares of Common stock as a result of the automatic conversion of preferred shares issued as dividends to prior holders of Series A and B Convertible Preferred shares who had already converted to Common stock prior to the payment of the preferred dividends.
On April 18, 2005, the Company granted to Crystal Research Associates, LLC a warrant to purchase 125,000 shares of the Company’s Common stock at an exercise price of $3.14. These options vested immediately and expire in five years.
50
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12 — Capital Stock – (continued)
On March 7, 2005, the Company granted to Kol Bio-Medical Instruments, Inc. a warrant to purchase 60,000 shares of the Company’s Common stock at an exercise price of $2.48. These options vest one year from the date of grant and expire in five years.
No dividends were declared or paid on the Company’s Common stock in any of the periods discussed in this report.
At December 31, the following amounts were accrued for dividends payable:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Series A Preferred Stock
|
|
$
|
10,739
|
|
|
$
|
14,786
|
|
|
Series B Preferred Stock
|
|
|
3,311
|
|
|
|
3,450
|
|
|
|
|
$
|
14,050
|
|
|
$
|
18,236
|
|
Note 13 — Long-Term Incentive Plan
Cytomedix has a shareholder-approved, Long-Term Incentive Plan (“LTIP”) that permits incentive awards of options, SARs, restricted stock awards, phantom stock awards, performance unit awards, dividend equivalent awards and other stock-based awards. Cytomedix may issue up to 5,000,000 shares of stock under this LTIP. At December 31, 2007, 1,209,113 shares were available for future grants. Of all options granted through December 31, 2007, 496,200 had been exercised and 3,294,687 remained outstanding. Option terms are set by the Board of Directors for each option grant, and generally vest immediately upon grant or over a period of time ranging
up to three years, are exercisable in whole or installments, and expire ten years from the date of grant. These options expire at various dates through January 25, 2018.
A summary of option activity under the LTIP as of December 31, 2007, and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2007
|
|
|
3,226,762
|
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
279,925
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(110,000
|
)
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(102,000
|
)
|
|
$
|
3.07
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
3,294,687
|
|
|
$
|
1.89
|
|
|
|
6.6
|
|
|
$
|
649,182
|
|
|
Exercisable at December 31, 2007
|
|
|
3,121,355
|
|
|
$
|
1.87
|
|
|
|
6.4
|
|
|
$
|
590,682
|
|
The following table summarizes information about stock options outstanding as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number of Outstanding Shares
|
|
Weighted Average Remaining Contract Life
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
|
$0.88 – $1.50
|
|
|
1,877,187
|
|
|
|
5.9
|
|
|
$
|
1.43
|
|
|
|
1,812,187
|
|
|
$
|
1.45
|
|
|
$1.51 – $3.00
|
|
|
1,325,000
|
|
|
|
7.5
|
|
|
$
|
2.33
|
|
|
|
1,235,001
|
|
|
$
|
2.31
|
|
|
$3.01 – $4.50
|
|
|
22,500
|
|
|
|
6.4
|
|
|
$
|
3.51
|
|
|
|
22,500
|
|
|
$
|
3.51
|
|
|
$4.51 – $6.00
|
|
|
70,000
|
|
|
|
8.0
|
|
|
$
|
5.20
|
|
|
|
51,667
|
|
|
$
|
5.19
|
|
51
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 13 — Long-Term Incentive Plan – (continued)
The weighted-average grant-date fair value of stock options granted under the LTIP during the years 2007, 2006, and 2005 was $0.93, $2.33, and $2.74, respectively. The total intrinsic value of stock options exercised under the LTIP during the fiscal years ended December 31, 2007, 2006, and 2005, was $344,000, $126,000, and $916,000, respectively.
As of December 31, 2007, there was approximately $200,000 of total unrecognized compensation cost related to nonvested stock options granted under the LTIP. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of stock options granted under the LTIP that vested during the fiscal years ended December 31, 2007, 2006, and 2005, was approximately $412,000, $1,187,000, and $1,459,000, respectively.
Pursuant to written resolution effective July 10, 2007, the Board of Directors modified certain options previously granted to Dr. Kshitij Mohan, the Company’s Chairman and CEO, to increase the exercise price from $1.50 to $2.24. The reason for the modification is to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price results in a reduction in value of approximately $18,000, which represents the loss in value of stock options based upon the increase in the exercise price. Pursuant to the written resolution, Dr. Mohan will receive a cash award of approximately $18,000 in 2008. This
modification did not result in any additional stock-based compensation.
Pursuant to written resolution effective July 10, 2007, the Board of Directors modified certain options previously granted to Mr. Andrew Maslan, the Company’s CFO, to increase the exercise price from $2.23 to $2.52. The reason for the modification is to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price results in a reduction in value of approximately $250, which represents the loss in value of stock options based upon the increase in the exercise price. Pursuant to the written resolution, Mr. Maslan will receive a cash award of approximately $250 in 2008. This modification did not result
in any additional stock-based compensation.
On July 15, 2005, the Company entered into a Separation Agreement and Release with William L. Allender. Under said Separation Agreement, Mr. Allender agreed to provide consulting services to the Company as needed. The Company agreed to extend the contractual life of 150,000 fully vested options to purchase Common stock held by Mr. Allender’s and to allow cashless exercise of said options as part of his severance package. As a result of that modification, the Company recognized additional compensation expense of $798,000 for the fiscal year ended December 31, 2005.
Note 14 — Supplemental Cash Flow Disclosures – Non-Cash Transactions
Non-cash transactions for years ended December 31 include:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Accrued dividends on 8% preferred stock
|
|
$
|
32,828
|
|
|
$
|
36,361
|
|
|
$
|
84,902
|
|
|
Stock issued for executive recruitment fees
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
Stock issued for contract litigation settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
227,500
|
|
|
Stock issued to outside patent counsel for satisfaction of existing payables
|
|
|
162,520
|
|
|
|
—
|
|
|
|
—
|
|
|
Preferred dividends paid by issuance of stock
|
|
|
37,014
|
|
|
|
35,232
|
|
|
|
166,063
|
|
|
Note received for Common stock issued on warrant exercise
|
|
|
—
|
|
|
|
620,000
|
|
|
|
—
|
|
Cash paid for interest and taxes was $0 in 2007, 2006, and 2005, respectively.
52
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 15 — Related Party Transactions
BDR, Inc. (“BDR”) is a consulting firm owned solely by Jimmy D. Swink, Jr. The Company entered into a consulting agreement with BDR, dated July 11, 2002. Under this agreement, the Company granted BDR stock options representing the right to purchase 300,000 shares of the Company’s Common stock at $1.50 per share (the fair market value on the date of grant). Additionally, in February 2004, the Company issued 10-year warrants to purchase an additional 200,000 shares of Common stock at $1.50 to BDR, in connection with the consulting agreement. All such options and warrants are fully vested as of December 31, 2007. Pursuant to extensions,
this consulting agreement expired on August 31, 2006. Under the consulting agreement, BDR received compensation totaling $0, $35,000, and $186,000 (of which $0, $0, and $78,000 was equity-based compensation valued in accordance with SFAS123) for services rendered in the years ended 2007, 2006, and 2005, respectively.
In 1999, the founder and then sole stockholder of the Company, Charles Worden, and the Company entered into an agreement where the Company was to pay Mr. Worden a royalty. Mr. Worden and the Company entered into a substitute royalty agreement with court approval on November 14, 2001, which superseded the agreement dated October 29, 1999. Under this agreement, the Company is to pay Mr. Worden a royalty equal to 5% of product sales, subject to a $6,250 minimum payment per month and a limit of $600,000 during any calendar year. For the years ended December 31, 2007, 2006 and 2005, the total royalty expense was $75,000 per year. This agreement also
provides Mr. Worden with a security interest and lien in the patent as well as a reversionary interest if the Company discontinues substantially all efforts to commercialize the Worden Patent. In 2007, the Company determined that Mr. Worden was no longer a related party.
Note 16 — Operating Leases
The Company leases its office space under an operating lease expiring in July 2008, with future minimum lease payments as indicated in the table below:
|
|
|
|
Years Ending December 31:
|
|
|
|
|
|
2008
|
|
$
|
38,369
|
|
|
Thereafter
|
|
|
—
|
|
|
Total future minimum lease payments
|
|
$
|
38,369
|
|
For the years ended December 31, 2007, 2006 and 2005, the Company incurred rent expense of approximately $65,000, $63,000, and $44,000, respectively.
Note 17 — Commitments and Contingencies
The Company is prohibited from granting a security interest in the Company’s patents and/or future royalty streams under the terms of the Series A and B Convertible Preferred stock.
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 are 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 is contingent on the Company’s attaining aggregate gross revenues for four consecutive quarters of at least $10,000,000 prior to July 2009 and would result in the issuance of approximately 325,000 shares of Common stock.
The Company is party to a registration rights agreement and a related warrant agreement with one of its former consultants. The registration rights agreement provides for liquidated damages, at the discretion of the warrantholder, in the event that the registration statement relating to the shares underlying the warrants becomes ineffective. The Company’s obligations under this agreement run through the earlier of April 1, 2012 or two years after the exercise of the related warrants. At the discretion of the warrantholder, the liquidated damages may take the form of cash or additional shares of the Company’s Common stock. As of December 31,
2007, the Company has estimated the maximum undiscounted liquidated damages at $128,000.
53
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 17 — Commitments and Contingencies – (continued)
However, pursuant to FASB Staff Position No. EITF 00-19-2, which the Company adopted in the fourth quarter of 2006, the Company has determined that it is unlikely that circumstances allowing for the aforementioned liquidated damages would arise, and therefore no contingent liability has been recorded.
In conjunction with this positive decision from the FDA, the Company agreed to conduct a post-market surveillance study to further analyze the safety profile of bovine thrombin as used in the AutoloGel
TM
System. This study will include 300 patients over a two year period, does not contain any significant inclusion/exclusion criteria, consists of a few simple diagnostic blood tests, and is estimated to cost approximately $500,000. The Company will explore whether other stakeholders in the outcome of the study will offset a portion of this cost. The Company expects to leverage the data generated from this study to use as a tool in its sales
and marketing efforts.
Note 18 — Subsequent Events
In January 2008, the Board of Directors authorized the grant of 180,000 stock options under the Long-Term Incentive Plan to board members for their upcoming service in 2008. These options have an exercise price of $1.41, which was the closing market price on the date of grant, vest in equal monthly installments through December 2008, and expire ten years from the date of grant.
In January 2008, the Company amended the Chief Executive Officer’s employment agreement. In exchange for the removal of certain anti-dilutive provisions in the original agreement, the Executive was granted 30,000 options and is entitled to receive an additional 30,000 options in December of each year provided that he is employed on December 1 of the respective year. The options will vest immediately, expire ten years from the date of grant, and have an exercise price equal to the market price on the date of grant (which was $1.50 for the 30,000 options granted in January 2008).
In March 2008, the Board of Directors authorized the grant of 10,000 stock options under the Long-Term Incentive Plan to certain employees. These options have an exercise price of $1.54, which was the closing market price on the date of grant, vest in equal annual installments through March 2011, and expire ten years from the date of grant.
In March 2008, the Company, upon approval by its Board of Directors, appointed Mr. Martin Rosendale as Executive Vice-President and Chief Operating Officer. In this capacity, Mr. Rosendale will, among other things, (i) oversee the Company’s operational aspects including sales and marketing, manufacturing, business development and administrative operations; (ii) assist and support the Company’s research and development activities; and (iii) perform such responsibilities, duties and authority, and to render such services as are customary in such position and as the CEO from time to time will reasonably direct. He will report directly to the
CEO of the Company. Mr. Rosendale will be entitled to:
|
|
•
|
annual base salary of $200,000 during the term of his employment, subject to review by the Board for subsequent increases on an annual basis;
|
|
|
•
|
annual bonus equal to 30% of his base salary for the prior fiscal period if, in the sole discretion of the Board, he meets the Company’s budgeted sales and other performance targets set by the CEO or the Board;
|
|
|
•
|
200,000 options under the Company’s Long-Term Incentive Plan, at commencement of his employment with the Company, at an exercise price equal to $1.54, the closing stock price on March 14, 2008, vesting as follows: 20,000 of these options will vest 90 days after the effective date of the Agreement, and the remainder will vest in three equal installments of 60,000 options at the first, second and third annual anniversaries thereof for the duration of his employment at the Company; and
|
54
TABLE OF CONTENTS
CYTOMEDIX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 18 — Subsequent Events – (continued)
|
|
•
|
Participation in all medical, dental, life, and disability insurance, participation in the Company’s 401(k) plan, and other benefits available to all full-time employees of the Company, subject to eligibility requirements.
|
Mr. Rosendale’s employment with the Company is “at will” and not for any specific term; it may be terminated by him or the Company at any time with or without cause. The Agreement also contains confidentiality, non-competition and other additional provisions which are customary to agreements of this nature. The foregoing is a summary of the Agreement and is qualified in its entirety by reference to the Agreement which is attached as an exhibit to this filing.
Note 19 — Quarterly Financial Data (Unaudited) Required by Regulation S-X Item 3-02(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
453,939
|
|
|
$
|
507,412
|
|
|
$
|
461,957
|
|
|
$
|
519,970
|
|
|
Gross profit
|
|
$
|
217,069
|
|
|
$
|
244,782
|
|
|
$
|
315,856
|
|
|
$
|
315,286
|
|
|
Net loss
|
|
$
|
(820,323
|
)
|
|
$
|
(601,824
|
)
|
|
$
|
(2,539,833
|
)
|
|
$
|
(1,075,889
|
)
|
Loss per common share —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.03
|
)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
485,537
|
|
|
$
|
411,324
|
|
|
$
|
574,091
|
|
|
$
|
477,203
|
|
|
Gross profit
|
|
$
|
221,975
|
|
|
$
|
188,038
|
|
|
$
|
350,773
|
|
|
$
|
172,784
|
|
|
Net income (loss)
|
|
$
|
(1,059,732
|
)
|
|
$
|
908,823
|
|
|
$
|
(698,631
|
)
|
|
$
|
(1,158,171
|
)
|
Income (loss) per common share —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
55
TABLE OF CONTENTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), the Company conducted an evaluation of its disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2007 as a result of the material weaknesses described below in Management's Report on Internal Control over Financial Reporting.
Remediation Initiatives
The Company commenced remedial actions in 2007 to correct and strengthen the internal controls in those areas where material weaknesses were identified, which remedial actions included:
|
|
•
|
Formation, effective for the first quarter of 2007, of a Disclosure Committee to improve the execution of the Company’s controls over financial disclosure.
|
|
|
•
|
Identification and implementation of a software solution to reduce the risk of error in accounting for stock-based compensation.
|
|
|
•
|
Monitoring the effectiveness of the Disclosure Committee’s performance and the software solution for stock-based compensation to ensure that they have yielded the desired effect of mitigating the identified material weaknesses in the future.
|
Through its remediation efforts around SFAS123R, Share-Based Payment, the Company noted errors, which it corrected through amended reports filed with the SEC on November 14, 2007. In the fourth fiscal quarter of 2007, the Company completed the loading of data into its software solution for equity-based compensation. Initial testing has begun and will be monitored for a period of time in 2008 as the Company maintains this system in parallel with its existing controls already in place to corroborate the results of each solution. Once the Company has completed its validation of the software solution, it will rely exclusively on it for equity-based
compensation accounting and option and warrant maintenance. The remedial efforts are on-going and expected to conclude in 2008.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of its management, including the Certifying Officers, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
56
TABLE OF CONTENTS
of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company did not maintain effective controls over the completeness and accuracy of the disclosure of income taxes. Specifically, its controls over the processes and procedures related to the determination and review of the financial statement footnote disclosures in this area were not adequate to ensure that the financial statement footnotes were prepared in accordance with generally accepted accounting principles. This control deficiency could result in a misstatement to the disclosure of income taxes that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, the
Company determined that this control deficiency constitutes a material weakness at December 31, 2007.
The Company did not maintain effective controls over the completeness and accuracy of the accounting for and disclosure of stock-based compensation. Specifically, its controls over the processes and procedures related to the determination of the stock-based compensation amounts and the determination and review of the financial statement footnote disclosures were not adequate to ensure that the compensation amount and the related financial statement footnotes were prepared in accordance with generally accepted accounting principles. This control deficiency resulted in the misstatement of the Company’s stock-based compensation expense and the
related disclosures, and in the restatement of the Company’s financial statements for 2004, 2005, and 2006, each of the interim periods of 2006 and the first and second quarters in 2007. Additionally, this control deficiency could result in a misstatement of stock-based compensation expense and the related disclosures that would result in a material misstatement of the annual or interim financial statements that would not be prevented or detected. Accordingly, the Company determined that this control deficiency constitutes a material weakness at December 31, 2007.
Based on this evaluation under the framework in
Internal Control — Integrated Framework
, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2007 due to the material weaknesses discussed above.
This Annual Report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this Annual Report.
Changes in Internal Control over Financial Reporting
The following changes in the Company’s internal control over financial reporting during the fourth fiscal quarter of 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting were as follows:
|
|
•
|
The Company completed the loading of data into its software solution for equity-based compensation
|
57
TABLE OF CONTENTS
Item 9B. Other Information
On January 25, 2008, Cytomedix, Inc. amended its employment agreement with its Chief Executive Officer Kshitij Mohan. The original employment agreement dated April 20, 2004, was filed as Exhibit 10.1 to Form 8-K filed on May 7, 2004. The original employment agreement contained certain anti-dilution provisions entitling Dr. Mohan to maintain his inducement award at a 2.76% interest in the outstanding stock of the Company on a fully diluted basis. Therefore, pursuant to these provisions, each issuance of additional shares of common stock or other security convertible into or exercisable for common stock has required an additional issuance to Dr. Mohan.
The maximum number of options issuable to Dr. Mohan pursuant to these anti-dilution provisions was options to purchase 1,000,000 shares. The Board of Directors determined that a deletion of the anti-dilution provisions from Dr. Mohan’s employment agreement is in the Company’s best interest.
In consideration for Dr. Mohan’s agreement to amend his employment agreement, the Company has agreed to immediately grant to Dr. Mohan an option to purchase thirty thousand (30,000) shares of the Company’s common stock at an exercise price equal to $1.50 (the closing sale price of the Company’s common stock on the date of the Amendment). In addition, as long as Dr. Mohan remains employed by the Company on December 1, 2008, and each subsequent year through December 1, 2011, the Company will, within thirty (30) days of each December 1, grant to Dr. Mohan an option to purchase an additional thirty thousand (30,000) shares of the
Company’s common stock at an exercise price equal to the closing sale price of the Company’s common stock on the date the Board authorizes and approves the grant. Therefore, if Dr. Mohan remains employed by the Company through December 1, 2011, he will be issued options to purchase a total of one hundred and fifty thousand (150,000) shares in exchange for his agreement to delete the anti-dilution provisions from his contract.
58
TABLE OF CONTENTS
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names and ages of all Cytomedix directors and executive officers as of December 31, 2007. Officers are appointed by, and serve at the pleasure of, the Board of Directors.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Date of Election or Appointment
|
|
Position(s) with the Company
|
|
James S. Benson
|
|
68
|
|
November 1, 2004
|
|
Director
|
|
David P. Crews
|
|
45
|
|
September 28, 2001
|
|
Director
|
|
Arun K. Deva
|
|
63
|
|
November 23, 2004
|
|
Director
|
|
David F. Drohan
|
|
69
|
|
July 12, 2004
|
|
Director
|
|
Mark T. McLoughlin
|
|
52
|
|
June 7, 2004
|
|
Director
|
|
Kshitij Mohan
|
|
62
|
|
April 20, 2004
|
|
Chairman of the Board, Chief Executive Officer
|
|
Andrew S. Maslan
|
|
38
|
|
August 15, 2005
|
|
Chief Financial Officer
|
|
Carelyn P. Fylling
|
|
60
|
|
December 1, 2001
|
|
Vice President of Professional Services
|
Biographical information with respect to the Company’s executive officers and directors is provided below.
James S. Benson
has served as a Director since November 1, 2004. Mr. Benson has over 25 years of experience in the healthcare industry, and also serves as a director of Cryolife, Inc., and Medical Device Consultants, Inc. Mr. Benson retired from the Advanced Medical Device Association (Advamed) where he served as executive vice president for technical and regulatory affairs. Prior to that, he held numerous senior positions at the Food and Drug Administration (FDA) over a twenty year period. He retired from the FDA as director of the Center for Devices and Radiological Health (CDRH). Earlier, he served as deputy commissioner of the FDA,
and also as its commissioner for a one-year period. During his tenure with the FDA, Mr. Benson worked closely with other Federal agencies and worked with Congress to craft and create various pieces of legislation including The Food and Drug Modernization Act of 1997, The Biomaterials Access Act of 1998 and The Medical Device User Fee and Modernization Act of 2002. Mr. Benson earned a B.S. degree in civil engineering from the University of Maryland and a M.S. degree in nuclear engineering from the Georgia Institute of Technology.
David P. Crews
has served as a Director since his election through the consent solicitation that became effective on September 28, 2001. Mr. Crews is executive vice president of Crews and Associates, Inc., a brokerage house located in Little Rock, Arkansas, founded by his father. Mr. Crews has worked at Crews & Associates for more than 22 years, specializing in the fixed income markets. He is a former partner of All American Leasing, a municipal finance firm, and also serves as vice president, secretary, and treasurer of CHASC, Inc., an entity that acquired Smith Capital Management (an investment advisory firm). Mr. Crews is also a
Board Member of Pure Energy Group, Inc. (an oil and gas company).
Arun K. Deva
has served as a Director since November 23, 2004. Mr. Deva is the founder and President of Deva & Associates, P.C., a Rockville, Maryland-based accounting and consulting firm that provides accounting, auditing, litigation support, due diligence, cost-benefit analysis and other financial consulting services to many federal agencies and corporations. He is also the founder and President of CPAMoneyWatch.com, LLC, a web-based financial services provider. Prior to establishing Deva & Associates in 1991, Mr. Deva was a partner at Touche Ross & Co. (now Deloitte & Touche). He has served as a management consultant
for several public and private companies with a focus on financial restructurings, negotiations with lenders and creditors, financial reporting and disclosures, and filings with the Securities and Exchange Commission. Mr. Deva is a member of the American Institute of Certified Public Accountants, Maryland Association of Certified Public Accountants and Association of Government Accountants. He was appointed to the Maryland Banking Board by the Governor of Maryland for a six-year term ending in 2008. Mr. Deva earned his Bachelor of Commerce degree in accounting from St. Xavier's College in India and a Masters of Business Administration degree in Finance from Indiana University, Bloomington, Indiana.
David F. Drohan
has served as a Director since July 12, 2004. Mr. Drohan retired from Baxter Healthcare Corporation where he served as Senior Vice President and President of Baxter's medication delivery business, a position he held since May 2001. In this capacity, he had direct general management responsibility for the
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development and worldwide marketing of intravenous products, drug-delivery and automated distribution systems, as well as anesthesia, critical care and oncology products representing $4 billion in combined annual sales. He joined Baxter in 1965 as a territory manager in New York and throughout the years has held a succession of senior positions. Prior to joining Baxter, Mr. Drohan worked for Procter & Gamble. Mr. Drohan is a director of Parmedium Health Care Corp., a trustee of Parents Project Muscular Dystrophy, and a director of the Baxter Credit Union. He earned his bachelor's degree in industrial relations from Manhattan College, New York.
Mark T. McLoughlin
has served as a Director since June 7, 2004. Mr. McLoughlin currently serves as Senior Vice President, Strategic Marketing and Operations for Cardinal Health, Inc., one of the world's largest health care manufacturing and distribution companies. In this capacity, he has responsibility for the Marketing organization Operations for Medical Products Manufacturing segment for Cardinal Health International based in Rolle, Switzerland. Prior to joining Cardinal, he was vice president of commercial operations for Norwood Abbey Ltd., an Australian-based medical technology company. Earlier, he was President of North American
operations for Ion Beam Application, Inc., a Belgium-based global medical technology company. His executive career experience also includes Mallinckrodt, as well as positions with other healthcare companies.
Kshitij Mohan
was appointed as Chief Executive Officer on April 20, 2004 and has served as a Director since May 7, 2004. Prior to assuming his positions in the Company, Dr. Mohan served as Chief Executive officer of International Remote Imaging Systems, Inc., the predecessor company of IRIS International. Previously, he was the Chief Regulatory and Technology Strategist for the Law Firm of King and Spalding, Senior Vice-President and Chief Technology Officer for Boston Scientific Corporation, and Corporate Vice-President of Baxter International, responsible for all corporate research and technical services and was a member of the Baxter
operating management team. Prior to entering the private sector, Dr. Mohan served in various capacities within the U.S. Food and Drug Administration, including leading the science and technology programs and the office of product evaluation and approval of medical devices and between 1979 – 1983 served in the White House Office of Management and Budget with responsibilities for the national R & D policies, programs of the National Science Foundation and NASA's Aeronautical and Space Research and Technology programs. Dr Mohan has been widely published in the field of health policies, regulations and Applied Physics and served on numerous Boards including the Corporate Advisory Boards of the Schools of Engineering at Dartmouth College and the University of California at Riverside. Dr. Mohan earned a PH.D. degree in Physics from Georgetown University, a M.S. degree in Physics from the University of Colorado and a B.Sc., First Class Honors, Patna University, Patna,
India.
Andrew S. Maslan
joined the Company as corporate controller on July 1, 2005, and became the Chief Financial Officer on August 15, 2005. Mr. Maslan most recently served as controller for BioReliance Corporation based in Rockville, Maryland, which was acquired by Invitrogen (Nasdaq: IVGN) in February 2004. Earlier, he held positions with two other Rockville, Maryland-based companies, serving as a principal with GlobeTraders, Inc., and senior accountant for Providence Laboratory Associates. Mr. Maslan began his professional career serving as an auditor with KPMG Peat Marwick, and is a certified public accountant licensed in the state of
Maryland.
Carelyn P. Fylling, RN, MSN
has served as the Company's Vice President of Professional Services since December 2001. Ms. Fylling was director of training and program development at the International Diabetes Center in Minneapolis, Minnesota. She also has served on the national Board of Directors of the American Diabetes Association and numerous national committees of the American Diabetes Association. Ms. Fylling received the prestigious Ames Award for Outstanding Educator in the Field of Diabetes. Subsequently, she joined Curative Health Services and helped the company grow from three employees to over 650 employees. During her 13 years
at Curative, Ms. Fylling helped to design the national wound database, developed clinical protocols, conducted outcome studies, trained physicians and nurses in comprehensive wound management, wrote scientific articles and abstracts, assisted in clinical trials and marketing, and developed an Internet-based online wound care training program for health professionals. Recently, she provided independent consulting and outsourcing services to the health care industry through Fylling Associates, LLC, which she wholly owns, and through Strategic Partners, LLC, in which she holds a partnership interest.
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There are no family relationships between any of the Company’s executive officers or directors and there are no arrangements or understandings between a director and any other person pursuant to which such person was elected as director. There were no material changes to the procedures by which shareholders may recommend nominees to the Board since the Company’s last disclosure of such policies.
No director or officer of the Company has, during the last five years: (i) been convicted of any criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities laws or finding any violations with respect to such laws.
Board of Directors
The Board oversees the business affairs of Cytomedix and monitors the performance of management. The Board members discussed various business matters informally on numerous occasions throughout the year 2007. Under the Company’s Bylaws, as amended and restated, the Board of Directors’ size may not exceed seven members. Presently, there are six Board members and one vacancy. At each annual meeting, shareholders elect directors for a full term or the remainder thereof, as the case may be, to succeed those whose terms have expired. Each director holds office for the term for which he or she is elected or until his or her successor is duly
elected.
Audit Committee
The Board formed an Audit Committee in December 2004. Mr. Arun K. Deva currently serves as chairman of the Audit Committee. The Board has determined that Mr. Deva is an audit committee financial expert as defined by Item 407(d) of Regulation S-K under the Securities Act and is “independent” within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Other members of the Audit Committee are Messrs. Crews and Drohan. The Board has determined that each member of the Audit Committee is “independent” as required by the AMEX Company Guide and under the federal securities laws. The Audit Committee has a written charter
adopted by the Board, which is available on the Company’s website at
www.cytomedix.com
and at no charge by contacting the Company at its headquarters as listed on the cover page of this report. Information appearing on the Company’s web site is not part of this Annual Report.
The purpose of the Audit Committee is to assist the Board in its general oversight of Cytomedix’s financial reporting, internal controls and audit functions. As described in the Audit Committee Charter, which is available at the Company’s website,
http://www.cytomedix.com
, the Audit Committee’s primary responsibilities are to:
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Review whether or not management has maintained the reliability and integrity of the accounting policies and financial reporting and disclosure practices of the Company;
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Review whether or not management has established and maintained processes to ensure that an adequate system of internal controls is functioning within the Company;
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Review whether or not management has established and maintained processes to ensure compliance by the Company with legal and regulatory requirements that may impact its financial reporting and disclosure obligations;
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Oversee the selection and retention of the Company’s independent registered public accounting firm, their qualifications and independence;
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Prepare a report of the Audit Committee for inclusion in the proxy statement for the Company’s annual meeting of shareholders;
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Review the scope and cost of the audit, the performance of the independent registered public accounting firm, and their report on the annual financial statements of the Company; and
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Perform all other duties as the Board may from time to time designate.
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The Audit Committee has reviewed and discussed the financial statements with management and PricewaterhouseCoopers LLP, the Company’s independent, registered, public accounting firm. The Audit
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Committee provided oversight and guidance to members of management on the Company’s policies and procedures relating to risk assessment and risk management and on the legal and regulatory compliance programs. The Audit Committee met on seven occasions in 2007.
The Audit Committee has discussed with PricewaterhouseCoopers LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees”. In addition, PricewaterhouseCoopers LLP has provided the Audit Committee with the written disclosures and the letter required by the Independence Standards Board Standard No. 1, as amended, “Independence Discussions with Audit Committees,” and the Audit Committee has discussed with PricewaterhouseCoopers LLP their firm’s independence. In addressing the quality of management’s accounting judgments, the Audit Committee asked for
management’s representations and reviewed certifications prepared by the CEO and CFO that the unaudited quarterly and audited financial statements of the Company fairly present, in all material respects, the financial condition and results of operations of the Company.
Based on the review of the financial statements, representations from management, and discussions with management and PricewaterhouseCoopers LLP, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Cytomedix’s Annual Report on Form 10-K for the year ended December 31, 2007, for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Arun K. Deva, Chairman
David F. Drohan
David P. Crews
Code of Conduct and Ethics
In April 2005, the Board approved a Code of Conduct and Ethics applicable to all directors, officers and employees which complies with Section 807 of the AMEX Company Guideand with the definition of a “code of ethics” as set forth in Item 406 of SEC Regulation S-K. A copy of this Code of Conduct is available at the Company’s website at
www.cytomedix.com
, and is available at no charge by contacting the Company at its headquarters as listed on the cover page of this report. Information appearing on the Company’s website is not part of this Annual Report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Act”) requires officers, directors and persons who own more than ten percent of a registered class of equity securities to, within specified time periods, file certain reports of ownership and changes in ownership with the SEC.
Based solely upon a review of Forms 3 and Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Act during the Company’s most recent fiscal year, and Forms 5 with respect to the most recent fiscal year, the Company believes that all such forms required to be filed pursuant to Section 16(a) were timely filed as necessary, by the executive officers, directors and security holders required to file same during the fiscal year ended December 31, 2007.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Summary
This report is the Compensation Discussion and Analysis of the executive compensation program and an explanation and analysis of the material elements of total compensation paid to each of the Company’s named executive officers. Included in the discussion is an overview and description of:
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the compensation philosophy and program;
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the objectives of the compensation program;
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what the compensation program is designed to reward;
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each element of compensation;
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•
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why the Company chooses to pay each element;
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how the amount of each element is determined; and
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•
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how each compensation element and the decision regarding that element fit into the overall compensation objectives and affect decisions regarding other elements.
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In reviewing the executive compensation program, the Compensation Committee of the Board considered issues pertaining to policies and practices for allocating between long-term and currently paid compensation and those policies for allocating between cash and non-cash compensation. It also considered the determinations for granting awards, performance factors for the company and its named executive officers, and how specific elements of compensation are structured and taken into account in making compensation decisions. Questions related to the benchmarking of total compensation or any material element of compensation, the tax and accounting treatment
of particular forms of compensation and the role of executive officers (if any) in the total compensation process also are addressed where appropriate.
The Compensation Committee has responsibility for reviewing and making recommendations to the Board with respect to the Company’s overall executive compensation policy, including such items as (i) the annual base salary, annual bonus, and annual and long-term equity-based or other incentives of each corporate officer, including the CEO; (ii) corporate goals and objectives relevant to each executive officer’s compensation, each executive officer’s performance in light of those goals and objectives, and recommendations as to each executive officer’s compensation level based on this evaluation, which recommendations will be subject to
approval by the full Board; and (iii) any other matter, such as severance agreements, change in control agreements, or special or supplemental executive benefits, within the Committee’s authority.
Executive Compensation Philosophy
Executive management is compensated through a combination of base salaries, merit based performance bonuses, and long-term equity compensation that is designed to be competitive with similarly situated companies within the Company’s industry. The executive compensation program is structured to align management’s incentives with the long-term interests of shareholders, and to maximize profitability and shareholder value.
The Company adheres to the following compensation policies, which are designed to support the achievement of its business strategies:
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The executive compensation program should strengthen the relationship between compensation, both cash and equity-based, and performance by emphasizing variable, at-risk compensation that is dependent upon the successful achievement of specified corporate, business unit and individual performance goals.
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A portion of each executive’s total compensation should be comprised of long-term, at-risk compensation to focus management on the long-term interests of shareholders.
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An appropriately balanced mix of at-risk incentive cash and equity-based compensation aligns the interests of Company executives with that of its shareholders. The equity-based component promotes a continuing focus on building profitability and shareholder value.
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Total compensation should enhance the Company’s ability to attract, retain, motivate and develop knowledgeable and experienced executives upon whom, in large part, successful operation and management depends.
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Compensation is set by establishing targeted compensation levels for each senior executive and allocating that compensation amount among base salary, merit-based compensation bonuses, and long-term equity compensation. At the highest and most senior levels, the Company offers incentive based compensation to reward company-wide performance and to maximize future profitability, stock appreciation and shareholder value.
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A core principle of the executive compensation program is the belief that compensation paid to executive officers should be closely aligned with the Company’s near- and long-term success, while simultaneously providing the flexibility to recruit and retain the most qualified key executives. The compensation program is structured so that it is related to stock performance and other factors, direct and indirect, all of which may influence long-term shareholder value and the Company’s success.
As a result, the total executive compensation plan has been designed to include the following elements:
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Annual Performance-Based Cash Bonuses
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•
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Long-Term Equity -Based Compensation
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The Company utilizes each of these elements of executive compensation to ensure proper balance between short- and long-term success as well as between financial performance and shareholder return. In this regard, the Company believes that the executive compensation program for named executive officers is consistent with the financial performance and the performance of each named executive officer.
The Company is committed to providing a competitive pay program that is fair, non-discriminatory, and attractive to quality personnel. Further, the Cytomedix compensation program is structured to achieve motivation of its employees and efficient performance. The Compensation Committee believes that stock options awarded under the Cytomedix Long-Term Incentive Plan provide the most useful incentive to encourage executive officers and other employees to maximize productivity and efficiency because the value of such options relates to the Company’s stock price. Awards under the Long-Term Incentive Plan have the effect of more closely aligning the
interests of the Company’s employees with its shareholders, while at the same time offering an attractive vehicle for the recruitment, retention, and compensation of employees.
Named Executive Officers for 2007
This analysis focuses on the compensation paid to “named executive officers,” which is a defined term generally encompassing all persons that served as principal executive officer or principal financial officer at any time during the fiscal year, as well as certain other highly paid executive officers serving in such positions at the end of the fiscal year. During 2006 and 2007, the named executive officers consisted of the following persons:
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Kshitij Mohan — Chairman of the Board, Chief Executive Officer (Principal Executive Officer)
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Andrew S. Maslan — Chief Financial Officer (Principal Financial Officer)
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Carelyn P. Fylling — Vice President of Professional Services
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The CEO’s annual performance bonus is dependent on his performance against pre-determined management business objectives (“MBO’s”). The MBO’s in effect for the CEO’s most recently completed employment year related to the following general areas:
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•
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Product Development, Approval, and Reimbursement
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Infrastructure Development
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The specific performance criteria for such employees are set by the Compensation Committee and approved by the Board of Directors on an annual basis to reflect an appropriate balance of the Company’s short-term and long-term goals.
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Elements of Compensation
Base Salaries
Unless determined pursuant to their employment agreements, the base salaries of the Company’s named executive officers are evaluated annually. In evaluating appropriate pay levels and salary increases for such officers, the Compensation Committee considers achievement of the Company’s strategic goals, level of responsibility, individual performance, and internal equity and external pay practices. In addition, the Committee considers the scope of the executives’ responsibilities, taking into account competitive market compensation for similar positions, as well as seniority of the individual, the Company’s ability to replace the
individual and other primarily judgmental factors deemed relevant by the Board and Compensation Committee.
Base salaries are reviewed annually by the Compensation Committee and Board, and adjusted from time to time pursuant to such review or at other appropriate times, in order to align salaries with market levels after taking into account individual responsibilities, performance and experience.
Bonuses
Bonus awards are designed to focus management attention on key operational goals for the current fiscal year. Company executives may earn bonuses based upon achievement of their specific operational goals and achievement by the Company or business unit of its financial targets or other goals. Cash bonus awards are distributed based upon the Company, and the individual, meeting performance criteria objectives. The final determination for all bonus payments is made by the Compensation Committee.
Bonuses are based on certain performance measures in order to maximize and align the interests of the Company’s officers with those of its shareholders. Although performance goals are generally standard for determining bonus awards, the Company has and will consider additional performance rating goals when evaluating the bonus compensation structure of executive management. In addition, in instances where the employee has responsibility over a specific area, performance goals may be directly tied to the overall performance of that particular area. The bonus amounts are set forth in the Summary Compensation Table below.
Equity Incentive Grants
In keeping with the Company’s philosophy of providing a total compensation package that favors at-risk components of pay, long-term incentives comprise a significant component of the executives’ total compensation packages. These incentives are designed to motivate and reward executives for maximizing shareholder value and encourage the long-term employment of key employees. The objective is to provide executives with above-average, long-term incentive award opportunities.
The Company views stock options as its primary long-term compensation vehicle for executive officers. Grants of stock options generally are based upon performance, the level of the executive’s position, and an evaluation of the executive’s past and expected future performance. The Company does not time or plan the release of material, non-public information for the purpose of affecting the value of executive compensation.
The Company believes that stock options will continue to be used as the predominant form of stock-based compensation.
Tax Considerations
Section 162(m) of the Internal Revenue Code places limits on the deductibility of compensation in excess of $1 million paid to executive officers of publicly held companies. The Compensation Committee does not believe that Section 162(m) has had or will have any impact on the compensation policies followed by the Company.
Compensation Committee
The Compensation Committee oversees and approves all compensation and awards made to executive officers under the executive compensation program. The Compensation Committee reviews the performance and compensation of the Chief Executive Officer, without his participation, and establishes his compensation accordingly, with consultation from others when appropriate. For the remaining executive officers, recommendations are made to the Compensation Committee by the Chief Executive Officer.
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Summary Compensation Table for the Year Ended December 31, 2007
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Name and Principal Position
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Year
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Salary
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Bonus
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Option Awards
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All Other Compensation
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Total
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Kshitij Mohan
(1)
Chief Executive Officer
(Effective April 1, 2004)
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2007
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$
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355,816
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$
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168,056
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$
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22,865
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$
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34,000
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$
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580,737
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2006
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$
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323,549
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$
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150,000
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$
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223,785
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$
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25,619
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$
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722,953
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Andrew S. Maslan
(2)
Chief Financial Officer
(Effective August 16, 2005)
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2007
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158,875
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40,252
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110,407
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7,936
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317,470
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2006
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148,500
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27,700
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153,295
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844
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330,339
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Carelyn P. Fylling
(3)
VP Professional Services
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2007
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138,103
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30,000
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17,561
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6,720
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192,384
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2006
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136,500
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—
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15,059
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169
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151,728
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(1)
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Upon acceptance of the position of Chief Executive Officer, Dr. Mohan was awarded 1,000,000 ten-year options to purchase the Company’s Common stock for $1.50 (the “Inducement Award”). Under the terms of his employment agreement, 500,000 options vested immediately, 250,000 vested in April 2005 and the remaining options vested in April 2006. This agreement also contained an anti-dilution provision providing that Dr. Mohan may receive additional options, also with an exercise price of $1.50, such that his Inducement Award remained at 2.76% of the Company’s fully diluted shares (exclusive of any shares of which Dr. Mohan is the beneficial owner). Dr. Mohan was entitled to 59,310 shares under this anti-dilution provision through September 30, 2007. Also, pursuant to the agreement, upon reaching the first and second anniversary dates of his agreement, Dr. Mohan received 100,000 ten-year options at $1.50. Effective October 1, 2007,
this agreement was amended to remove the anti-dilution provision in exchange for an option to purchase 30,000 shares of the Company’s common stock at an exercise price equal to the closing sale price on the date of grant ($1.50), and, as long as Dr. Mohan remains employed by the Company on December 1, 2008, and each subsequent year through December 1, 2011, the Company will, within 30 days of each December 1, grant to Dr. Mohan an option to purchase an additional 30,000 shares of the Company’s common stock at an exercise price equal to the closing sale price of the Company’s common stock on the date the Board authorizes and approves the grant. The maximum amount of options issuable pursuant to this amendment is 150,000. In July 2007, the Board modified 700,000 options previously granted to Dr. Mohan to increase the exercise price from $1.50 to $2.24. The reason for the modification was to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The
increase in exercise price resulted in a reduction in value of approximately $18,000, which represents the loss in value of stock options based upon the increase in the exercise price. Dr. Mohan received a cash award of approximately $18,000 in 2008. Amounts in the All Other Compensation column consist of $25,000 that Dr. Mohan received as a “perk package each year, $9,000 employer 401(k) match in 2007, and $619 in company paid life insurance premiums for Dr. Mohan’s benefit in 2006.
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(2)
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Pursuant to his employment agreement as amended, in 2005 Mr. Maslan was granted 60,000 ten-year options to purchase shares of the Company’s Common stock at an exercise price of $5.07 per share. In 2006 Mr. Maslan was granted 40,000 and 50,000 ten-year options to purchase shares of the Company’s Common stock at exercise prices of $2.23 and $2.75 per share, respectively, and in 2007, Mr. Maslan was granted 20,000 ten-year options to purchase shares of the Company’s Common stock at an exercise price of $0.88. Options vest at intervals through July 2010. In July 2007, the Board modified 40,000 options previously granted to Mr. Maslan to increase the exercise price from $2.23 to $2.52. The reason for the modification was to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price resulted in a reduction in value of approximately $250, which represents the loss in value of stock
options based upon the increase in the exercise price. Mr. Maslan received a cash award of approximately $250 in 2008. Amounts in the All Other Compensation column consist of $7,936 employer 401(k) match in 2007, and $844 in company paid life insurance premiums for Mr. Maslan’s benefit in 2006.
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(3)
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In 2006, Ms. Fylling was granted 20,000 ten-year options to purchase shares of Common stock at $2.40. Amounts in the All Other Compensation column consist of $6,720 employer 401(k) match in 2007, and $169 in company paid life insurance premiums for Ms. Fylling’s benefit in 2006.
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Grants of Plan-Based Awards in 2007
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Name
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Grant Date
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Date Board Took Action to Grant Award
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Option Awards: Number of Securites Underlying Options
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Exercise Price of Option Awards
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Grant Date Fair Value of Option Awards
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Kshitij Mohan
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8/2/2007
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4/19/2004
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34,670
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$
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1.50
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$
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24,962
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9/11/2007
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4/19/2004
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255
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$
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1.50
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$
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246
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Andrew S. Maslan
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7/27/2007
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7/26/2007
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20,000
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$
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0.88
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$
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15,000
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Carelyn P. Fylling
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7/27/2007
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7/26/2007
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20,000
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$
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0.88
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$
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15,000
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|
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Except as set forth below, the Company has no agreement or understanding, express or implied, with any officer, director, or principal shareholder, or their affiliates or associates, regarding employment with the Company or compensation for services other than those identified below.
Kshitij Mohan:
On April 20, 2004, the Company entered into an employment contract with Dr. Kshitij Mohan to serve as Chief Executive Officer. The employment contract had an initial term of two years. The term is automatically extended by one year increments on each anniversary of the effective date unless the contract is otherwise terminated in accordance with its provisions. As an Inducement Award, Dr. Mohan received 1,000,000 ten-year stock options at an exercise price of $1.50 per share. Of these options, 500,000 became immediately exercisable, 250,000 became exercisable on the first anniversary of the agreement, and
250,000 became exercisable on the second anniversary. This agreement also contained an anti-dilution provision providing that Dr. Mohan may receive additional options, also with an exercise price of $1.50, such that his Inducement Award remains at 2.76% of the Company’s fully diluted shares (exclusive of any shares of which Dr. Mohan is the beneficial owner). Dr. Mohan has received 59,310 options under this anti-dilution provision through September 30, 2007. Dr. Mohan’s base salary for the first contract year was $275,000, increasing by at least 10% on each anniversary of the agreement. At December 31, 2007, Dr. Mohan’s annual base salary was $366,025. Pursuant to this agreement, Dr. Mohan was entitled to and received 100,000 options upon each of the first and second anniversary dates of this agreement. These options had a ten-year term and an exercise price of $1.50 per share. Additionally, in each of the first three years of this his employment, Dr. Mohan received
$150,000 cash bonus based on his achievement of performance criteria agreed upon by Dr. Mohan and the Board of Directors. In employment years ending April 20, 2008 and beyond, Dr. Mohan is eligible for an annual bonus at the discretion of the Board of Directors, upon the achievement of mutually agreed-upon performance criteria. Dr. Mohan also receives a guaranteed “perk package” of $25,000 to be paid at the beginning of each year under the term of this agreement. Effective October 1, 2007, this agreement was amended to remove the anti-dilution provision in exchange for an option to purchase 30,000 shares of the Company’s common stock at an exercise price equal to the closing sale price on the date of grant ($1.50), and, as long as Dr. Mohan remains employed by the Company on December 1, 2008, and each subsequent year through December 1, 2011, the Company will, within 30 days of each December 1, grant to Dr. Mohan an option to purchase an additional 30,000 shares of the
Company’s common stock at an exercise price equal to the closing sale price of the Company’s common stock on the date the Board authorizes and approves the grant. The maximum amount of options issuable pursuant to this amendment is 150,000. In July 2007, the Board modified 700,000 options previously granted to Dr. Mohan to increase the exercise price from $1.50 to $2.24. The reason for the modification was to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price resulted in a reduction in value of approximately $18,000, which represents the loss in value of stock options based upon the increase in the exercise price. Dr. Mohan received a cash award of approximately $18,000 in 2008.
Andrew Maslan:
On June 3, 2005, the Company entered into an employment agreement with Mr. Andrew S. Maslan to serve as Corporate Controller. Employment was at will, with certain notification provisions. Mr. Maslan’s base salary was $135,000, subject to review at the end of the first calendar year. Mr. Maslan’s annual target bonus percentage was 20%, depending on the achievement of performance criteria. Mr. Maslan was also granted 60,000 ten-year options to purchase shares of the Company’s Common stock at an exercise
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price of $5.07. In October 2006, this agreement was amended to increase Mr. Maslan’s annual base salary to $155,000 and target bonus percentage to 25% and provided for the grant of an additional 50,000 10-year options to purchase the Company’s stock at a price of $2.73 per share. Additional grants of options or increases to base salary may be considered annually, as of the anniversary date of the agreement, or in the ordinary course of business at the discretion of the CEO and Board of Directors. In July 2007, the Board modified 40,000 options previously granted to Mr.. Maslan to increase the exercise price from $2.23 to $2.52. The reason
for the modification was to remove the unintended tax consequences pursuant to I.R.S. Code Section 409A. The increase in exercise price resulted in a reduction in value of approximately $250, which represents the loss in value of stock options based upon the increase in the exercise price. Mr. Maslan received a cash award of approximately $250 in 2008.
Carelyn Fylling:
On September 4, 2002, the Company entered into an employment agreement with Ms. Carelyn P. Fylling to serve as Vice President of Professional Services. The term was for a period of one year, renewable on the first anniversary for a period of two years and in one year increments thereafter. Under the agreement, Ms. Fylling’s base salary was $130,000, subject to increase upon review by the Board at the end of each calendar year. Stock options and annual bonus are at the discretion of the Board. Other benefits are in accordance with Company policy.
The following table presents potential payments to executive officers upon termination or a change-in-control event as defined by their respective employment agreements, based on assumptions as if the event took place on December 31, 2007.
|
|
|
|
|
|
|
Name/Reason for Termination
|
|
Base Salary
|
|
Discretionary Bonus
|
Kshitij Mohan
|
|
|
|
|
|
|
|
|
|
Disability
(1)
|
|
$
|
335,523
|
|
|
$
|
104,795
|
|
|
Change of Control
(2)
|
|
|
732,050
|
|
|
|
300,000
|
|
|
Not for Cause
(3)
|
|
|
732,050
|
|
|
|
404,795
|
|
|
Death
(4)
|
|
|
—
|
|
|
|
—
|
|
|
Voluntary by Dr. Mohan
(5)
|
|
|
—
|
|
|
|
—
|
|
Andrew S. Maslan
|
|
|
|
|
|
|
|
|
|
Not for Cause
(6)
|
|
|
81,375
|
|
|
|
—
|
|
Carelyn P. Fylling
|
|
|
|
|
|
|
|
|
|
Disability
(7)
|
|
|
131,381
|
|
|
|
7,151
|
|
|
Death
(8)
|
|
|
—
|
|
|
|
7,151
|
|
|
Not for Cause
(9)
|
|
|
71,663
|
|
|
|
7,151
|
|
|
Involuntary Termination by Ms. Fylling for Good Reason
(10)
|
|
|
131,381
|
|
|
|
7,151
|
|
|
Change of Control
(11)
|
|
|
71,663
|
|
|
|
7,151
|
|
|
Voluntary by Ms. Fylling
(12)
|
|
|
23,888
|
|
|
|
—
|
|
|
|
(1)
|
Base salary will be paid over a period of 11 months, less net amounts received under Company sponsored long-term disability insurance. Discretionary bonus was estimated based on pro-rata portion (based on current employment year) and targeted $150,000 annual cash bonus. All unexercised options granted to Dr. Mohan will remain exercisable through their original expiration date.
|
|
|
(2)
|
Base salary will be paid over a period of 24 months. Discretionary bonus is due within 30 days of change-in-control and is equal to two years bonus estimated based on targeted $150,000 annual cash bonus. All unexercised options granted to Dr. Mohan will remain exercisable through their original expiration date.
|
|
|
(3)
|
Base salary will be paid over a period of 24 months. Discretionary bonus is due within 30 days of change-in-control and is equal to pro-rata portion (based on current employment year) plus two years bonus estimated based on targeted $150,000 annual cash bonus. All unexercised options granted to Dr. Mohan will remain exercisable through their original expiration date.
|
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TABLE OF CONTENTS
|
|
(4)
|
All unexercised options granted to Dr. Mohan will remain exercisable through their original expiration date.
|
|
|
(5)
|
If Dr. Mohan provides 30 days prior written notice to facilitate transition, then all unexercised options granted to Dr. Mohan will remain exercisable through their original expiration date. Otherwise, unexercised options granted to Dr. Mohan will expire three months after termination.
|
|
|
(6)
|
Base salary will be paid over a period of 6 months. Unvested options will continue to vest for a period of six months from termination.
|
|
|
(7)
|
Base salary will be paid over a period of 11 months, less net amounts received under Company sponsored long-term disability insurance. Prorated bonus and incentive compensation based on the then-applicable bonus plan/long-term incentive compensation program (based on current employment year).
|
|
|
(8)
|
Base salary through end of month in which death occurs, plus prorated bonus and incentive compensation based on the then-applicable bonus plan/long-term incentive compensation program (based on current employment year). All vested stock options become property of the executive’s estate.
|
|
|
(9)
|
Lump sum severance payment equal to six months of base salary. Prorated bonus and incentive compensation based on the then-applicable bonus plan/long-term incentive compensation program (based on current employment year). The exercise date of all stock options shall be extended for twelve months following the date of termination.
|
|
|
(10)
|
Lump sum severance payment equal to eleven months of base salary. Prorated bonus and incentive compensation based on the then-applicable bonus plan/long-term incentive compensation program (based on current employment year). The exercise date of all stock options shall be extended for twelve months following the date of termination.
|
|
|
(11)
|
All issued and unvested stock options become immediately fully vested and exercisable. Lump sum severance payment equal to six months of base salary. Prorated bonus and incentive compensation based on the then-applicable bonus plan/long-term incentive compensation program (based on current employment year). The exercise date of all stock options shall be extended for twelve months following the date of termination.
|
|
|
(12)
|
Ms. Fylling’s employment may be terminated voluntarily (i) upon written consent of Ms. Fylling and the Company, or (ii) upon sixty days’ written notice by Ms. Fylling. If voluntarily terminated pursuant to (i), Ms. Fylling agrees to stay in the employ of the Company for three months, in which she will receive 110% of her base salary. If voluntarily terminated pursuant to (ii), the Company may accelerate the termination date by paying the base salary for such sixty day period in a lump sum.
|
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TABLE OF CONTENTS
Outstanding Equity Awards at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Name
|
|
Number of Securities Underlying Unexercised Options Exercisable
(1)
|
|
Number of Securities Underlying Unexercised Options Unexercisable
|
|
Option Exercise Price
|
|
Option Expiration Date
|
|
Kshitij Mohan
|
|
|
490,000
|
|
|
|
—
|
|
|
$
|
1.50
|
|
|
|
4/20/2014
|
|
|
|
|
|
500,000
|
|
|
|
—
|
|
|
$
|
2.24
|
|
|
|
4/20/2014
|
|
|
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
2.24
|
|
|
|
6/6/2015
|
|
|
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
2.24
|
|
|
|
8/17/2016
|
|
|
|
|
|
59,310
|
|
|
|
—
|
|
|
$
|
1.50
|
|
|
|
1/25/2018
|
|
|
Andrew S. Maslan
|
|
|
45,000
|
|
|
|
15,000
|
(2)
|
|
$
|
5.07
|
|
|
|
1/11/2016
|
|
|
|
|
|
26,667
|
|
|
|
13,333
|
(3)
|
|
$
|
2.52
|
|
|
|
3/16/2016
|
|
|
|
|
|
16,667
|
|
|
|
33,333
|
(4)
|
|
$
|
2.73
|
|
|
|
10/11/2016
|
|
|
|
|
|
—
|
|
|
|
20,000
|
(6)
|
|
$
|
0.88
|
|
|
|
7/27/2017
|
|
|
Carelyn P. Fylling
|
|
|
250,000
|
|
|
|
—
|
|
|
$
|
1.50
|
|
|
|
8/7/2012
|
|
|
|
|
|
19,077
|
|
|
|
—
|
|
|
$
|
1.25
|
|
|
|
10/21/2013
|
|
|
|
|
|
6,667
|
|
|
|
13,333
|
(5)
|
|
$
|
2.40
|
|
|
|
1/11/2016
|
|
|
|
|
|
—
|
|
|
|
20,000
|
(6)
|
|
$
|
0.88
|
|
|
|
7/27/2017
|
|
|
|
(1)
|
All options are fully vested.
|
|
|
(2)
|
Options vest on 7/1/2008.
|
|
|
(3)
|
Options vest on 3/17/2008.
|
|
|
(4)
|
Options vest as follows: 16,667 on 10/11/2008, 16,666 on 10/11/2009.
|
|
|
(5)
|
Options vest as follows: 6,667 on 1/12/2008, 6,666 on 1/12/2009.
|
|
|
(6)
|
Options vest as follows: 6,667 on 7/27/2008, 6,667 on 7/27/2009, and 6,666 on 7/27/2010.
|
Director Compensation
For service during 2007, each non-employee director was entitled to and received options to purchase 30,000 shares of the Company’s Common stock; each committee chair was entitled to and received options to purchase 10,000 shares of the Company’s Common stock; each non-employee director was entitled to and received $500 for his participation in each telephonic meeting of the Board or a Committee and $1,000 for his participation in each in-person meeting of the Board or a Committee.
Director Compensation in 2007
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned or Paid in Cash
|
|
Option Awards
(1)
|
|
Total
|
|
James S. Benson
|
|
$
|
6,000
|
|
|
$
|
41,284
|
|
|
$
|
47,284
|
|
|
David P. Crews
|
|
$
|
8,000
|
|
|
$
|
30,960
|
|
|
$
|
38,960
|
|
|
Arun K. Deva
|
|
$
|
8,500
|
|
|
$
|
41,284
|
|
|
$
|
49,784
|
|
|
David F. Drohan
|
|
$
|
8,000
|
|
|
$
|
30,960
|
|
|
$
|
38,960
|
|
|
Mark T. McLoughlin
|
|
$
|
3,500
|
|
|
$
|
41,284
|
|
|
$
|
44,784
|
|
|
|
(1)
|
At December 31, 2007, the following number of stock options remained unexercised by non-employee directors as follows: Benson — 150,000, Crews — 320,000, Deva — 140,000, Drohan — 120,000, McLoughlin — 150,000.
|
Compensation Committee Interlocks and Insider Participation
The Compensation Committee reviews and approves the compensation for executive employees. The Committee consists of Mark T. McLoughlin (Chairman), David P. Crews, and David F. Drohan, all of whom
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TABLE OF CONTENTS
are independent directors. The Compensation Committee held three meetings during the fiscal year ended December 31, 2007. No Compensation Committee members or other directors served:
|
|
•
|
as a member of the compensation committee of another entity which has had an executive officer who has served on the Company’s compensation committee;
|
|
|
•
|
as a director of another entity which has had an executive officer who has served on the Company’s compensation committee; or
|
|
|
•
|
as a member of the compensation committee of another entity which has had an executive officer who has served as one of the Company’s directors.
|
Compensation Committee Report
The following paragraphs in this section constitute information required pursuant to Section 407(e)(5) of Regulation S-K promulgated under the Securities Act of 1933, as amended. In accordance with these rules, the information so provided is “furnished”, not “filed” with the SEC.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section of this Item 11 with management, and, based on that review and discussion, recommended to the Board of Directors that said Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Submitted by Compensation Committee
|
|
By:
|
/s/ James S. Benson (Chairman)
David P. Crews
David F. Drohan
Mark T. McLoughlin
|
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The Company maintains a Long-Term Incentive Plan approved by its shareholders that authorizes awards representing up to 5,000,000 shares of Common stock.
Equity Compensation Plan Information as of December 31, 2007
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants, and Rights
|
|
Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights
|
|
Number of Securities Remaining Available for Future Issuance
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
3,294,687
|
|
|
$
|
1.89
|
|
|
|
1,209,113
|
|
|
Equity compensation plans not approved by security holders
(1)
|
|
|
2,236,632
|
|
|
$
|
1.53
|
|
|
|
n/a
|
|
|
Total
|
|
|
5,531,319
|
|
|
$
|
1.74
|
|
|
|
1,209,113
|
|
|
|
(1)
|
These amounts represent the aggregate of individual compensation arrangements with external service providers.
|
As of December 31, 2007, 496,200 shares of common stock have been issued upon exercise of options granted pursuant to the Long Term Incentive Plan.
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TABLE OF CONTENTS
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding the ownership of the Company’s Common stock as of March 14, 2008 by all those known by the Company to be beneficial owners of more than five percent of its Common stock. This table is prepared in reliance upon beneficial ownership statements filed by such shareholders with the SEC under Section 13(d) or 13(g) of the Exchange Act.
|
|
|
|
|
|
|
|
|
Title of Class
|
|
Name and Address of Beneficial Owner
|
|
Amount and Nature of Beneficial Ownership
|
|
Percent of Class
|
|
Common Stock
|
|
David E. Jorden
600 Travis, Suite 3700
Houston, Texas 77002
|
|
2,487,800
(1)
|
|
7.7%
|
|
Common Stock
|
|
FEQ Gas and FEQ Investments
|
|
2,194,100
(2)
|
|
6.6%
|
|
Common Stock
|
|
Group consisting of Jorden,
FEQ Gas, FEQ Investments
|
|
4,681,900
|
|
14.0%
|
|
|
(1)
|
Includes 167,000 shares issuable upon exercise of warrants. Pursuant to the terms of the warrants, the reporting person cannot exercise such warrants if the exercise would result in the reporting person being the “beneficial owner” of more than 9.999% of the outstanding stock within the meaning of Rule 13d-1 under the Exchange Act.
|
|
|
(2)
|
FEQ Gas, and FEQ Investments are both controlled by Mr. Ernest Bartlett. Includes 1,308,100 shares issuable upon exercise of warrants. Pursuant to the terms of the warrants relating to 858,100 shares, the reporting person cannot exercise such warrants if the exercise would result in the reporting person being the “beneficial owner” of more than 9.999% of the outstanding stock within the meaning of Rule 13d-1 under the Exchange Act.
|
Security Ownership of Management
The following table sets forth information regarding the ownership of the Company’s Common stock as of March 14, 2008 by: (i) each director; (ii) each of the Named Executive Officers in the Summary Compensation Table; and (iii) all executive officers and directors of the Company as a group. As of March 14, 2008, there are 31,938,074 shares of Common stock issued and outstanding.
|
|
|
|
|
|
|
|
|
Title of Class
|
|
Name of Beneficial Owner
|
|
Amount and Nature of Beneficial Ownership
(1)
|
|
Percent of Class
(1)
|
|
Common Stock
|
|
James S. Benson
|
|
190,000
(2)
|
|
*
|
|
Common Stock
|
|
David P. Crews
|
|
1,011,623
(3)
|
|
3.1%
|
|
Common Stock
|
|
Arun K. Deva
|
|
190,000
(4)
|
|
*
|
|
Common Stock
|
|
David F. Drohan
|
|
152,000
(5)
|
|
*
|
|
Common Stock
|
|
Carelyn P. Fylling
|
|
313,375
(6)
|
|
*
|
|
Common Stock
|
|
Andrew S. Maslan
|
|
174,000
(7)
|
|
*
|
|
Common Stock
|
|
Mark T. McLoughlin
|
|
190,000
(8)
|
|
*
|
|
Common Stock
|
|
Kshitij Mohan
|
|
1,289,310
(9)
|
|
3.9%
|
|
Common Stock
|
|
Group consisting of Benson, Crews, Deva, Drohan, Fylling, Maslan, McLoughlin, and Mohan
|
|
3,510,308
|
|
9.6%
|
|
|
(1)
|
For purposes of determining the amount of securities beneficially owned, share amounts include all Common stock owned outright plus all convertible shares, warrants, and options exercisable for Common stock. The Percent of Class for Common stock is based on the number of shares of the Company’s Common stock outstanding as of March 14, 2008. Shares of Common stock issuable upon conversion of convertible notes, or the exercise of options or warrants currently exercisable, or exercisable within 60 days after the preparation of this table, are deemed outstanding for the purpose of computing the
|
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TABLE OF CONTENTS
|
|
|
percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other persons.
|
|
|
(2)
|
Consists of 190,000 shares Mr. Benson may acquire upon the exercise of stock options.
|
|
|
(3)
|
Consists of 644,871 shares owned as trustee for David Paul Crews Revocable Trust, 16,752 shares owned by children, and 350,000 shares Mr. Crews may acquire upon the exercise of stock options.
|
|
|
(4)
|
Consists of 10,000 shares directly owned by Mr. Deva and 180,000 shares Mr. Deva may acquire upon the exercise of stock options.
|
|
|
(5)
|
Consists of 2,000 shares directly owned by Mr. Drohan and 150,000 shares Mr. Drohan may acquire upon the exercise of stock options.
|
|
|
(6)
|
Consists of 4,298 shares directly owned by Ms. Fylling and 309,077 shares Ms. Fylling may acquire upon the exercise of stock options.
|
|
|
(7)
|
Consists of 4,000 shares directly owned by Mr. Maslan and 170,000 shares Mr. Maslan may acquire upon the exercise of stock options.
|
|
|
(8)
|
Consists of 190,000 shares Mr. McLoughlin may acquire upon the exercise of stock options.
|
|
|
(9)
|
Consists of 10,000 shares directly owned by Dr. Mohan and 1,279,310 shares Dr. Mohan may acquire upon the exercise of stock options.
|
There are no arrangements, known to the Company, including any pledge by any person of securities of the registrant, the operation of, which may, at a subsequent date, result in a change of control of the registrant.
Item 13. Certain Relationships and Related Transactions, and Director Independence
During the 2007 fiscal year, the Company was not involved in any related party transactions subject to Item 404 of Regulation S-K.
Review and Approval Policies and Procedures for Related Party Transactions
Pursuant to Board policy, the Company’s executive officers and directors, and principal stockholders, including their immediate family members and affiliates, are not permitted to enter into a related party transaction without the prior consent of the Board Any request for such related party transaction with an executive officer, director, principal stockholder, or any of such persons’ immediate family members or affiliates, in which the amount involved exceeds $120,000 must first be presented to the Board for review, consideration and approval. All of the Company’s directors, executive officers and employees are required to report to
the Board any such related party transaction. In approving or rejecting the proposed agreement, the Board will consider the relevant facts and circumstances available and deemed relevant to the Board which will approve only those agreements that, in light of known circumstances, are in, or are not inconsistent with, the Company’s best interests, as the Board determines in the good faith exercise of its discretion.
Director Independence
The Company has the following directors: James S. Benson, David P. Crews, Arun K. Deva, David F. Drohan, Mark T. McLoughlin, and Kshitij Mohan. Each of these directors is independent as defined by Section 121(A) of the listing standards of the American Stock Exchange, with the exception of Dr. Mohan, who, in addition to serving as the Chairman of the Board, is also the Company’s Chief Executive Officer. Dr. Mohan does not serve on the Audit, Nominating and Governance, or Compensation Committees. The Board based its independent determinations primarily on a review of the responses of the directors and executive officers to questions regarding
employment and transaction history, affiliations and family and other relationships and on discussions with the directors.
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Item 14. Principal Accounting Fees and Services
The following table presents fees for professional services rendered by PricewaterhouseCoopers, LLP and L J Soldinger Associates LLC for the fiscal years 2006 and 2007:
|
|
|
|
|
|
|
Services Performed
|
|
2007
|
|
2006
|
|
Audit Fees
(1)
|
|
$
|
433,000
|
|
|
$
|
392,000
|
|
|
Audit-Related Fees
(2)
|
|
$
|
—
|
|
|
$
|
2,000
|
|
|
Tax Fees
(3)
|
|
$
|
34,000
|
|
|
$
|
23,000
|
|
|
All Other Fees
(4)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total Fees
|
|
$
|
467,000
|
|
|
$
|
417,000
|
|
|
|
(1)
|
Audit fees represent fees billed for professional services provided in connection with the audit of the Company’s annual financial statements, reviews of its quarterly financial statements, audit services provided in connection with statutory and regulatory filings for those years and audit services provided in connection with securities registration and/or other issues resulting from that process. In 2006, audit fees also includes services rendered for audits of management’s assessment of the effectiveness of internal controls over financial reporting and the effectiveness of internal control over financial reporting. In 2007, audit fees also include $123,000 associated with the Company’s financial restatements, filed with the SEC on November 14, 2007.
|
|
|
(2)
|
Audit-related fees represent fees billed primarily for assurance and related services reasonably related to securities registration and/or other issues resulting from that process.
|
|
|
(3)
|
Tax fees principally represent fees billed for tax preparation, tax advice and tax planning services.
|
|
|
(4)
|
All other fees principally would include fees billed for products and services provided by the accountant, other than the services reported under the three captions above.
|
Pursuant to its charter, the Audit Committee must pre-approve audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor. In 2006 and 2007, all such services were pre-approved by the Audit Committee.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has the sole authority to pre-approve all audit and non-audit services provided by independent accountants. The Audit Committee has adopted policies and procedures for the pre-approval of services provided by the independent accountants. The Audit Committee, on an annual basis, reviews audit and non-audit services performed by the independent accountants. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the accountants’ independence. All requests for services to be provided by the independent accountants,
which must include a description of the services to be rendered and the amount of corresponding fees, are submitted to the Chief Financial Officer. The CFO has the authority to authorize services that fall within the category of services that the Audit Committee has pre-approved. If there is any question as to whether a request for services falls within the category of services that the Audit Committee has pre-approved, the CFO will consult with the chairman of the Audit Committee. The CFO submits requests to provide services that the Audit Committee has not pre-approved, which must include an affirmation by the CFO and the independent accountants, that the request is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its chairman or any of its other members pursuant to delegated authority) for approval.
As permitted under the Sarbanes-Oxley Act of 2002, the Audit Committee may delegate pre-approval authority to one or more of its members. Any service pre-approved by a delegate must be reported to the Audit Committee at the next scheduled quarterly meeting. The Audit Committee considered whether the provision of the auditors’ services, other than for the annual audit and quarterly reviews, is compatible with its independence and concluded that it is compatible.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The following financial statements of Cytomedix, Inc. are included in Item 8:
2. Schedule II — Valuation and Qualifying Accounts
See Footnotes to Financial Statements in Item 8 of this report, other than those listed in the table below.
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|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Charged to Costs and Expenses
|
|
Deductions
(1)
|
|
Balance at End of Period
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
137,000
|
|
|
|
3,000
|
|
|
|
0
|
|
|
|
140,000
|
|
|
Valuation allowance for deferred tax assets
|
|
|
10,344,000
|
|
|
|
1,982,000
|
|
|
|
0
|
|
|
|
12,326,000
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
90,000
|
|
|
|
62,000
|
|
|
|
(15,000
|
)
|
|
|
137,000
|
|
|
Valuation allowance for deferred tax assets
|
|
|
9,511,000
|
|
|
|
833,000
|
|
|
|
0
|
|
|
|
10,344,000
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
39,000
|
|
|
|
62,000
|
|
|
|
(11,000
|
)
|
|
|
90,000
|
|
|
Valuation allowance for deferred tax assets
|
|
|
6,897,000
|
|
|
|
2,614,000
|
|
|
|
0
|
|
|
|
9,511,000
|
|
|
|
(1)
|
Reflects receivables written off as uncollectible.
|
(b) Exhibits
For a list of exhibits filed with this Form 10-K, refer to the Exhibit Index beginning on page
77
.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYTOMEDIX, INC.
|
|
By:
|
/s/ Kshitij Mohan
Kshitij Mohan, CEO and Chairman of
the Board of Directors
|
Date: March 25, 2008
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signed originals of this written statement have been provided to Cytomedix, Inc. and will be retained by Cytomedix, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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TABLE OF CONTENTS
EXHIBIT INDEX
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|
|
|
|
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, File No. 000-28443).
|
|
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, File No. 000-28443).
|
|
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, File No. 000-28443).
|
|
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, File No. 000-28443).
|
|
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, File No. 000-28443).
|
|
4.1
|
|
Amended and Restated Certificate of Designation of the Relative Rights and Preferences of Series A Preferred, Series B Preferred and common stock of Cytomedix, Inc. (Previously filed on March 31, 2004, as exhibit to Form 10-KSB for year ended December 31, 2003, File No. 000-28443).
|
|
4.2
|
|
Form of Class A Warrant issued to New Investors and DIP Lenders (Previously filed on December 5, 2002, as exhibit to Form 10-QSB for quarter ended September 30, 2001, File No. 000-28443).
|
|
4.3
|
|
Form of Class B Warrant issued to New Investors and DIP Lenders (Previously filed on December 5, 2002, as exhibit to Form 10-QSB for quarter ended September 30, 2001, File No. 000-28443).
|
|
4.4
|
|
Form of Series C-1 Warrant to Purchase Shares of common stock of Cytomedix, Inc. (Previously filed on March 29, 2004 as exhibit to Current Report on Form 8-K, File No. 000-28443.)
|
|
4.5
|
|
Form of Series C-2 Warrant to Purchase Shares of common stock of Cytomedix, Inc. (Previously filed on March 29, 2004 as exhibit to Current Report on Form 8-K, File No. 000-28443).
|
|
4.6
|
|
Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Stock of Cytomedix, Inc. as filed with the Delaware Secretary of State on March 25, 2004 (Previously filed on March 29, 2004 as exhibit to Current Report on Form 8-K, File No. 000-28443).
|
|
4.7
|
|
Form of warrant issued to investors in the 2004 Unit Offering (Previously filed on May 11, 2004, as exhibit to the registration statement on Form SB-2, File No. 333-115364).
|
|
4.8
|
|
Form of Class D Warrant to Purchase Shares of Common Stock of Cytomedix, Inc. (Previously filed on May 2, 2005, as exhibit to Current Report on Form 8-K, File No. 001-32518).
|
|
4.9
|
|
Form of Registration Rights Agreement between Cytomedix, Inc., and Class D Warrantholders (Previously filed on May 2, 2005, as exhibit to Current Report on Form 8-K, File No. 001-32518).
|
|
10.1
|
|
Royalty Agreement, dated as of December 26, 2000, by and between Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed on January 17, 2001, as exhibit to Current Report on Form 8-K, File No. 000-28443).
|
|
10.2
|
|
First Amendment to Royalty Agreement, dated as of April 20, 2001, by and between Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed on May 25, 2001, as exhibit to the registration statement on Form SB-2/A, File No. 333-55818).
|
|
10.3
|
|
Second Amendment to Royalty Agreement, dated as of December 5, 2002, by and between Cytomedix, Inc. and Curative Health Services, Inc. (Previously filed on March 31, 2003, as exhibit to Form 10-KSB for year ended December 31, 2002, File No. 000-28443).
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TABLE OF CONTENTS
|
|
|
|
|
Number
|
|
Exhibit Table
|
|
10.4
|
|
Cytomedix, Inc. Long-Term Incentive Plan.*
|
|
10.5
|
|
License Agreement dated March 21, 2001, by and between Cytomedix, Inc. and DePuy AcroMed, Inc. (Previously filed on April 16, 2001, as exhibit to Form 10-KSB for year ended December 31, 2000, File No. 000-28443).
|
|
10.6
|
|
Amendment dated March 3, 2005, to the License Agreement by and between Cytomedix, Inc. and DePuy Spine, Inc. (f/k/a DePuy Acromed, Inc.) (Previously filed on March 31, 2005, as exhibit to Form 10-KSB for year ended December 31, 2004, File No. 000-28443).
|
|
10.7
|
|
Second License Agreement dated March 3, 2005, to the License Agreement by and between Cytomedix, Inc. and DePuy Spine, Inc. (f/k/a DePuy Acromed, Inc.) (Previously filed on March 31, 2005, as exhibit to Form 10-KSB for year ended December 31, 2004, File No. 000-28443).
|
|
10.8
|
|
Settlement and License Agreement dated May 1, 2005 by and between Cytomedix, Inc. and Medtronic, Inc. (Previously filed on May 10, 2005, as exhibit to Current Report on Form 8-K, File No. 000-28443).
|
|
10.9
|
|
Settlement Agreement and License Agreement dated May 23, 2005, by and between Cytomedix, Inc., and Harvest Technologies Corporation (Previously filed on May 27, 2005, as exhibit to Current Report on Form 8-K, File No. 000-28443).
|
|
10.10
|
|
Settlement and License Agreement dated June 26, 2005, by and between Cytomedix, Inc., and Perfusion Partners and Associates Inc. (Previously filed on August 15, 2005, as exhibit to Form 10-QSB for the quarter ended June 20, 2005, File No. 000-28443).
|
|
10.11
|
|
License Agreement dated October 7, 2005, by and between Cytomedix, Inc., and COBE Cardiovascular, Inc. (Previously filed on October 11, 2005, as exhibit to Current Report on Form 8-K, File No. 000-28443).
|
|
10.12
|
|
Settlement and License Agreement dated October 12, 2005, by and between Cytomedix, Inc., and SafeBlood Technologies, Inc. (Previously filed on November 9, 2005, as exhibit to Form 10-QSB, File No. 000-28443).
|
|
10.13
|
|
Employment Agreement with Ms. Carelyn P. Fylling (Previously filed on December 5, 2002, as exhibit to Form 10-QSB for quarter ended September 30, 2001, File No. 000-28443).*
|
|
10.14
|
|
Employment Agreement with Kshitij Mohan, Ph.D., dated April 20, 2004 (Previously filed on May 7, 2004, on Current Report on Form 8-K, File No. 00028443).*
|
|
10.15
|
|
Termination Agreement between Cytomedix, Inc., and Kshitij Mohan, dated April 20, 2004 (Previously filed on May 7, 2004, as exhibit to Current Report on Form 8-K, File No. 000-28443).*
|
|
10.16
|
|
Employment Agreement dated June 3, 2005, by and between Cytomedix, Inc., and Andrew Maslan (Previously filed on June 20, 2005, as exhibit to Current Report on Form 8-K, File No. 000-28443).*
|
|
10.17
|
|
Distributor Agreement dated October 31, 2005 by and between Cytomedix, Inc. and National Wound Therapies, LLC. (Previously filed on March 23, 2006, as exhibit to Form 10-KSB, File No. 001-32518).
|
|
10.18
|
|
Settlement and License Agreement dated May 19, 2006, between Cytomedix, Inc., and Biomet Biologics, Inc. (Previously filed on August 9, 2006, as exhibit to Form 10-Q, File No. 001-32518).
|
|
10.19
|
|
First Addendum to Letter Agreement dated October 4, 2006, between Cytomedix, Inc., and Andrew Maslan (Previously filed on November 1, 2006 as exhibit to Form 10-Q, File No. 001-32518).*
|
|
10.20
|
|
License Agreement between Cytomedix, Inc., and Smith & Nephew, Inc. (Previously filed on October 15, 2007 as exhibit to Current Report on Form 8-K, File No 001-32518).
|
|
23.1
|
|
Consent of LJ Soldinger Associates, LLC.
|
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TABLE OF CONTENTS
|
|
|
|
|
Number
|
|
Exhibit Table
|
|
23.2
|
|
Consent of PricewaterhouseCoppers, LLP
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certificate of Chief Executive Officer pursuant to 18 U.S.C.§1350.
|
|
32.2
|
|
Certificate of Chief Financial Officer pursuant to 18 U.S.C.§1350.
|
|
|
*
|
Indicates a management contract or compensatory plan or arrangement.
|
79