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EX-32.1 - CYTOMEDIX INCv178857_ex32-1.htm
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EX-32.2 - CYTOMEDIX INCv178857_ex32-2.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM 10-K



 

 
(Mark One)
    
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

OR

 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from  to .

Commission File Number 001-32518

[GRAPHIC MISSING]

CYTOMEDIX, INC.

(Exact Name of Registrant as Specified in Its Charter)

 
Delaware   23-3011702
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

416 Hungerford Drive, Suite 330
Rockville, MD 20850

(Address of Principal Executive Offices) (Zip Code)

(240) 499-2680

(Registrant’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.0001
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     
Large Accelerated Filer o   Accelerated Filer o   Non-Accelerated Filer o   Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting stock (Common stock) held by non-affiliates of the registrant as of the close of business on June 30, 2009 was approximately $16 million based on the closing sale price of the Common stock on the NYSE Amex on that date. The registrant does not have any non-voting common equity.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 37,284,206 shares of Common stock, par value $.0001, outstanding as of March 15, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 


 
 

TABLE OF CONTENTS

CYTOMEDIX, INC.

TABLE OF CONTENTS

 
  Page
PART I
 

Item 1.

Business

    1  

Item 1A.

Risk Factors

    16  

Item 1B.

Unresolved Staff Comments

    22  

Item 2

Properties

    22  

Item 3.

Legal Proceedings

    22  

Item 4.

Submission of Matters to a Vote of Security Holders

    22  
PART II
 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    23  

Item 6.

Selected Financial Data

    23  

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    24  

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

    29  

Item 8.

Financial Statements and Supplementary Data

    30  

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    56  

Item 9A(T).

Controls and Procedures

    56  

Item 9B.

Other Information

    56  
PART III
 

Item 10.

Directors, Executive Officers and Corporate Governance

    57  

Item 11.

Executive Compensation

    60  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    63  

Item 13.

Certain Relationships and Related Transactions, and Director Independence

    65  

Item 14.

Principal Accountant Fees and Services

    66  
PART IV
 

Item 15.

Exhibits and Financial Statement Schedules

    67  
Signatures     68  
Exhibit Index     69  

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Cytomedix, Inc. that is based on management’s exercise of business judgment and assumptions made by and information currently available to management. Although forward-looking statements in this Annual Report reflect the good faith judgment of management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases and reports released by the Company, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect the Company’s current view of future events and are subject to certain risks and uncertainties as noted in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the expectations will materialize. Many factors could cause actual results to differ materially from these forward looking statements including those set forth in Item 1A of this Annual Report. Other unknown, unidentified or unpredictable factors could materially and adversely impact future results. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release any revisions to its forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.

The Company files reports with the Securities and Exchange Commission (“SEC” or “Commission”). It makes available on its website (www.cytomedix.com) free of charge its Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronic filing of such materials with or furnishing of them to the SEC. Information appearing at the Company’s website is not a part of this Annual Report. You can also read and copy any materials filed by the Company with the Commission at its Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission, including Cytomedix.

The Company’s corporate headquarters are located at 416 Hungerford Drive, Suite 330, Rockville, MD 20850. Its phone number is (240) 499-2680. Its fiscal year begins on January 1, and ends on December 31, and any references herein to “Fiscal 2009” mean the year ended December 31, 2009, and references to other “Fiscal” years mean the year ending December 31, of the year indicated.

The Company owns or has rights to various copyrights, trademarks and trade names used in its business. This Annual Report also includes discussions of or references to other trademarks, service marks and trade names of other companies. Other trademarks and trade names appearing in this Annual Report are the property of the holder of such trademarks and trade names.

The Company obtained statistical data, market data and other industry data and forecasts used in this Annual Report from publicly available information. While it believes that the statistical data, industry data, forecasts and market research are reliable, the Company has not independently verified the data, and does not make any representation as to the accuracy of that information.

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PART I

Item 1. Business

Corporate Overview

Informatix Holdings, Inc. was incorporated in Delaware in 1998. In 1999, Autologous Wound Therapy, Inc. (“AWT”), an Arkansas Corporation, merged with and into Informatix Holdings, Inc. and the name of the surviving corporation was changed to Autologous Wound Therapy, Inc. In 2000, AWT changed its name to Cytomedix, Inc. (“Cytomedix” or the “Company”). In 2001, the Company filed bankruptcy under Chapter 11 of the United States Bankruptcy Code, after which Cytomedix was authorized to continue to conduct its business as debtor and debtor-in-possession. The Company emerged from bankruptcy in 2002 under a Plan of Reorganization. At that time, all of the Company’s securities or other claims against or equity interest in the Company were canceled and of no further force or effect. Holders of certain claims or securities were entitled to receive new securities from Cytomedix in exchange for their claims or equity interests prior to bankruptcy. All known and allowed claims and equity interests have been satisfied and resolved as of the filing of this Annual Report. The Company’s principal offices are located in Rockville, Maryland.

NYSE Amex — Approval of the Plan of Compliance

As previously disclosed, the Company was notified by the Exchange of its non-compliance with Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iii) of the Exchange Company Guide relating to its shareholders’ equity. On July 24, 2009, the Company received a letter from NYSE Amex (the “Exchange”) indicating that the Exchange accepted the Company’s plan of compliance and granted the Company an extension until November 12, 2010 to regain compliance with the Exchange’s continued listing requirements. The Company is required to provide the Exchange staff with updates on its progress relating to the execution of the plan so as to enable the Exchange staff to review the Company’s adherence to the plan during the extension period. Failure to regain compliance with the continued listing standards by the end of the extension period or to make progress consistent with the plan of compliance during the extension period could result in the Company being delisted from the Exchange. We maintain regular dialogue with the Exchange staff regarding our progress.

Financial Information About Segments and Geographic Regions

Cytomedix has only one operating segment and operates only in the United States. See Item 8, Financial Statements and Supplementary Data.

Business

Cytomedix is a biotechnology company that develops, sells, and licenses regenerative biological therapies, to primarily address the areas of wound care, inflammation, and angiogenesis. The Company currently markets the AutoloGelTM System, a device for the production of platelet rich plasma (“PRP”) gel derived from the patient’s own blood. The AutoloGelTM System is cleared by the Food and Drug Administration (“FDA”) for use on a variety of exuding wounds. The Company is currently pursuing a multi-faceted strategy to penetrate the chronic wound market with its AutoloGelTM System. We are also pursuing opportunities for the application of AutoloGelTM and PRP technology into other markets such as hair transplantation and orthopedics, as well as actively seeking complementary products for the wound care market. The Company is also seeking to monetize other product candidates in its pipeline through strategic partnerships, out-licensing, or sale. Most notably is its anti-inflammatory peptide (designated “CT-112”) that has shown promise in pre-clinical testing. Cytomedix sells its products primarily to health care providers in the United States. Until November 2009, it licensed certain of its patents to surgical medical device suppliers in the United States; these license agreements and the revenue streams associated therewith, have since terminated as the underlying patents have expired.

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AutoloGelTM System

Market

Cytomedix’s AutoloGelTM System currently targets the chronic wound technology market, which the Company estimates to be a $2.2 billion market. Chronic, non-healing wounds typically arise from one of three etiologies: diabetic foot ulcers, venous leg ulcers, and pressure ulcers. The following table lists the incidence of these wound types:

Incidence of Chronic Wounds in the U.S.
(Number of Wounds in Millions)
Source: Advanced Wound Management: Healing and Restoring Lives;
Advanced Medical Technology Association (AdvaMed), June 2006

 
  U.S.
Diabetic Foot Ulcers     1.5  
Venous Leg Ulcers     2.5  
Pressure Ulcers     2.0  
Totals     6.0  

The prevalence of chronic wounds in the U.S. is linked directly to increased aging demographics, vascular diseases, venous insufficiency, and excessive pressure and diabetic neuropathy. The prevalence of worldwide chronic wounds is estimated to be 18 million(1).

Diabetic Foot Ulcers — According to the American Diabetes Association(2), there are approximately 20.8 million people with diabetes in the U.S., or 7% of the total population. It is estimated that 15% of these people with diabetes will develop a foot ulcer in their lifetime and that 14 – 24% of diabetic foot ulcers result in amputation(3) Approximately 86,000 amputations per year occur due to these ulcers at an estimated amputation costs of $60,000 (2003 costs) per procedure(3), implying an aggregate cost of nearly $5.2 billion per year. The chances of a second amputation within 3 – 5 years may be as high as 50%, with a 5 year post-amputation mortality rate of 39 – 68%.(4)
Venous Stasis Leg Ulcers — Venous leg ulcers are the most frequently occurring type of chronic wound. The prevalence rises dramatically with age, increasing to 1% of the population over age 60. It is estimated that treatment costs total between $2.5 to $3.5 billion annually (1998 costs) and a loss of 2 million workdays per year.(5)
Pressure Ulcers — Over 2 million pressure ulcers occur each year with an annual cost greater than $1.3 billion (1994 costs). One study indicates that nearly 15% of hospitalized patients age 65 or older developed a pressure ulcer during a 5-day or longer stay. Furthermore, up to one-fifth of all home health service visits involve care of a pressure ulcer, and more than one-third of people with spinal cord injuries develop pressure ulcers.(5)

Broadly, the Company divides this market into targeted submarkets that contain substantial chronic wounds and have established payment pathways for our products. These include government agencies (including the Veterans Administration (“VA”), Department of Defense, Indian Health Services, and others), capitated environments (including Long-Term Acute Care hospitals (“LTAC”), health maintenance organizations, and others), state Medicaid agencies, and commercial third-party payors (e.g. Blue Cross/Blue Shield, Aetna, United Healthcare, etc).

(1) Growth Factors: Indications, Products, and Markets; Kalorama Publications (October 2003).
(2) http://www.diabetes.org (2008).
(3) H.R 3203 Submitted to the House of Representatives (September 30, 2003).
(4) Reiber GE, Boyko EJ, Smith DG: Lower Extremity Foot Ulcers and Amputations in Diabetes. In Diabetes in America. 2nd ed., National Institutes of Health, NIDDK, NIH Pub No. 95-1468 (1995).
(5) Advanced Wound Management: Healing and Restoring Lives; Advanced Medical Technology Association (AdvaMed) (June 2006).

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The Company believes that LTAC’s and VA Medical Centers together represent an approximately $500 million market. There are over 400 individual LTAC facilities in the U.S. accredited by the Joint Commission on the Accreditation of Healthcare Organizations and there are over 900 LTAC healthcare providers in the U.S. according to the American Hospital Association. There are approximately 1,300 VA facilities and it is estimated that the VA, Department of Defense, and Workers Compensation Programs represent nearly 10% of the total national healthcare expenditures.

The Company believes that the wound care market is generally complex and crowded with some products struggling to verifiably demonstrate clinical efficacy. Other commodity types of products have established habitual use patterns and provider contracts to encourage standardized use. As such, the uptake of new products, including the AutoloGelTM System, is generally slow, as most new products are met initially with a degree of skepticism. While this represents a challenge in the short-run, the Company believes the effectiveness demonstrated by AutoloGelTM will establish the technology in a permanent role within chronic wound care. The Company will continue to position the AutoloGelTM System as a proven wound care alternative that facilitates the body’s natural healing abilities to address a large unmet clinical need. In 2009, the Company successfully established several new customer accounts whose wound care professionals include recognized thought leaders in wound care. We believe that use by these thought leaders will encourage broader clinical acceptance of AutoloGelTM.

FDA Clearance

In September 2007, the Company received FDA marketing clearance for its AutoloGelTM System. The indications for use are as follows:

“The AutoloGelTM System is intended to be used at point-of-care for the safe and rapid preparation of platelet rich plasma (“PRP”) from a small sample of a patient’s own blood. Under the supervision of a healthcare professional, the PRP gel produced by the AutoloGelTM System is suitable for exuding wounds, such as leg ulcers, pressure ulcers, and diabetic ulcers and for the management of mechanically or surgically debrided wounds.”

This clearance is a broad indication for use that encompasses many wound etiologies as well as debrided wounds. It is the Company’s belief that this also establishes Cytomedix as the only company with an FDA cleared PRP gel system specifically for use on chronic wounds.

The Company promotes the AutoloGelTM System within the FDA’s specific marketing clearance for the gel to be used as a wound dressing for the management of these wounds. However, Company-sponsored published and unpublished studies, including a prospective, multi-center, randomized, blinded, controlled, clinical trial (published in a peer reviewed medical journal), as well as other published data on traditional treatments and competing advanced treatments for diabetic foot ulcers, indicate increased wound healing with the use of AutoloGelTM as compared to a control. Increased healing is not specifically included in the FDA cleared indication. In the 510(k) process, the claim made by the Company was that its product is substantially equivalent to other products legally on the market and therefore, the indication cleared was similar to that of other wound management products, which had not used healing as an endpoint.

In conjunction with the positive clearance decision from the FDA, the Company agreed to conduct a post-market surveillance program to further analyze the safety profile of bovine thrombin as used in the AutoloGelTM System. The Company has named this program The AutoloGelTM Post-marketing Surveillance (“TAPS”). The TAPS program was initiated in 2008 and will analyze data from 300 patients over a three year period, does not contain any specific inclusion/exclusion criteria other than following the FDA cleared Instructions for Use, and consists of some simple diagnostic blood tests. The entire program is estimated to cost between $500,000 and $700,000 in total. However, the Company expects to offset a portion of these costs through future sales of the AutoloGelTM System to those sites participating in the TAPS program. In addition to laboratory tests, data describing the wound repair process will be gathered and analyzed. The Company expects to publish the data generated from this study and leverage it as a tool in its sales and marketing efforts and its pursuit of Medicare and broad commercial insurance reimbursement. The Company began enrolling patients in the TAPS program in late 2009.

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AutoloGelTM Efficacy Studies

Cytomedix has completed several efficacy studies for AutoloGelTM. The ground breaking study was its prospective, randomized, blinded, controlled, multi-center clinical trial completed in 2005 (the “RCT”). Forty patients met the trial protocol, with 35 of the 40 patients (88%) having wounds less than or equal to 7 square centimeters in area and 2 cubic centimeters in volume (the “Majority Wound Group”). In the Majority Wound Group, the healing rate for AutoloGelTM was 81.3% and that for the control group was 42.1%. Within the full cohort of the 40 patients, 68.4% of the patients treated with AutoloGel TM achieved full wound closure versus 42.9% of those patients treated in the control group.

Several other prospective and retrospective case studies, wound registries, and/or non-randomized trials have been completed and/or published. The results of these studies demonstrate healing outcomes for AutoloGelTM consistent with the trend in the RCT described above.

Two abstracts featuring the AutoloGelTM System were published at the April 2009 Symposium on Advanced Wound Care and Wound Healing Society (SAWC/WHS) Meeting. Two additional abstracts were presented at the October 2009 Clinical Symposium for Advances in Skin and Wound Care and a single abstract was presented at the October 2009 National Association for Long Term Hospitals (NALTH) conference. An AutoloGelTM case series, authored by one of our customers, was published in May 2009 in the journal Wounds. In the first half of 2009, we also collected new data through our clinical evaluations and customer experiences on 65 wounds of all types. The average duration of these wounds before the first treatment with AutoloGelTM was 48 weeks. The AutoloGelTM System produced a favorable clinical response in 97% of the wounds treated, resulting in a mean reduction in wound volume of 62% in less than three weeks of treatment on average. The Company expects this 65 wound case series to be published in a peer reviewed journal in the first half of 2010. Furthermore, 6 poster presentations and 1 oral presentation will be featured at the April 2010 SAWC/WHS Meeting. We believe that these recent publications, other published literature, and the data we continue to collect through product evaluations will support our marketing efforts and help build a compelling case for a reconsideration of Medicare Part B reimbursement by the Centers for Medicare and Medicaid Services (“CMS”).

Cytomedix believes that the efficacy of AutoloGelTM is directly linked to its formulation which includes specific centrifugation parameters, platelet concentrations, and other formulation enhancements, all of which enjoy patent protection through at least early 2019 in the United States and several other countries.

Economic Study

In September 2007, B&D Consulting, an independent, national, advisory and advocacy firm located in Washington, DC, (“B&D”) completed a Company-commissioned cost effectiveness analysis of AutoloGelTM as compared to certain alternative, advanced therapies for patients with diabetic foot ulcers (the “Economic Study”). Results of the Economic Study, as reported by the authors, show that AutoloGelTM demonstrates lower cost and better healing outcomes than the other therapies analyzed therein.

B&D developed the research methodology, model structure, assumptions, and inputs from the peer-reviewed literature, including the publication of Cytomedix’s RCT. Cytomedix paid B&D a one-time, fixed fee for its work. This fee was not dependent on the results of the Economic Study.

The estimated 5-year average direct wound care costs (exclusive of lost work, disability, etc.; inclusive of recurrent wounds, amputations, etc.) when AutoloGelTM was used to treat the most commonly sized diabetic foot ulcers were approximately $15,000. This was markedly less than similar costs ranging from approximately $24,000 to $47,000 when either standard of care or advanced therapies were simulated. Data from published articles of alternative treatments utilized in this model included such therapies as standard of care alone, tissue engineered grafts, ultrasound, single growth factor therapies, and negative pressure wound therapy. Therapies that did not have published, peer-reviewed studies of their use in diabetic foot ulcers, with full wound healing as the primary endpoint, were not considered in the Economic Study. This study was published in the journal Advances in Skin and Wound Care in December 2008.

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Sales and Marketing

The Company’s focus is currently on the targeted submarkets that have established payment pathways for our products. In the first quarter of 2008, it initiated a deliberate strategic launch designed to refine/improve the sales approach for the AutoloGelTM System and provide incremental investment in the sales and marketing efforts.

In January 2009, we implemented a strategic shift in the commercialization tactics for marketing of the AutoloGelTM System. We have placed new emphasis on scientific and clinical messaging, and have realigned the commercial organization to reflect a stronger requirement for clinical support during the sales process. We have added clinical support staff to facilitate clinical product evaluations and establish protocols for the standardized use of the AutoloGelTM System and have added several additional sales representatives. Our company executives have joined sales managers and clinical staff in the selling process to establish a greater sense of importance and commitment to the AutoloGelTM System and the positive patient outcomes it produces. Early results of the strategy indicate sales growth and broader customer acceptance. We have experienced a marked increase in the number of product evaluations and interest in the technology. Product sales in 2009 were more than double those in 2008. In 2009, we also added some of the top key opinion leaders in wound care to our roster of clients. These leaders have expressed strong initial support for our technology and continue to be active users/buyers of AutoloGelTM. As their experience with AutoloGelTM grows over time, we expect their influence in the clinical community will help drive sales as well as influence additional thought leaders, advocacy groups, and CMS. Our focus is to continue and accelerate this growth trend in the coming quarters.

We have developed a new packaging concept, based on customer feedback, which we expect to introduce in the first half of 2010. The new design and component enhancements will improve the customer experience, reduce process steps and simplify the preparation of AutoloGelTM. We are also working with medical device engineers to further refine the AutoloGelTM System.

Within the current target market, Cytomedix has focused most of its attention within LTAC’s and the VA Medical Centers. Its sales in 2008 and 2009 were primarily generated from these facilities. In 2010, the Company will focus largely on executing its sales strategy within this subset of its current target market, initiate efforts to obtain selected commercial insurance reimbursement, and explore additional state Medicaid coverage. The Company currently enjoys coverage in Illinois and Minnesota, and may seek to expand that to other states where it has adequate sales representation. The Company has also instituted a pilot program whereby it will seek reimbursement from commercial insurers by obtaining prior authorization to treat patients. Success of this pilot program will provide an additional viable payment pathway for AutoloGelTM and support our efforts to obtain Medicare coverage. To a lesser extent, the Company will also seek to facilitate sales into the surgical hair restoration market.

Distribution Agreement for Japan

In September 2009, we entered into a license and distribution agreement with Millennia Holdings, Inc. (“Millennia”) for the Company’s AutoloGelTM System in Japan. The agreement provides territorial exclusivity for 10 years with the option to extend terms upon agreement by both parties. Millennia will be responsible for implementing regulatory and reimbursement processes for the AutoloGelTM System in Japan. Through its subsidiary wound management company, which is the sole wound management corporation in Japan, Millennia will work with its network of hospitals in Japan to conduct the necessary clinical studies for regulatory approval. Thereafter, Millennia plans to sell and distribute Cytomedix’s AutoloGelTM System for the treatment of a variety of chronic wounds, including diabetic wounds, which represent a growing and underserved patient population in Japan. The diabetic population in Japan is estimated to be 22.1 million, including patients suspected to have diabetes, according to the National Health and Nutrition Report 2008 by the Ministry of Health Labor and Welfare in Japan. This data indicates that nearly one out of five Japanese either has diabetes or is suspected to be diabetic, thus providing a significant market potential for diabetic wound healing in Japan. Cytomedix must supply Millennia with approximately $25,000 worth of equipment and inventory over the first three years of this agreement. As part of its performance milestones in these first three years, Millenia will complete an investigation of the Japanese regulatory environment as it relates to AutoloGel TM, introduce AutoloGelTM to the clinical marketplace, complete case studies in hospitals, and determine a pricing structure

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for the Japanese market, including transfer pricing to be agreed upon by Cytomedix. Thereafter, the parties will agree to a plan of distribution including minimum purchase commitments by Millennia.

Medicare Reimbursement

In March 2008, the Centers for Medicare and Medicaid Services (“CMS”) re-affirmed its 2003 decision of non-coverage for all PRP gel products, which includes AutoloGelTM, stating that the data available was “suggestive but not adequate.” Although the submarkets currently targeted by Cytomedix are significant, the Company believes the achievement of the full market potential of the AutoloGelTM System requires Medicare reimbursement. Therefore, it plans to continue to work with CMS and ultimately obtain a positive coverage decision.

The Company met with CMS in April 2008 to determine the optimal path forward for obtaining Medicare coverage for its AutoloGelTM System. In consultation with our advisors, we have formulated a four-pronged strategy to obtain Medicare coverage as follows:

Compile and publish additional data.  Cytomedix continues to gather additional data from two primary sources. First, our post market surveillance program (TAPS program) was designed to accumulate healing outcome data as well as safety data. TAPS follows a rigorous protocol that has Institutional Review Board (“IRB”) approval, involves multiple centers, and is well controlled. Second, as part of the clinical evaluations we conduct for prospective customers, we are able to gather efficacy data on AutoloGelTM. We expect to submit for publication data from the TAPS program by the end of 2010. Data on 65 wounds from the clinical evaluations has already been submitted for publication and is in the process of being edited based on editorial review board comments. We expect this article to be published in the first half of 2010. The data generated from these two sources will be the underpinning of our request for reconsideration by CMS.
Establish strong support among key advocacy groups.  There are numerous advocacy groups and professional societies whose members would benefit by the broad reimbursement of PRP gel. We are canvassing those groups who would stand to benefit by a positive coverage decision, and whose opinions are highly regarded by CMS. We are working to ensure they are fully informed of all the facts around PRP gel generally, and AutoloGelTM specifically, so that they may appropriately voice their perspective during the anticipated reconsideration.
Develop portfolio of other payors who reimburse for AutoloGelTM.  AutoloGelTM currently enjoys Medicaid reimbursement in Illinois and Minnesota. Additionally, several commercial insurers have reimbursed for AutoloGelTM. We are working to expand the number and frequency of such commercial and Medicaid payors. This broader coverage, along with the growing clinical acceptance resulting from our sales and marketing efforts, will create an environment that makes obtainment of Medicare coverage more likely.
Demonstrate political interest.  In 2009 we have obtained letters signed by numerous members of Congress indicating their interest in PRP gel and its potential as an effective treatment of chronic wounds. This is important to counterbalance the lobbying efforts of our competitors who, we believe, have previously lobbied against coverage for AutoloGelTM.

We expect to submit our request for reconsideration in the second half of 2010. We are working toward a positive coverage decision from CMS sometime in 2011.

Suppliers

The Company outsources manufacturing for all the components of the AutoloGelTM System. While the Company utilizes single suppliers for several components of AutoloGelTM, such components are generally readily available on the open market and therefore the Company believes that, with one exception, no dependencies exist from its current sourcing practices. The one exception is a reagent, bovine thrombin, available exclusively through King Pharmaceuticals.

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Competition

There are multiple wound care products across several categories, each of which may pose some form of competition to AutoloGelTM. However, many of these products may also be viewed and used in a complementary fashion with AutoloGelTM. A discussion of the competitive products follows below.

Wet to dry saline/gauze — The clinician will apply a dry gauze cover to the wound and soak it in saline. When dry, the gauze adheres, and can be removed to debride the wound. Cytomedix estimates that a significant number of wounds are still managed with this inexpensive, long standing approach.
Examples: Tyco, J&J gauze
Advanced wound dressings — These dressings are designed to interact with the wound characteristics. These dressings may provide a wound cover, debridement, absorption, delivery of moisture to the wound, etc. They typically use advanced materials or technology (e.g. foam, alginate, hydrocolloid, hydrogel) and may act as delivery systems for active ingredients (e.g. silver, iodine). These products seek to keep the wound moist, but not wet, and are also referred to as moist wound healing.
Examples: Duoderm, Allevyn, Kaltostat, Tegaderm, Aquacel AG, Mepilex
Skin substitutes — These include skin grafts or flaps, and biologically derived tissue or synthetic “skin” to replace the natural body cover. They are used frequently for burns and in selected chronic wounds to speed the process of wound healing. They tend to be used for large exposed areas, and the consequences of their failure to graft may prolong time to closure and be very expensive.
Examples: Aloderm, Apligraf, Dermagraft
Wound devices — Devices generally seek to circumvent deficiencies in the patients’ ability to regulate the biological, physical or chemical environment in the wound bed to facilitate the healing process. Usually these products seek to enhance the natural healing response through active alteration of the body’s regulation of heat, oxygen, electricity, pressure, or other homeostatic activity.
Examples: Negative pressure wound therapy (e.g. VAC), hyperbaric oxygen, enzymatic debriding, electro stimulation, ultrasound (e.g. MIST)
PRP GEL — Other platelet gel companies, many of whom had licensing agreements with Cytomedix that expired in November 2009, may pose a competitive threat in the future. To date, these companies are selling platelet gel mostly into the surgical markets (e.g. cardiovascular, orthopedic), but may also try to sell into the chronic wound care market. When compared to these products, Cytomedix’s AutoloGelTM System has the smallest, most portable centrifuge with the fastest spin time (1 minute compared to 13 – 20 minutes). This makes it possible to more easily use AutoloGelTM in a greater variety of health care settings (i.e. hospital, outpatient clinics, physicians’ offices, or long term care, long term acute care, and home health settings). In addition, it is a user-friendly system so multiple health care providers can process the gel, rather than specialty technicians. Other PRP systems generally require a larger blood draw, more detailed processing steps, and a longer spin time. While other platelet gel companies claim a larger growth factor and platelet count than at baseline, no studies exist that prove this is efficacious in chronic wounds. To date, Cytomedix’s AutoloGelTM System is the only platelet gel system that has completed a prospective, randomized, controlled trial in humans in the U.S. and AutoloGelTM is the only PRP gel to enjoy FDA marketing clearance for use on chronic wounds. Furthermore, AutoloGelTM’s patented formulation includes ascorbic acid, which aides in the formation of the collagen matrix and, as an anti-oxidant, scavenges free radicals, both important elements in the natural wound repair process.

Other Opportunities

The Company is seeking to identify other markets for its AutoloGelTM System. Process, formulation, and device improvements are expected to extend the Company’s market reach and patent protection.

The Company is currently implementing an improved kit design, with other additional enhancements that will ease clinician use. Furthermore, we are developing a significantly enhanced device that will remove several process steps and provide for a more sterile environment. These improvements will facilitate our ability to

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target certain surgical procedures. We expect to submit a 510(k) for this enhanced device in the fourth quarter of 2010. This device will represent a significant improvement over the device listed in our recent 510(k) for an orthopedic application. As such, we have voluntarily withdrawn our existing 510(k) as we expect the new device to be available for marketing within a several month period after the original device would have been cleared.

Additionally, we have partnered with Dr. Robert Reese, a leader in hair restoration surgery, to facilitate sales into the billion dollar U.S. surgical hair restoration market. Dr. Reese has conducted trials to determine the benefits of using AutoloGelTM in hair transplantation procedures and has been published on this subject. This is a natural market for Cytomedix as it is a self-pay market, so it is uncomplicated with insurance reimbursements, and the FDA indication covers the use of AutoloGelTM on wounds created during the hair transplantation procedure. Dr. Reese has been retained as a consultant to the Company.

The Company may also seek strategic partnerships to leverage the additional healing properties that combination therapies may provide or as the best means to address the markets outside of chronic wounds. Other markets where AutoloGelTM may also be relevant are:

Angiogenesis (the growth of new blood vessels)
Application system for biologics, synthetics
Delivery system for stem cells

Anti-inflammatory Peptide

CT-112, an anti-inflammatory octapeptide, continues to represent an avenue through which we can further monetize our intellectual property. In pre-clinical in-vitro and in-vivo studies, CT-112 was shown to be potentially useful as a therapeutic for a number of autoimmune diseases, such as rheumatoid arthritis, graft-versus-host disease, chronic obstructive pulmonary disease, reperfusion injury and atherosclerosis. Market assessments found that these fields are crowded with new therapies under investigation and that the requisite clinical trials are lengthy and involve large numbers of patients. The Company engaged the Frankel Group to conduct a review of potential therapeutic indications for CT-112, which revealed a number of underserved conditions that provide optimal market opportunity along with a well-defined regulatory pathway. Initial targets may include Pyoderma Gangrenosum (PG), atopic dermatitis, and an anti-inflammatory coating for medical devices. To facilitate partnering and further development of the CT-112 candidate, we have completed studies in human cell systems that are intended to provide potency estimates. We currently are engaged in discussions with strategic partners regarding development of the CT-112 candidate as a coating for medical devices.

Patents, Licenses, and Property Rights

Cytomedix relies on a combination of patents, trademarks, trade secrets, and copyright laws, as well as confidentiality procedures, contractual provisions, and other similar measures, to establish and protect its intellectual property.

The Company is party to certain royalty agreements relating to its intellectual property under which it pays certain fees, as follows:

Curative Health Services, Inc. is entitled 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 patents it acquired from Curative. The DePuy and other license agreements concluded in November 2009, simultaneous with the expiration of the underlying patents. The Company currently has no further income relating to the Curative patents on which it would owe a royalty.

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Mr. Charles Worden is entitled to receive a royalty equal to 5% of gross profits on revenues generated from reliance on the Worden Patents (U.S. patents 6,303,112 and 6,524,568), patents covering the formulation of AutoloGelTM, 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 on the patents as well as a reversionary interest if the Company discontinues substantially all efforts to commercialize the underlying patents.

Patents

Cytomedix’s patent strategy, designed to maximize value, seeks to (i) assist the Company in establishing significant market positions for its products, (ii) attract strategic partners for collaborative research, development, marketing, distribution, or other agreements, which could likely include milestone payments to the Company, and (iii) generate revenue streams through licensing agreements.

Cytomedix’s current patent portfolio consists of more than 30 domestic and international patents that generally fall into the following families:

Process, formulation, and methods for utilizing platelet releasates to heal damaged tissue
Biomarkers for wound healing treatment efficacy
Peptides with anti-inflammatory properties
Peptides with angiogenic properties

The above patent families encompass the Company’s AutoloGelTM System, CT-112 anti-inflammatory peptide, homologous growth factors, wound-healing biomarkers, and several other potential therapies. Cytomedix is continually assessing new opportunities to create or in-license other intellectual property assets. In 2010, the Company is planning to file at least several new provisional patent applications covering new inventions or improvements to existing patents.

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Licensing

The Company has established its intellectual property rights arising from its process patents regarding the use of platelet releasates to heal damaged tissue. Over several years it has reached settlement and/or licensing agreements with numerous companies infringing or seeking to avoid infringement of the Company’s patents as listed in the table below. The underlying patents expired in late November 2009.

       
Licensee   Date of
Agreement
  Date of
Expiration(1)
  Lump Sum(2)   On-going Royalty
Percentage
DePuy Spine, Inc.(3)     3/19/2001       11/24/2009     $ 750,000       6.5%  
       3/4/2005                             
Medtronic, Inc. (assigned to Arteriocyte Medical Systems, Inc. effective November 2007)     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 (4)      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 (4)      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) 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.
(2) 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.
(3) Cytomedix had two license agreements with DePuy Spine, Inc. The original license agreement is dated March 19, 2001, subsequently amended on 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.
(4) Some of these amounts were payable over a period of time as defined in executed notes payable to Cytomedix.
(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 were not tied to any performance commitments by Cytomedix and were not dependent on Biomet sales.

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Government Regulation

Government authorities in the United States at the federal, state, and local levels extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, sampling, marketing, and import and export of pharmaceutical products, biologics, and medical devices. The Company’s products and product candidates are subject to regulatory approval or clearance by the FDA prior to commercialization. Various federal, state, and local statutes and regulations also govern testing, manufacturing, safety, labeling, storage, and record-keeping related to such products and their marketing. Cytomedix would also be required to obtain regulatory approval from comparable agencies in foreign countries before commercial marketing in those countries. Before a product candidate is approved by the FDA for commercial marketing, rigorous preclinical and human clinical testing is conducted to test the safety and effectiveness of the product. If the Company fails to comply with the applicable requirements under these laws and regulations at any time during the product development process, approval process, or after approval, it may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of the Company’s operations, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on the Company.

Medical Device Regulation

The AutoloGelTM System and other devices that the Company may manufacture and distribute are subject to regulations by the Food and Drug Administration, including marketing clearance or approval, record-keeping requirements, good manufacturing practices and mandatory reporting of certain adverse experiences resulting from use of the devices, and certain state agencies. Labeling and promotional activities are also subject to regulation by the FDA and the Federal Trade Commission, in certain circumstances. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses and the agency scrutinizes the labeling and advertising of medical devices to ensure that unapproved uses are not promoted. Before a new medical device can be introduced to the market, the manufacturer must generally obtain FDA clearance or approval. In the United States, medical devices are classified into one of three classes — Class I, II or III. The controls applied by the FDA to the different classifications are those believed by the FDA to be necessary to provide reasonable assurance that the device is safe and effective. Class I devices are non-critical products that the FDA believes can be adequately regulated by “general controls” that include provisions relating to labeling, manufacturer registration, defect notification, records and reports, and current good manufacturing practices (“cGMP”) based on the FDA’s Quality Systems Regulations. Most Class I devices are exempt from pre-market notification and some are also exempt from cGMP requirements. Class II devices are products for which the general controls of Class I devices, by themselves, are not sufficient to assure safety and effectiveness and, therefore, require special controls. Additional special controls for Class II devices include performance standards, post-market surveillance patient registries, and the use of FDA guidelines. Standards may include both design and performance requirements. Class III devices have the most restrictive controls and require pre-market approval by the FDA. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. The FDA inspects medical device manufacturers and has a broad authority to order recalls of medical devices, to seize non-complying medical devices, and to criminally prosecute violators.

Section 510(k) of the Federal Food, Drug and Cosmetic Act requires individuals or companies manufacturing most medical devices intended for human use to file a notice with the FDA at least ninety days before intending to introduce the device into the market. This notice, commonly referred to as a 510(k), must identify the type of classified device into which the product falls, the class of that type, and a specific product already being marketed or cleared by the FDA and to which the product is “substantially equivalent.” In some instances, the 510(k) must include data from human clinical studies in order to establish “substantial equivalence.” The FDA must agree with the claim of “substantial equivalence” before the device can be marketed. The statutory time frame for clearance of a 510(k) is 90 days, though it often takes longer.

If a product is Class III and does not qualify for the 510(k) process, then the FDA requires a pre-market approval (“PMA”) application and approval before marketing can begin. PMA applications must demonstrate, among other factors, that the device in question is safe and effective. Obtaining a PMA application approval can sometimes take several years, depending upon the complexity of the issues involved with the device. The

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statutory time frame for the review of a PMA by the FDA is 180 days and many devices are reviewed and approved within that time frame or within a few months afterward. Marketing approval based on a PMA is generally a longer process than the 510(k) clearance process that is typically obtained in comparatively less time.

The Company currently markets the AutoloGelTM System Centrifuge II, the AutoloGelTM Wound Dressing Kit, and certain commercially-available reagents (i.e. calcium chloride, ascorbic acid, ACD-A anticoagulant, and bovine thrombin). Each System component is a legally-marketed product that has been cleared by the FDA. The AutoloGelTM System Centrifuge II, when used with the AutoloGelTM Wound Dressing Kit and AutoloGelTM Reagents Kit, are suitable for use on exuding wounds such as leg ulcers, pressure ulcers and diabetic ulcers and for the management of mechanically or surgically-debrided wounds.

During 2003, the Company made a business decision to undertake a prospective, randomized, blinded, controlled trial for the AutoloGelTM System. The objective of the trial was to demonstrate safety and efficacy to the scientific and reimbursement community, as well as to the FDA, of the AutoloGelTM System for use on diabetic foot ulcers. In making this decision, the Company subjected itself to increased FDA oversight and its regulations governing the investigational use of medical devices, codified at 21 C.F.R. Part 812. To this end, the Company submitted an Investigational Device Exemption (“IDE”) application to the FDA under these rules and obtained approval on March 5, 2004, thus allowing the Company to begin its clinical trial. Once the study was completed and clinical results analyzed, the Company submitted a 510(k) requesting the FDA’s clearance of the AutoloGelTM System in January 2006, as discussed above, under the caption Clinical Trial and FDA Clearance. Clearance was received in September 2007.

As a manufacturer of medical devices, Cytomedix is also subject to and complies with good manufacturing practices of the Quality System Regulation in 21 C.F.R. Part 820 of the Food, Drug and Cosmetic Act.

Bio-Pharmaceutical Product Regulation

The Company’s CT-112 product candidate and other bio-pharmaceuticals it may develop are also regulated by the FDA. Under the United States regulatory scheme, the development process for new such products can be divided into two distinct phases:

Preclinical Phase.  The preclinical phase involves the discovery, characterization, product formulation and animal testing necessary to prepare an Investigational New Drug application (“IND”) for submission to the FDA. The IND must be accepted by the FDA before the drug can be tested in humans. The review period for an IND submission is 30 days, after which, if no comments are made by the FDA, the product candidate can be studied in Phase I clinical trials. Certain preclinical tests must be conducted in compliance with the FDA’s good laboratory practice regulations and the United States Department of Agriculture’s Animal Welfare Act.
Clinical Phase.  The clinical phase of development follows a successful IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy, and dosage of the drug in humans, as well as the ability to produce the drug in accordance with cGMP requirements. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study and the parameters to be used in assessing the safety and the efficacy of the drug. Each protocol must be submitted to the FDA as part of the IND prior to beginning the trial. Each trial must be reviewed, approved, and conducted under the auspices of an IRB and each trial, with limited exceptions, must include the patient’s informed consent. Typically, clinical evaluation involves the following time-consuming and costly three-phase sequential process:
Phase I.  In Phase I clinical trials, a small number of volunteers, typically healthy individuals, are tested with the drug to determine the drug’s safety and tolerability and includes biological analyses to determine the availability and metabolism of the active ingredient following administration.
Phase II.  Phase II clinical trials involve administering the drug to individuals who suffer from the target disease or condition to determine the drug’s potential efficacy and ideal dose. These clinical trials are typically well controlled, closely monitored, and conducted in a relatively small number of patients, usually involving no more than several hundred subjects.

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Phase III.  Phase III clinical trials are performed after preliminary evidence suggesting effectiveness of a drug has been obtained and safety, tolerability, and an ideal dosing regimen have been established. Phase III clinical trials are intended to gather additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to complete the information needed to provide adequate instructions for the use of the drug. Phase III trials usually include from several hundred to several thousand subjects.
Throughout the clinical phase, samples of the product made in different batches are tested for stability to establish shelf life constraints. In addition, large-scale production protocols and written standard operating procedures for each aspect of commercial manufacture and testing must be developed. These trials require scale up for manufacture of increasingly larger batches of bulk chemical. These batches require validation analyses to confirm the consistent composition of the product.
Phase I, II, and III testing may not be completed successfully within any specified time period, if at all. The FDA closely monitors the progress of each of the three phases of clinical trials that are conducted under an IND and may, at its discretion, reevaluate, alter, suspend (place on “clinical hold”), or terminate the testing based upon the data accumulated to that point and the agency’s assessment of the risk/benefit ratio to the patient. The FDA may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also request that additional clinical trials be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory approval of products under development. Furthermore, IRBs, which are independent entities constituted to protect human subjects at the institutions in which clinical trials are being conducted, have the authority to suspend clinical trials at their respective institutions at any time for a variety of reasons, including safety issues.

After the successful completion of Phase III clinical trials, the sponsor of the new bio-pharmaceutical submits a Biologics License Application (“BLA”) to the FDA requesting approval to market the product for one or more indications. A BLA is a comprehensive, multi-volume application that includes, among other things, the results of all preclinical studies and clinical trials, information about the drug’s composition and manufacturing, and the sponsor’s plans for producing, packaging, and labeling the drug. Under the Pediatric Research Equity Act of 2003, an application also is required to include an assessment, generally based on clinical study data, on the safety and efficacy of drugs for all relevant pediatric populations before the BLA is submitted. The statute provides for waivers or deferrals in certain situations. In most cases, the BLA must be accompanied by a substantial user fee. In return, the FDA assigns a goal of 10 months from acceptance of the application to return of a first “complete response,” in which the FDA may approve the product or request additional information.

The submission of the application is no guarantee that the FDA will find it complete and accept it for filing. The FDA reviews all BLA’s submitted before it accepts them for filing. It may refuse to file the application and request additional information rather than accept the application for filing, in which case, the application must be resubmitted with the supplemental information. After the application is deemed filed and accepted by the FDA, agency staff reviews a BLA to determine, among other things, whether a product is safe and effective for its intended use. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation of the data submitted in its BLA. As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of physicians, for review, evaluation, and an approval recommendation. The FDA is not bound by the opinion of the advisory committee. Drugs that successfully complete BLA review may be marketed in the United States, subject to all conditions imposed by the FDA.

Prior to granting approval, the FDA generally conducts an inspection of the facilities, including outsourced facilities, that will be involved in the manufacture, production, packaging, testing, and control of the drug candidate for cGMP compliance. The FDA will not approve the application unless cGMP compliance is satisfactory. If the FDA determines that the marketing application, manufacturing process, or manufacturing

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facilities are not acceptable, it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the marketing application does not satisfy the regulatory criteria for approval and refuse to approve the application by issuing a “not approvable” letter. The length of the FDA’s review may range from a few months to many years.

If the FDA approves the BLA, the product becomes available for physicians to prescribe in the United States. After approval, the BLA holder is still subject to continuing regulation by the FDA, including record keeping requirements, submitting periodic reports to the FDA, reporting of any adverse experiences with the product, and complying with drug sampling and distribution requirements. In addition, the BLA holder is required to maintain and provide updated safety and efficacy information to the FDA. The BLA holder is also required to comply with requirements concerning advertising and promotional labeling, including prohibitions against promoting any non-FDA approved or “off-label” indications of products. Failure to comply with those requirements could result in significant enforcement action by the FDA, including warning letters, orders to pull the promotional materials, and substantial fines. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval.

Biologics manufacturers and their subcontractors are required to register their facilities and products manufactured annually with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMP regulations. Facilities may also be subject to inspections by other federal, foreign, state or local agencies. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

In addition, following FDA approval of a product, discovery of problems with a product or the failure to comply with requirements may result in restrictions on a product, manufacturer, or holder of an approved marketing application, including withdrawal or recall of the product from the market or other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Also, the FDA may require post-market testing and surveillance to monitor the product’s safety or efficacy, including additional clinical studies, known as Phase IV trials, to evaluate long-term effects.

Fraud and Abuse Laws

The Company may also be indirectly subject to federal and state physician self referral laws. Federal physician self-referral legislation (commonly known as the “Stark Law”) prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated health services” if the physician or an immediate family member has any financial relationship with the entity. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties of up to $15,000 per referral and possible exclusion from federal health care programs such as Medicare and Medicaid. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund such amounts. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a health care provider to their patients when referring patients to that provider. Both the scope and exception for such laws vary from state to state.

The Company may also be subject to federal and state anti-kickback laws. Section 1128B (b) of the Social Security Act, commonly referred to as the Anti-Kickback Law, prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal health care program such as Medicare and Medicaid. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are otherwise lawful in businesses outside of the health care industry. The U.S. Department of Health and Human Services (“DHHS”) has issued regulations, commonly known as safe harbors that set forth certain provisions which, if fully met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Although

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full compliance with these provisions ensures against prosecution under the Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. The penalties for violating the Anti-Kickback Law include imprisonment for up to five years, fines of up to $250,000 per violation for individuals and up to $500,000 per violation for companies and possible exclusion from federal health care programs. Many states have adopted laws similar to the federal Anti-Kickback Law, and some of these state prohibitions apply to patients for health care services reimbursed by any source, not only federal health care programs such as Medicare and Medicaid.

In addition, there are two other health care fraud laws to which the Company may be subject, one which prohibits knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any health care benefit program, including private payers (“fraud on a health benefit plan”) and one which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. These laws apply to any health benefit plan, not just Medicare and Medicaid.

The Company may also be subject to other laws which prohibit submitting claims for payment or causing such claims to be submitted that are false. Violation of these false claims statutes may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs. These statutes include the federal False Claims Act, which prohibits the knowing filing of a false claim (or causing the submission of a false claim) or the knowing use of false statements to obtain payment from the U.S. federal government. When an entity is determined to have violated the False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Suits filed under the False Claims Act can be brought by an individual on behalf of the government (a “qui tam action”). Such individuals (known as “qui tam relators”) may share in the amounts paid by the entity to the government in fines or settlement. In addition certain states have enacted laws modeled after the False Claims Act. “Qui tam” actions have increased significantly in recent years causing greater numbers of health care companies to have to defend false claim actions, pay fines or be excluded from the Medicare, Medicaid or other federal or state health care programs as a result of an investigation arising out of such action.

Several states also have referral, fee splitting and other similar laws that may restrict the payment or receipt of remuneration in connection with the purchase or rental of medical equipment and supplies. State laws vary in scope and have been infrequently interpreted by courts and regulatory agencies, but may apply to all health care products and services, regardless of whether Medicaid or Medicare funds are involved.

Research and Development

The Company is currently focusing its limited resources primarily on broad commercialization of AutoloGelTM. It therefore expends only limited amounts on research and development activities (“R&D”). The Company currently has several development projects underway to enhance the AutoloGelTM System. These enhancements are designed to provide a more efficient user experience by removing steps from the process of creating AutoloGelTM, and to increase the closed nature of the device to allow for better suitability in a surgical setting. These enhancements will further strengthen our competitive edge in the chronic wound market, and also facilitate our entry into surgical markets and other applications. Some of these enhancements are expected to yield a family of patents. We are working with advisory, engineering, and design firms as well as OEM medical device manufacturers to develop these improvements. Total R&D expenditures in 2010 are expected to be in the range of $350,000 to $450,000.

Employees

As of this Annual Report, the Company had 17 employees, including the Company’s CEO, CFO, and VP of Professional Services. The remaining personnel consist of scientific, sales and marketing, accounting, clinical, and investor relations professionals. None of the Company’s employees is covered by a collective bargaining agreement or represented by a labor union. The Company considers its employee relations to be good.

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Item 1A. Risk Factors

The Company faces many risks. The risks described below may not be the only risks the Company faces. Additional risks not yet known or currently believed to be immaterial may also impair Cytomedix’s business. If any of the events or circumstances described in the following risks actually occurs, the Company’s business, financial condition or results of operations could suffer, and the trading price of its Common stock could decline. You should consider the following risks, together with all of the other information in this Annual Report on Form 10-K, before making an investment decision with respect to Cytomedix securities.

There is Substantial Doubt As to the Company’s Ability to Continue As a Going Concern

The Company has suffered recurring losses from operations and has insufficient liquidity to fund its ongoing operations that raise substantial doubt about its ability to continue as a going concern. In addition, the Company’s financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, there is substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the Company will need to increase sales volume and obtain additional capital to continue as a going concern and to fund our operations, including to:

Continue and increase investment in sales and marketing activities related to the AutoloGelTM System
Pursue a strategic partner for CT-112
Develop additional new products and/or make improvements to existing products
Conduct additional trial(s) or studies to support efforts to obtain CMS reimbursement for its products
Pursue existing and new claims covered by intellectual property owned or contemplated by the Company
Sustain its corporate overhead requirements and hire and retain necessary personnel
Pursue other potential attractive opportunities

Until the Company can generate a sufficient amount of product revenue to finance its cash requirements, which it may not accomplish, it expects to finance future cash needs primarily through offerings of its debt or equity securities, strategic collaborations, or government grants. The Company does not know whether additional funding will be available on acceptable terms, or at all. If the Company is not able to secure additional funding when needed, it may have to delay, reduce the scope, or eliminate one or more of its programs, or substantially curtail or close its operations altogether. In addition, it may have to partner one or more of its technologies at an earlier stage of development, which could lower the economic value of those programs to the Company.

The Company’s Independent Registered Public Accounting Firm Has Expressed Substantial Doubt About Our Ability to Continue as a Going Concern

The Company has received an audit report from its independent registered accounting firm containing an explanatory paragraph stating that its historical recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern.

The Company Has Limited Sources of Working Capital

Because the Company was in bankruptcy in 2002 and due to the rights of some of the Company’s preferred shareholders, the Company may not be able to obtain debt financing. Working capital required to implement our business plan will most likely be provided by funds obtained through offerings of our equity securities, and revenues generated by the Company. No assurance can be given that the Company will have revenues sufficient to support and sustain its operations or that it would be able to obtain equity financing in the current economic environment. To date, the overwhelming majority of the Company’s revenues have been provided by its licensing agreements. These agreements expired in November 2009. There is no assurance that the Company will be able to replace these revenues through product sales, new licensing agreements, or other sources. If the Company does not have sufficient working capital and is unable to generate revenues or raise

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additional funds, the Company may delay the completion of or significantly reduce the scope of its current business plan; delay some of its development and clinical or marketing testing, its plans to pursue Medicare and/or commercial insurance reimbursement for its wound treatment technologies; or postpone the hiring of new personnel; or, under certain dire financial circumstances, cease its operations.

Adverse Conditions in the Global Economy and Disruption of Financial Markets May Significantly Restrict the Company’s Ability to Generate Revenues or Obtain Debt or Equity Financing

The global economy continues to experience volatility and uncertainty. Such conditions could reduce demand for the Company’s products, significantly jeopardizing the ability to achieve meaningful market penetration for AutoloGelTM. These conditions could also affect potential strategic partners of Cytomedix, which in turn could make it much more difficult to execute a strategic collaboration, and therefore significantly jeopardize the Company’s ability to fully develop CT-112. Global credit and capital markets continue to be relatively challenging. Cytomedix may be unable to obtain capital through issuance of its equity securities, a significant source of funding for the Company throughout its history. If it is unable to secure funding through strategic collaborations, equity investments, or debt financing, it may not be able to achieve profitability and could result in a cessation of operations.

Business credit and liquidity have tightened in much of the world. Volatility and disruption of financial markets could limit Cytomedix customers’ ability to obtain adequate financing or credit to purchase and pay for Cytomedix products in a timely manner, or to maintain operations, and result in a decrease in sales volume. General concerns about the fundamental soundness of domestic and international economies may also cause customers to reduce purchases. Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase credit availability may not be effective. Economic conditions and market turbulence may also impact the Company’s suppliers’ ability to supply sufficient quantities of product components in a timely manner, which could impair the Company’s ability to fulfill sales orders. It is difficult to determine the extent of the economic and financial market problems and the many ways in which they may affect the Company’s suppliers, customers, investors, and business in general. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm sales, profitability and results of operations.

Economic downturns or other adverse economic changes (local, regional, or national) can also hurt the Company’s financial performance in the form of lower interest earned on investments and/or could result in losses of portions of principal in the Company’s investment portfolio. While the Company’s investment policy requires it to invest only in short-term, low risk investments, there is no assurance that principal will not be eroded as a significant portion of these investments is in excess of federally mandated insurance.

The Company May Not Regain Compliance with the NYSE Amex Continued Listing Criteria

As a NYSE Amex listed company, Cytomedix is required to comply with the continued listing criteria of the exchange. We currently do not meet the minimum shareholders’ equity requirements per Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iii) of the Exchange Company Guide. On July 24, 2009, the Company received a letter from NYSE Amex (the “Exchange”) indicating that the Exchange accepted the Company’s plan of compliance and granted the Company an extension until November 12, 2010 to regain compliance with the Exchange’s continued listing requirements. In order to regain compliance, we will need to, among other things, increase our shareholders’ equity balance to at least $6 million. The Company is required to provide the Exchange staff with updates on its progress relating to the execution of the plan so as to enable the Exchange staff to review the Company’s adherence to the plan during the extension period. Failure to regain compliance with the continued listing standards by the end of the extension period or to make progress consistent with the plan of compliance during the extension period could result in the Company being delisted from the Exchange. There is no assurance that the Company will execute its compliance plan as intended or by the November 12, 2010 deadline. If we fail to reach the compliance goals set forth in the plan, we would likely be delisted from NYSE Amex, which could significantly reduce the active market for and liquidity of the Company’s stock.

The Company Has a History of Losses

The Company has a history of losses, is not currently profitable, and expects to incur substantial losses and negative operating cash flows for the foreseeable future. The Company may never generate sufficient revenues to achieve and maintain profitability. The Company will continue to incur expenses at current levels as it

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seeks to expand its operations, pursue development of its technologies, works to increase its sales, implement internal systems and infrastructure, and hire additional personnel. These ongoing financial losses may adversely affect the Company’s stock price.

The Company Has a Short Operating History and Limited Operating Experience

The Company must be evaluated in light of the uncertainties and complexities affecting an early stage biotechnology company. The Company has only recently implemented its commercialization strategy. Thus, the Company has a very limited operating history. Continued operating losses, together with the risks associated with the Company’s ability to gain new customers for its product offerings may have a material adverse effect on the Company’s liquidity. The Company may also be forced to respond to unforeseen difficulties, such as decreasing demand for its products, downward pricing trends, and services, regulatory requirements and unanticipated market pressures. Since emerging from bankruptcy and continuing through today, the Company is developing a business model that includes protecting its patent position, addressing its third-party reimbursement issues, developing and executing a sales and marketing program, and developing other technologies covered by, or derived from, its intellectual property. There can be no assurance that its business model in its current form can accomplish the Company’s stated goals.

The Company’s Intellectual Property Assets Are Critical to Its Success

The Company regards its patents, trademarks, trade secrets, and other intellectual property assets as critical to its success. The Company relies on a combination of patents, trademarks, and trade secret and copyright laws, as well as confidentiality procedures, contractual provisions, and other similar measures, to establish and protect its intellectual property. The Company attempts to prevent disclosure of its trade secrets by restricting access to sensitive information and requiring employees, consultants, and other persons with access to the Company’s sensitive information to sign confidentiality agreements. Despite these efforts, the Company may not be able to prevent misappropriation of its technology or deter others from developing similar technology in the future. Furthermore, policing the unauthorized use of its intellectual property assets is difficult and expensive. Litigation has been necessary in the past and may be necessary in the future in order to protect the Company’s intellectual property assets. Litigation could result in substantial costs and diversion of resources. The Company cannot assure that it will be successful in any litigation matter relating to its intellectual property assets. Continuing litigation or other challenges could result in one or more of its patents being declared invalid. In such a case, any royalty revenues from the affected patents would be adversely affected although the Company may still be able to continue to develop and market its products. Furthermore, the unauthorized use of the Company’s patented technology by otherwise potential customers in its target market, may significantly undermine its ability to generate sales.

The Company’s patent covering the specific gel formulation that is applied as part of the AutoloGelTM System (the “Worden Patent”) expires no earlier than February 2019. The Company’s U.S. Knighton Patent (which was the subject of license agreements between the Company and Medtronic, Inc., DePuy Spine, Inc., Biomet Biologics, Inc., COBE Cardiovascular, Inc., and Harvest Technologies Corporation, among others) expired in November 2009. In 2009, the license agreements under the Knighton Patent accounted for approximately 89% of the Company’s revenues. There is no assurance that the Company will obtain a significantly increased share of the wound care market to replace the royalty revenue generated by the U.S. Knighton Patent in 2009. Furthermore, the Company may be more vulnerable to competitive factors because, henceforth, third parties will not then need a license from the Company to perform the methods claimed in the Knighton Patent.

The AutoloGelTM System and Components are Subject to Governmental Regulation

The Company’s success is also impacted by factors outside of the Company’s control. The Company’s current technology and products may be subject to extensive regulation by numerous governmental authorities in the United States, both federal and state, and in foreign countries by various regulatory agencies. Specifically, the Company’s devices and bio-pharmaceutical products are subject to regulation by the FDA and state regulatory agencies. The FDA regulates drugs, medical devices and biologics that move in interstate commerce and requires that such products receive clearance or pre-marketing approval based on evidence of safety and efficacy. The regulations of government health ministries in foreign countries are analogous to those of the FDA in both application and scope. In addition, any change in current regulatory interpretations by, or positions of, state regulatory officials where the AutoloGelTM System is used could materially and adversely affect

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the Company’s ability to sell products in those states. The FDA will require the Company to obtain clearance or approval of new devices when used for treating specific wounds or marketed with specific wound healing claims, or for other products under development.

The Company believes that the AutoloGelTM System and all Company products are legally marketed. The FDA has cleared the Company to market the AutoloGelTM System, including the Wound Dressing Kit and Centrifuge II, for use in exuding wounds such as leg ulcers, pressure ulcers, and diabetic ulcers, and the management of mechanically and surgically-debrided wounds. As the Company expands and offers additional products in the United States and in foreign countries, clearance or approval from the FDA and comparable foreign regulatory authorities prior to introduction of any such products into the market may be required. The Company has no assurance that it will be able to obtain all necessary approvals from the FDA or comparable regulatory authorities in foreign countries for these products. Failure to obtain the required approvals would have a material adverse impact on the Company’s business and financial condition.

Compliance with FDA and other governmental requirements imposes significant costs and expenses. Further, the Company’s failure to comply with these requirements could result in sanctions, limitations on promotional or other business activities, or other adverse effects on the Company’s business. Further, recent efforts to control healthcare costs could negatively affect demand for the Company’s products and services.

Clinical Trials May Fail to Demonstrate the Safety or Efficacy of the Company’s Product Candidates

The Company’s product candidates are subject to the risks of failure inherent in the development of biotherapeutic products. The results of early-stage clinical trials do not necessarily predict the results of later-stage clinical trials. Product candidates in later-stage clinical trials may fail to demonstrate desired safety and efficacy traits despite having successfully progressed through initial clinical testing. Even if the Company believes the data collected from clinical trials of its product candidates is promising, this data may not be sufficient to support approval by the U.S. or foreign regulatory agencies. Pre-clinical and clinical data can be interpreted in different ways. Accordingly, the regulatory officials could reach different conclusions in assessing such data, which could delay, limit or prevent regulatory approval. In addition, the U.S. regulatory authorities or the Company may suspend or terminate clinical trials at any time. Any failure or delay in completing clinical trials for product candidates, or in receiving regulatory approval for the sale of any product candidates, has the potential to materially harm the Company’s business, and may prevent it from raising necessary, additional financing that may be needed in the future.

A Disruption in Healthcare Provider Networks Could Have an Adverse Effect on Operations and Profitability

The Company’s operations and future profitability are dependent, in large part, upon the ability to contract with healthcare providers on favorable terms. In any particular service area, healthcare providers could refuse to contract with Cytomedix or take other actions that could result in higher healthcare costs, or create difficulties in meeting the Company’s regulatory requirements. In some service areas, certain healthcare providers may have a significant market presence. If healthcare providers refuse to contract with Cytomedix, use their market position to negotiate unfavorable contracts or place the Company at a competitive disadvantage, the Company’s ability to market services or to be profitable in those service areas could be adversely affected. Provider networks could also be disrupted by the financial insolvency of a large healthcare provider group. Any disruption in provider networks could adversely impact the Company’s ability to generate revenues or profits.

The Company’s Sales and Marketing Strategy for Its AutoloGelTM System May Not Succeed

In January 2009, the Company implemented a revised sales and marketing strategy that focuses on intensive clinician to clinician interaction with both prospective and existing customers, and the scientific explanation of AutoloGelTM’s mechanism of action. There is no assurance that this approach will result in significant, sustainable growth in sales revenue, or that the Company, as currently capitalized, will have sufficient resources to provide the level of clinical support for this initiative to be successful.

CMS’s Non-Coverage of AutoloGelTM Could Greatly Restrict the Company’s Sales

The AutoloGelTM System is marketed to healthcare providers. Some of these providers, in turn, seek reimbursement from third-party payers such as Medicare, Medicaid, and other private insurers. Many foreign

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countries also have comprehensive government managed healthcare programs that provide reimbursement for healthcare products. Under such healthcare systems, reimbursement is often a determining factor in predicting a product’s success, with some physicians and patients strongly favoring only those products for which they will be reimbursed. With CMS’s national non-coverage decision, the market for the AutoloGelTM System is restricted and it may be difficult, if not impossible, to sell AutoloGelTM in most care settings. This currently hinders the Company’s ability to grow its revenues and could reduce the likelihood that it will ever achieve sustainable profitability. There is no assurance that the Company’s efforts to obtain CMS coverage will be successful.

The Company’s Intention to Develop a Plan to Secure Medicare Reimbursement Without Conducting a New Randomized Controlled Trial May Not Be Successful

In March 2008, CMS reaffirmed its 2003 non-coverage decision for PRP gel, which would include AutoloGelTM. Following CMS’s decision, the Company met with CMS in April 2008 to discuss the optimal path for securing future coverage for AutoloGelTM and in concert with consultants and advisors, has developed a multi-pronged strategy to obtain Medicare reimbursement for AutoloGelTM. While the Company is striving to obtain a positive coverage decision without undertaking a new randomized, controlled trial with the same rigors, restrictions, and costs of its previous RCT, there is no assurance that the Company will ultimately be successful with this strategy and that CMS will determine that the evidence is sufficient to reverse all or a portion of its existing non-coverage decision. If we later determine that a new randomized, controlled trial is necessary, it could cost several millions of dollars and take multiple years to complete. The Company would almost certainly need to obtain additional, outside financing to fund such a trial.

The Company May Be Unable to Attract a Strategic Partner for the Further Development of CT-112

Due to our limited resources, we have determined that the best vehicle to move the development of CT-112 forward is through a strategic partnership, outlicensing, or other similar arrangement. While we are engaged in ongoing discussions with potential partners or licensees, there is no assurance that we will be able to come to any such agreement. Furthermore, even if such a strategic relationship regarding CT-112 is reached, there is no assurance that development milestones, clinical data, or other such benchmarks will be achieved. Therefore, CT-112 may never proceed toward commercialization or drive cash infusions for the Company, and we may ultimately not be able to monetize the patents, existing clinical data, and other intellectual property related to CT-112.

The Success of the AutoloGelTM System Is Dependent on Acceptance by the Medical Community

The commercial success of the Company’s products and processes will depend upon the medical community and patients accepting the therapies as safe and effective. If the medical community and patients do not ultimately accept the therapies as safe and effective, the Company’s ability to sell the products and processes will be materially and adversely affected. While acceptance by the medical community may be fostered by broad evaluation via peer-reviewed literature, the Company may not have the resources to facilitate sufficient publication.

The Company May Be Unable to Attract and Retain Key Personnel

The future success of the Company depends on the ability to attract, retain and motivate highly skilled management, including sales representatives. The Company has retained a team of highly qualified officers and consultants, but the Company cannot provide assurance that it will be able to successfully retain all of them, or be successful in recruiting additional personnel as needed. The Company’s inability to do so will materially and adversely affect the business prospects, operating results and financial condition. The Company’s ability to maintain and provide additional services to its existing customers depends upon its ability to hire and retain business development and scientific and technical personnel with the skills necessary to keep pace with continuing changes in regenerative biological therapy technologies. Competition for such personnel is intense; the Company competes with pharmaceutical, biotechnology and healthcare companies. The Company’s inability to hire additional qualified personnel may lead to higher recruiting, relocation and compensation costs for such personnel. These increased costs may reduce the Company’s profit margins or make hiring new personnel impractical.

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Legislative and Administrative Action May Have an Adverse Effect on the Company

Political, economic and regulatory influences may subject the health care industry in the United States to fundamental change. The Company cannot predict what other legislation relating to its business or to the health care industry may be enacted, including legislation relating to third-party reimbursement, or what effect such legislation may have on the Company’s business, prospects, operating results and financial condition. The Company expects federal and state legislators to continue to review and assess alternative health care delivery and payment systems and possibly adopt legislation affecting fundamental changes in the health care delivery system. Such laws may contain provisions that may change the operating environment for its targeted customers including hospitals and managed care organizations.

Health care industry participants may react to such legislation by curtailing or deferring expenditures and initiatives, including those relating to the Company’s products. Future legislation could result in modifications to the existing public and private health care insurance systems that would have a material adverse effect on the reimbursement policies discussed above.

With growing pressures on government budgets due to the current economic downturn, government efforts to contain or reduce health care spending are likely to gain increasing emphasis. Several members of the current presidential administration and Congress are espousing support for cost-containment measures that could have significant implications for healthcare therapies, including the Company’s current and future products. If enacted and implemented, such measures could result in decreased revenue from the AutoloGelTM System and decrease potential returns from the Company’s research and development initiatives.

Furthermore, there is no assurance that we will be able to successfully neutralize any lobbying efforts against our efforts to secure Medicare coverage or other initiatives we may have with governmental agencies.

The Company Could Be Affected by Malpractice Claims

Providing medical care entails an inherent risk of professional malpractice and other claims. The Company does not control or direct the practice of medicine by physicians or health care providers who use the products and does not assume responsibility for compliance with regulatory and other requirements directly applicable to physicians. The Company cannot assure that claims, suits or complaints relating to the use of the AutoloGelTM System and treatment administered by physicians will not be asserted against the Company in the future. The production, marketing and sale, and use of the AutoloGelTM System entail risks that product liability claims will be asserted against the Company. These risks cannot be eliminated, and the Company could be held liable for any damages that result from adverse reactions or infectious disease transmission. Such liability could materially and adversely affect the Company’s business, prospects, operating results and financial condition. The Company currently maintains professional and product liability insurance coverage, but the Company cannot give assurance that the coverage limits of this insurance would be adequate to protect against all potential claims. The Company cannot assure that it will be able to obtain or maintain professional and product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities.

AutoloGelTM Has Existing Competition in the Marketplace

In the market for biotechnology products, the Company faces competition from pharmaceutical companies, biopharmaceutical companies, medical device companies, and other competitors. Other companies have developed or are developing products that may be in direct competition with the AutoloGelTM System. Biotechnology development projects are characterized by intense competition. Thus, the Company cannot assure any investor that it will be the first to the market with any newly developed products or that it will successfully be able to market these products. If the Company is not able to participate and compete in the regenerative biological therapy market, the Company’s financial condition will be materially and adversely affected. The Company cannot assure that it will be able to compete effectively against such companies in the future. Many of these companies have substantially greater capital resources, larger marketing staffs and more experience in commercializing products. Recently developed technologies, or technologies that may be developed in the future, may be the basis for developments that will compete with the Company’s products.

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The Company May Likely Issue Additional Equity or Debt Securities Which May Materially and Adversely Affect the Price of Its Common Stock

Sales of substantial amounts of shares of the Company’s Common stock in the public market, or the perception that those sales may occur, could cause the market price of its Common stock to decline. Cytomedix has used, and will likely continue to use, its Common stock or securities convertible into or exchangeable for Common stock to fund working capital needs or to acquire technology, product rights or businesses, or for other purposes. If additional equity securities are issued, particularly during times when the Company’s Common stock is trading at relatively low price levels, the price of its Common stock may be materially and adversely affected.

There is a Limited Public Trading Market for the Company’s Common Stock

The average daily trading volume in Cytomedix Common stock is relatively low. As long as this condition continues, it could be difficult or impossible to sell a significant number of shares of Common stock at any particular time at the market prices prevailing immediately before such shares are offered. Stockholders may be required to hold shares of Cytomedix’s Common stock for an indefinite period of time. In addition, sales of substantial amounts of Common stock could lower the prevailing market price of the Company’s Common stock. This would limit or perhaps prevent the Company’s ability to raise capital through the sale of securities. Additionally, the Company has significant numbers of outstanding warrants and options that, if exercised and sold, could put additional downward pressure on the Common stock price. In addition, in recent years, and especially in recent months, the stock market in general, and the market for life sciences companies in particular, have experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and it may adversely affect the price of Cytomedix’s Common stock. These broad market fluctuations may reduce the demand for the Company’s stock and therefore adversely affect the price of the Company’s securities, regardless of operating performance.

The Company is Subject to Anti-Takeover Provisions and Laws

Provisions in Cytomedix’s Restated Certificate of Incorporation and Restated Bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult for a third party to acquire control of the Company without the approval of the Board of Directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of the Company’s outstanding voting Common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect the Common stock price.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company does not own any real property and does not intend to invest in any real property in the foreseeable future. The Company’s offices and storage facilities are located in Rockville, Maryland, comprise 3,100 square feet under an operating lease expiring June 30, 2011. See Note 17 to the Financial Statements.

Item 3. Legal Proceedings

At present, the Company is not engaged in or the subject of any legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Since June 2005, the Company’s Common stock has been listed on the NYSE Amex (formerly the American Stock Exchange) under the symbol “GTF.” Set forth below are the high and low closing sale prices for the Common stock for each quarter in the two most recent fiscal years as reported by NYSE Amex. The quotations reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not represent actual transactions.

   
Quarter Ended   High   Low
December 31, 2009   $ 0.66     $ 0.36  
September 30, 2009   $ 0.81     $ 0.35  
June 30, 2009   $ 1.05     $ 0.28  
March 31, 2009   $ 0.60     $ 0.18  
December 31, 2008   $ 0.84     $ 0.15  
September 30, 2008   $ 0.90     $ 0.45  
June 30, 2008   $ 1.09     $ 0.60  
March 31, 2008   $ 2.04     $ 0.58  

On March 15, 2010, the closing price of the Company’s Common stock was $0.45.

Holders

There were approximately 613 shareholders of record of Common stock as of March 15, 2010.

Dividends

Cytomedix did not pay dividends to holders of Common stock in 2009 or 2008. The Company is prohibited from declaring dividends on Common stock if any dividends are due on shares of Series A, B, or C Convertible Preferred stock. If there are no unpaid dividends on shares of Series A, B, or C Convertible Preferred stock, any decision to pay cash dividends on Common stock will depend on the Company’s ability to generate earnings, need for capital, and overall financial condition, and other factors the Board deems relevant. Cytomedix does not anticipate paying cash dividends on Common stock in the foreseeable future, but instead will retain any earnings for reinvestment in the business.

Issuer Purchases of Equity Securities

The Company did not make any stock repurchases during the last quarter of 2009.

Recent Sales of Unregistered Securities

The Company did not issue any unregistered securities during the last quarter of 2009.

Item 6. Selected Financial Data

As a smaller reporting issuer (as defined in Item 10(f)(1) of Regulation S-K), the Company is not required to report selected financial data specified in Item 301 of Regulation S-K.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Historically, the Company’s revenues have primarily been earned through its licensing agreements. These revenues, net of related royalty and contingent legal fees, represented the primary source of cash from operations for the Company in 2008 and 2009. These revenues, which constituted approximately 89% of the Company’s revenues in 2009, ceased at the end of November 2009 as the underlying license agreements expired at that time.

Sales of the Company’s products, while growing, are currently very modest. The Company implemented a strategic shift in its commercialization efforts in January 2009. This new approach focuses on the scientific mechanisms underpinning AutoloGelTM, and leverages our clinical expertise in chronic wound care. Part of this new sales approach includes increased clinical involvement by our staff to assist prospective customers in conducting intensive on-site evaluations of AutoloGelTM and offering on-going support to existing customers in order to optimize healing outcomes. This new approach is eliciting positive customer responses. In 2009, product sales of $226,000 were more than double those in 2008, evidencing success of the new sales strategy. We expect continued growth in the coming quarters. The Company continues to target selected submarkets, including the Veterans Administration and other government agency health facilities, as well as capitated payment scheme environments such as long-term acute care facilities.

Our revenues are insufficient to cover our operating expenses. Operating expenses primarily consist of employee compensation, professional fees, consulting expenses, and other general business expenses such as insurance, travel expenses, and sales and marketing related items. Cash used in operations is expected to increase in the short term as we have increased our investment in our AutoloGelTM commercialization efforts, and no longer enjoy the inflows from the now expired licensing agreements.

Comparison of Years Ended December 31, 2009 and 2008

Revenues

Revenues fell $25,000 (1%) to $2,066,000, comparing the year ended December 31, 2009, to the previous year. Revenues are normally generated from two sources: the sale of the disposable kits and reagents and royalties received from licensing activities. The decrease was due to lower royalties of $150,000, mostly offset by higher product sales of $125,000. Decreases in royalties were due to the conclusion of licensing agreements in late November 2009 upon expiration of the patents underlying these agreements. Product sales grew as a result of our strategic shift in commercialization tactics which emphasizes scientific messaging and clinical support. We expect continued growth in product sales in 2010.

Gross Profit

Gross profit rose $118,000 (8%) to $1,607,000, comparing the year ended December 31, 2009, to the previous year. For the same periods, gross margins rose to 78% from 71%. The increase in gross profits is attributable to improved margins. Gross margins on royalties increased by a shift to higher margin royalty revenue, but were partly offset by a shift in product revenue to lower margin reagent kits and a $14,000 write-off of obsolete inventory in the second quarter of 2009.

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Operating Expenses

Operating expenses fell $4,327,000 (46%) to $5,057,000, comparing the year ended December 31, 2009, to the previous year. A discussion of the various components of Operating expenses follows below.

Salaries and Wages

Salaries and wages fell $435,000 (17%) to $2,183,000, comparing the year ended December 31, 2009, to the previous year. The decrease was primarily due to lower bonus expense ($493,000), as the Company elected not to pay bonuses to employees in 2009, and the accrual in 2008 of a severance package to the former CEO ($510,000). These amounts were partly offset by higher salaries ($341,000), and the reversal in 2008 of the bonus accrual for the former CEO ($192,000).

Consulting Expenses

Consulting expenses fell $77,000 (25%) to $236,000, comparing the year ended December 31, 2009, to the previous year. The decrease was primarily due to non-cash equity-based compensation expenses associated with the modification of certain consultant warrants in 2008.

Professional Fees

Professional fees fell $125,000 (15%) to $709,000, comparing the year ended December 31, 2009, to the previous year. Professional fees consist primarily of legal and accounting services.

The decrease was primarily due to lower legal fees ($130,000) associated with Medicare reimbursement efforts and patent maintenance fees.

Trials and Studies

Trials and studies expenses rose $82,000 (56%) to $227,000, comparing the year ended December 31, 2009, to the previous year. The increase was due to increased costs associated with the TAPS program ($30,000) and the CT-112 project ($52,000), both initiated in the third quarter of 2008.

General and Administrative Expenses

General and administrative expenses fell $229,000 (12%) to $1,701,000, comparing the year ended December 31, 2009, to the previous year. Decreases in patent amortization ($151,000), equity-based compensation ($216,000), recruiting fees ($43,000), information technology costs ($35,000), investor services ($22,000) and various other expenses, were partly offset by increased travel expenses ($130,000) and sales supplies ($52,000).

Impairment of Goodwill and Patents

Impairment of goodwill and patents expense was $3,543,000 for the year ended December 31, 2008. The impairment charge was due to the reduced value of the Company’s intellectual property as a result of its negative cash flows and the substantial doubt as to its ability to continue as a going concern. There was no impairment charge in 2009.

Other Income

Other income fell $222,000 (95%) to $11,000 comparing the year ended December 31, 2009, to the previous year. The decrease was primarily due to lower net interest earned on cash invested in money market accounts and notes receivable balances ($147,000), and lower patent settlement income ($71,000) as the Company had received a final balloon payment in the third quarter of 2008 under a license agreement it was accounting for on a cash basis.

Liquidity and Capital Resources

As of December 31, 2009, we had cash and equivalents of approximately $2.1 million and working capital of approximately $1.5 million. Our financing activities provided approximately $1.4 million, net in each of the years 2009 and 2008 through the issuance of Common stock and warrants in registered direct offerings.

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There exists substantial doubt that the Company will continue as a going concern. We believe that we have adequate cash to fund operations through the second quarter of 2010. However, our long term viability is dependent upon, among other things, our ability to raise additional debt and/or equity financing. The licensing agreements, under which the Company’s royalty revenues are generated, expired in late November 2009. This revenue, which constituted approximately 89% of the Company’s revenues in 2009, has ceased and there is no assurance that the Company will be able to replace this revenue through increased sales of its current or future products, new license agreements, or other mechanisms.

Additional cash will be required for the Company to pursue its strategic plan. Specific programs that may require additional funding include, without limitation: continued investment in the sales and marketing efforts, new product development or modifications, conduct of the studies the Company deems necessary in order to obtain CMS coverage, solicitation of a partner for further development of CT-112, and pursuit of certain other attractive opportunities for the Company. We are exploring potential strategic partnerships for some of these endeavors, which could provide a capital infusion to the Company. However, it may be necessary to partner one or more of our technologies at an earlier stage of development, which could cause the Company to share a greater portion of the potential future economic value of those programs with its partners. We will seek to raise capital through the issuance of our equity securities, though this may result in significant dilution to our existing investors. The Company continuously assesses the state of the capital markets and its access to capital. It weighs the cost of capital and dilutive effects of equity issuance against the expected benefits of further pursuit of certain strategic objectives. The Company’s ability to raise additional capital is dependent on, among other things, the state of the financial markets at the time of any proposed offering. Given the current state of the financial markets, the likelihood of a capital raise may be significantly diminished. Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. There is no assurance that additional funding, through any of the aforementioned means, will be available on acceptable terms, or at all. If we do not obtain additional financing prior to the end of the second quarter of 2010, we may need to substantially curtail or cease our operations altogether.

The Company has certain warrants that are callable by the Company, subject to certain requirements including a minimum per share price ranging from $4 to $6, at an aggregate exercise price of approximately $6.0 million. The Company has no material commitments for capital expenditures. The Company has begun implementation of a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost between $500,000 and $700,000 in total. Of that amount, approximately $111,000 has been incurred through December, 2009, and approximately $300,000 will be expended in 2010.

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

Stock-Based Compensation

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

For the years ended December 31, 2009 and 2008, the Company recognized $432,000 and $592,000, respectively, of compensation expense for stock issued and stock options granted under the LTIP. At December 31, 2009, there was $344,000 remaining in unrecognized compensation cost related to stock options under the LTIP, which is expected to be recognized over a weighted average period of 1.7 years.

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

For share-based awards issued during the year ended December 31, 2009 and 2008, the expected term was estimated by using peer company information as Cytomedix’s history is limited. Estimated volatility was derived using the Company’s historical stock price volatility. No cash dividends have ever been declared or paid on the Company’s Common stock and currently none is anticipated. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the 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 vested 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 years ended December 31, 2009 and 2008, the Company recognized $12,000 and $135,000, respectively, of compensation expense for warrants issued to service providers. At December 31, 2009, there was no remaining unrecognized compensation cost related to warrants.

Valuation of Goodwill

The Company is required to perform a review for impairment of goodwill in accordance with FASB ASC 350, Intangibles — Goodwill and Other. Goodwill is considered to be impaired if it is determined that the carrying value of the Company exceeds its fair value. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. Examples of such events or circumstances include:

a significant adverse change in legal factors or in the business climate;
a significant decline in Cytomedix’s stock price or the stock price of comparable companies;
a significant decline in the Company’s projected revenue or cash flows;
an adverse action or assessment by a regulator;
unanticipated competition;
a loss of key personnel;
a more-likely-than-not expectation that the Company will be sold or otherwise disposed of;
a substantial doubt about the Company’s ability to continue as a going concern.

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, 2008 and determined that goodwill was fully impaired, resulting in an impairment charge of approximately $2.0 million in the fourth quarter of 2008. This determination was primarily attributable to the substantial doubt regarding the Company’s ability to continue as a going concern, the fact that the Company continues to incur significant negative cash flows from operations, the significant decline in the Company’s market capitalization, and the overall deterioration in the global economy and financial markets at that time. This assessment was supported by the findings in the annual independent valuation that the Company commissioned as of December 31, 2008.

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Valuation of Patents

The Company capitalizes the costs of purchased 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 FASB ASC 360, Property, Plant, and Equipment, 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 value of the Company’s patents, determined upon fresh start accounting in 2002, was driven by the Worden patents, which cover the formulation of AutoloGelTM and expire in 2019. The value was being amortized via the straight-line method through 2019, and had an unamortized remaining value of approximately $1.5 million at December 31, 2008, prior to consideration of any impairments. Given the substantial doubt regarding the Company’s ability to continue as a going concern and the fact that the Company continues to incur significant negative cash flows from operations, the Company identified that it may not realize the value of these patents and concluded that their value had been fully impaired, resulting in a charge of approximately $1.5 million in the fourth quarter of 2008.

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, and 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 2009 and 2008, the Company recorded $0 and $71,000 (net of associated costs), respectively, in non-operating income associated with infringement settlements.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, now included in FASB ASC 825-10, Financial Instruments. This guidance now requires disclosures about fair value of financial instruments in interim reporting periods. These disclosures were previously only required in annual financial statements. The adoption of this guidance did not have a material impact on our financial statements.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset of Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, now included in FASB ASC 820, Fair Value Measurements and Disclosures, which provides additional guidance for estimating fair value when the volume and level of market activity for an asset or liability have significantly decreased. This guidance emphasizes that even if there has been a significant decrease in the volume and level of market activity for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. In addition, the statement provides guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of this guidance did not have a material impact on our financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, now included in FASB ASC 855, Subsequent Events, which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The adoption of this guidance did not have a material impact on our financial statements.

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In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, now included in FASB ASC 105, Generally Accepted Accounting Principles. This guidance establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. This guidance explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants and is effective for the Company’s current reporting period. We have updated our financial statement disclosures to reflect the adoption of this standard.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, which amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC 605, Revenue Recognition. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact, if any, that the adoption of this amendment will have on its financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting issuer (as defined in Item 10(f)(1) of Regulation S-K), the Company is not required to report quantitative and qualitative disclosures about market risk specified in Item 305 of Regulation S-K.

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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 sheets 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. (the “Company”) at December 31, 2009 and December 31, 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 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) 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has insufficient liquidity to fund its ongoing operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia
March 29, 2010

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CYTOMEDIX, INC.
  
BALANCE SHEETS

   
  December 31,
2009
  December 31,
2008
ASSETS
                 
Current assets
                 
Cash   $ 2,107,499     $ 4,027,026  
Short-term investments, restricted     52,672        
Accounts and royalties receivable, net     180,560       390,739  
Patent settlements receivable, current portion           102,618  
Prepaid expenses, inventory, and other current assets     166,731       190,720  
Total current assets     2,507,462       4,711,103  
Property and equipment, net     84,623       87,389  
Total assets   $ 2,592,085     $ 4,798,492  
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Current liabilities
                 
Accounts payable and accrued expenses   $ 1,037,894     $ 1,325,325  
Deferred revenues, current portion           197,344  
Dividends payable on Series A and Series B preferred stock     7,285       7,243  
Total current liabilities     1,045,179       1,529,912  
Other liabilities           123,241  
Total liabilities     1,045,179       1,653,153  
Commitments and contingencies
                 
Stockholders' equity
                 
Series A Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2009 and 2008 issued and outstanding – 97,663 and 90,217 shares, respectively, liquidation preference of $97,663 and $90,217, respectively     10       9  
Series B Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2009 and 2008 issued and outstanding – 65,784 and 92,300 shares, respectively, liquidation preference of $65,784 and $92,300, respectively     7       10  
Series C Convertible preferred stock; $.0001 par value, authorized 1,000,000 shares; 2009 and 2008 issued and outstanding – 0.0 shares            
Common stock; $.0001 par value, authorized 65,000,000 shares;
                 
2009 issued and outstanding – 37,273,628 shares;
                 
2008 issued and outstanding – 33,962,623 shares     3,727       3,396  
Additional paid-in capital     44,074,575       42,219,802  
Accumulated deficit     (42,531,413 )      (39,077,878 ) 
Total stockholders' equity     1,546,906       3,145,339  
Total liabilities and stockholders' equity   $ 2,592,085     $ 4,798,492  

 
 
The accompanying notes are an integral part of these financial statements.

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CYTOMEDIX, INC.
  
STATEMENTS OF OPERATIONS

   
  Year Ended December 31,
     2009   2008
Revenues
                 
Sales   $ 226,212     $ 100,983  
Royalties     1,839,972       1,989,754  
Total revenues     2,066,184       2,090,737  
Cost of revenues
                 
Cost of sales     58,690       16,764  
Cost of royalties     400,115       584,256  
Total cost of revenues     458,805       601,020  
Gross profit     1,607,379       1,489,717  
Operating expenses
                 
Salaries and wages     2,183,082       2,617,646  
Consulting expenses     235,929       312,822  
Professional fees     709,479       834,834  
Trials and studies     227,490       145,713  
General and administrative expenses     1,700,863       1,929,551  
Impairment of goodwill and patents           3,543,205  
Total operating expenses     5,056,843       9,383,771  
Loss from operations     (3,449,464 )      (7,894,054 ) 
Other income
                 
Interest income, net     9,764       156,609  
Other gain     1,116       5,350  
Patent litigation settlements, net           71,346  
Total other income     10,880       233,305  
Loss before provision for income taxes     (3,438,584 )      (7,660,749 ) 
Income tax provision            
Net loss     (3,438,584 )      (7,660,749 ) 
Preferred dividend on:
                 
Series A preferred stock     7,738       7,773  
Series B preferred stock     7,213       7,174  
Net loss to common stockholders   $ (3,453,535 )    $ (7,675,696 ) 
Loss per common share – Basic and diluted   $ (0.10 )    $ (0.24 ) 
Weighted average shares outstanding – Basic and diluted     35,116,049       32,515,784  

 
 
The accompanying notes are an integral part of these financial statements.

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CYTOMEDIX, INC.
  
STATEMENTS OF STOCKHOLDERS’ EQUITY

                 
                 
  Series A Preferred   Series B Preferred   Common Stock   Additional
Paid-In
Capital
  Accumulated
Deficit
  Total
Stockholders
Equity
     Shares   Amount   Shares   Amount   Shares   Amount
Balance at December 31, 2007     92,837     $ 9       85,405     $ 9       31,926,788     $ 3,193     $ 40,026,574     $ (31,402,182 )    $ 8,627,603  
Common stock issued upon conversion of Series A stock     (17,479 )      (1 )                  5,827             1              
Dividend issued on Series A and Series B stock     14,859       1       6,895       1                   21,752             21,754  
Common stock issued pursuant to registered direct offering completed in Third Quarter 2008                             2,000,008       200       1,445,114             1,445,314  
Common stock issued in lieu of cash for fees earned by advisors                             30,000       3       11,997             12,000  
Employees and Directors                                         579,699             579,699  
Other parties                                         134,665             134,665  
Net loss                                               (7,675,696 )      (7,675,696 ) 
Balance at December 31, 2008     90,217     $ 9       92,300     $ 10       33,962,623     $ 3,396     $ 42,219,802     $ (39,077,878 )    $ 3,145,339  
Common stock issued upon conversion of Series B stock                 (33,979 )      (4 )      11,326       1       3              
Dividend issued on Series A and Series B stock     7,446       1       7,463       1                   14,907             14,909  
Common stock issued pursuant to registered direct offering completed in Third Quarter 2008                             3,299,679       330       1,396,437             1,396,767  
Stock-based compensation related to options and warrants issued for services rendered by – 
                                                                                
Employees and Directors                                         431,846             431,846  
Other parties                                         11,580             11,580  
Net loss                                               (3,453,535 )      (3,453,535 ) 
Balance at December 31, 2009     97,663     $ 10       65,784     $ 7       37,273,628     $ 3,727     $ 44,074,575     $ (42,531,413 )    $ 1,546,906  

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CYTOMEDIX, INC.
  
STATEMENTS OF CASH FLOWS

   
  Year Ended December 31,
     2009   2008
Cash flows from operating activities:
                 
Net loss   $ (3,438,584 )    $ (7,660,749 ) 
Adjustments to reconcile net loss to net cash used in operating activities:
                 
Depreciation and amortization     33,406       170,767  
Stock-based compensation     443,426       726,364  
Gain on disposal of assets     (1,116 )      (5,300 ) 
Impairment of goodwill and patents           3,543,205  
Change in accounts and royalties receivable, net     312,797       245,702  
Change in other current assets     23,989       47,428  
Change in patent settlements receivable, non-current           193,978  
Change in accounts payable and accrued expenses     (287,431 )      377,028  
Change in deferred revenues     (197,344 )      (215,285 ) 
Change in other liabilities     (123,241 )      103,841  
Net cash used in operating activities     (3,234,098 )      (2,473,021 ) 
Cash flows from investing activities
                 
Purchase of investment     (52,672 )       
Purchase of equipment     (31,424 )      (87,013 ) 
Proceeds from sale of equipment     1,900       5,300  
Net cash used in investing activities     (82,196 )      (81,713 ) 
Cash flows from financing activities:
                 
Proceeds from sale of common stock, net     1,396,767       1,445,314  
Net cash provided by financing activities     1,396,767       1,445,314  
Net decrease in cash     (1,919,527 )      (1,109,420 ) 
Cash, beginning of period     4,027,026       5,136,446  
Cash, end of period   $ 2,107,499     $ 4,027,026  

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 1 — Description of the Business

Cytomedix is a biotechnology company that develops, sells, and licenses regenerative biological therapies, to primarily address the areas of wound care, inflammation, and angiogenesis. The Company currently markets the AutoloGelTM System, a device for the production of platelet rich plasma (“PRP”) gel derived from the patient’s own blood. The AutoloGelTM System is cleared by the Food and Drug Administration (“FDA”) for use on a variety of exuding wounds. Cytomedix sells its products primarily to health care providers in the United States. Until November 2009, it licensed certain of its patents to surgical medical device suppliers in the United States; these license agreements have since terminated as the underlying patents have expired.

Note 2 — Liquidity Risks and Management’s Plans

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred, and continues to incur, significant losses from operations. The licensing agreements, under which the Company’s royalty revenues are generated, expired in late November 2009. In addition, the Company needs to obtain increased product sales and additional capital to continue its business operations and fund deficits in operating cash flow. The Company is currently executing a new sales strategy, but it is difficult to forecast the success of this new strategy in the current market. The Company also plans to obtain additional capital, to finance the development of its business operations, through strategic collaborations, issuance of its equity securities, grant funding, or any other means it deems appropriate. There is no assurance that such capital will be available on acceptable terms or at all. As a result, there is substantial doubt as to the Company’s ability to continue as a going concern.

In the event the Company is unable to successfully increase product sales and obtain additional capital, it is unlikely that the Company will have sufficient cash flows and liquidity to finance its business operations as currently contemplated. Accordingly, if the Company determines it will not be able to obtain the necessary financing to address its working capital needs for a reasonable period into the future, it may pursue alternative paths forward for the Company. These paths could include, but not be limited to, sale of the Company or its assets, merger, organized wind-down, going private/dark, fundamental shift in its strategic plan (e.g. abandon commercialization strategy and focus exclusively on licensing), bankruptcy, etc.

The balance sheets do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Note 3 — 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

As of December 31, 2009 and 2008, the Company maintained no amounts in financial institutions in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance. However, approximately $1,482,000 and $3,431,000 held in money market accounts at brokerage firms were in excess of Securities Investor Protection Corporation (“SIPC”) coverage as of December 31, 2009 and 2008, respectively. These amounts not covered

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 3 — Summary of Significant Accounting Policies  – (continued)

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 components of the AutoloGelTM offering, most 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, with whom the Company has an established vendor relationship.

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 exclusively of finished goods. Cost is determined on a first-in-first-out 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 ten months to two years. Expired products are segregated and used for demonstration purposes only; the Company writes off expired inventory through cost of sales.

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 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 FASB ASC 360, Property, Plant, and Equipment, 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 FASB ASC 350, Intangibles — Goodwill and Other, with regard to its indefinite-lived intangibles. ASC 350 requires that goodwill be assessed at least annually for impairment by

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 3 — Summary of Significant Accounting Policies  – (continued)

applying a fair value based test. This evaluation has been performed for 2008 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. As of December 31, 2008, the Company determined that the full value of its Goodwill and Patents were impaired, and took impairment charges totaling approximately $3.5 million. See Note 10 for a further explanation.

Income Taxes

The Company accounts for income taxes under the liability method, which requires companies to account for deferred income taxes using the asset and liability method. Under the asset and liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax rate changes are reflected in income during the period such changes are enacted.

At December 31, 2009, we have accumulated U.S. federal and state net operating tax losses that are available to offset future taxable income and reduce future federal and state income taxes during the carryforward period. The utilization of available losses depends on the generation of future taxable income to absorb the losses. We may not be able to use available losses within the carryforward period. In addition, based on generally accepted accounting principles, we have determined for financial accounting and reporting purposes that it is unlikely that we will be able to apply or use the available losses to reduce future federal or state income taxes during the carryforward period. This assessment is updated annually or more frequently based on changes in circumstances.

A valuation allowance is recorded against deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment for a valuation allowance requires judgment on the part of management with respect to the benefits that may be realized. The Company has concluded, based upon available evidence, it is more likely than not that the U.S. federal, state, and local deferred tax assets at December 31, 2009, will not be realizable. For the year ended December 31, 2009, we did not record an income tax provision, as a full valuation allowance has been provided against U.S. federal, state, and local deferred tax assets. The valuation allowance will be reversed at such time that realization is believed to be more likely than not. 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 2008 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.

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 FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) consideration is fixed or determinable; and (4) 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. The Company does not maintain a reserve for returned products as, historically, these amounts have been negligible.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 3 — Summary of Significant Accounting Policies  – (continued)

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, had been recorded as Other income at its present value and reflected in the Patent litigation settlements, net line of the Statements of Operations. Any future lump sums deemed a settlement of past infringement will be reflected in operating income. The Company recorded revenue in 2008 and 2009 and settlement income in 2008 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 from time to time, may issue compensatory stock options or shares to employees, consultants, and other service providers under its Long-Term Incentive Plan (“LTIP”) (see Note 14). In some cases, it has issued compensatory warrants to service providers outside the LTIP (see Note 13). The Company issues new shares of its Common stock when employees or service providers exercise options or warrants.

The Company adopted FASB ASC 718, Compensation — Stock Compensation, 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 ASC 718. This compensation is then expensed over the vesting period of the underlying award. 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 fair value of each option award to employees and directors 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:

   
  2009   2008
Risk free rate     2.05 %      2.96 % 
Expected years until exercise     5.8       6.0  
Expected stock volatility     141 %      125 % 
Dividend yield            

For employee and director options, 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 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. The fair value of compensatory options or warrants issued to service providers utilizes the same methodology with the exception of the expected term. For these awards to non-employees, the Company estimates that the options or warrants will be held for the full term.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 3 — Summary of Significant Accounting Policies  – (continued)

Stock-based compensation for awards granted to non-employees is periodically remeasured as the underlying options and warrants vest. The Company recognizes an expense for such awards throughout the performance period as the services are provided by the non-employees, based on the fair value of these options and warrants at each reporting period.

The Company estimates the fair value of stock issuances based on the closing market value of the Company’s stock on the date of grant.

Loss per Share

Loss per share is calculated in accordance with FASB ASC 260, 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, and the Common stock equivalents of convertible preferred 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:

   
  2009   2008
Options     4,616,554       4,020,388  
Warrants     7,058,972       5,353,172  
Series A Preferred Stock     32,554       30,072  
Series B Preferred Stock     21,928       30,767  
       11,730,008       9,434,399  

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 2009 and 2008, the Company contributed approximately $47,000 and $42,000 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 October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, which amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC 605, Revenue Recognition. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact, if any, that the adoption of this amendment will have on its financial statements.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 4 — Restricted Short-Term Investments

In June 2009, the Company purchased a Certificate of Deposit (“CD”) from its commercial bank in the amount of $52,500. This CD bears interest at an annual rate of 0.65% and matures on February 24, 2010.

The Company has determined the fair value of the CD in accordance with established standards that provide a framework for measuring fair value utilizing a three-tier fair value hierarchy. This hierarchy prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs required by these standards, as well as the assets that we value using those levels of inputs.

Level 1:  Quoted prices in active markets for identical assets and liabilities.

Level 2:  Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable.

Level 3:  Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument.

The Company’s CD was determined using Level 1 inputs. The fair value as of December 31, 2009 was $52,672. The Company does not currently have any assets whose fair value was determined using Level 2 or Level 3 inputs.

This CD collateralizes the Letter of Credit described in Commitment and Contingencies (see Note 18).

Note 5 — 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 AutoloGelTM 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.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 5 — 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(1)
  Lump
Sum(2)
  On-Going
Royalty
Percentage
DePuy Spine, Inc.(3)     3/19/2001       11/24/2009     $ 750,000       6.5%
 
       3/4/2005                             
Medtronic, Inc. (assigned to Arteriocyte Medical Systems, Inc. effective November 2007)     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. (“PPAI”)     6/26/2005       11/24/2009     $ 250,000 (4)      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 (4)      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) 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.
(2) 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.
(3) Cytomedix had two license agreements with DePuy Spine, Inc. The original license agreement was dated March 19, 2001, subsequently amended on 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.
(4) Some of these amounts were payable over a period of time as defined in executed notes payable to Cytomedix.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 5 — Patent Settlement and License Agreements  – (continued)

(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 were not tied to any performance commitments by Cytomedix and were not dependent on Biomet sales.

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 were 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 were one-time, non-recurring transactions. Amounts related to these settlements that were payable to the Company over time are reflected as “Patent settlements receivable, current portion.” Associated costs, consisting of royalty and contingent legal fees payable upon the collection of such receivables, are reflected in “Accounts payable and accrued expenses.”

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:

   
  2009   2008
Income   $     $ 82,000  
Costs           (11,000 ) 
Net settlement income   $     $ 71,000  

Due to PPAI’s recent emergence from bankruptcy, the Company recorded revenue when payments were received from PPAI. As of December 31, 2008, the Company had received the full $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.

Note 6 — Royalty Agreements

The Company is party to a Royalty Agreement with Curative Health Services, Inc. Under this agreement as amended, Curative was due 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 patents it acquired from Curative. On the Statements of Operations, these costs are reflected in the Cost of royalties line when the costs were related to ongoing license revenue and in the Patent litigation settlements, net line when the costs were related to settlements of prior infringement. The related payables are included in Accounts payable and accrued expenses on the Balance Sheets. The DePuy and other license agreements concluded in November 2009, simultaneous with the expiration of the underlying patents. The Company currently has no further income relating to the Curative patents on which it would owe a royalty.

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 gross profit on sales relying on certain patents, 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.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 7 — Receivables

Accounts and royalties receivable, net consisted of the following at December 31:

   
  2009   2008
Trade receivables   $ 68,171     $ 49,960  
Royalty receivables     131,715       361,250  
Other receivables     929       6,014  
       200,815       417,224  
Less allowance for doubtful accounts     (20,255 )      (26,485 ) 
     $ 180,560     $ 390,739  

Bad debt expense was approximately $20,000 and $3,000, respectively, for the years ended December 31, 2009 and 2008.

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:

   
  2009   2008
Noninterest bearing:
                 
Principal remaining, due quarterly through June 2009   $   —     $ 100,000  
Less unamortized discount based on imputed interest rate of 8.25%           (2,021 ) 
Net           97,979  
Interest bearing principal remaining, 8.0% interest rate           4,639  
Total           102,618  
Current portion           102,618  
Long-term portion   $     $  

Note 8 — Prepaid Expenses, Inventory, and Other Current Assets

Prepaid expenses, other current assets and inventory consisted of the following at December 31:

   
  2009   2008
Prepaid insurance   $ 99,998     $ 112,944  
Prepaid fees and rent     12,061       12,436  
Deposits and advances     28,686       28,153  
Inventory     25,986       37,187  
     $ 166,731     $ 190,720  

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 9 — Property and Equipment

Property and equipment consisted of the following at December 31:

   
  2009   2008
Medical equipment   $ 112,406     $ 330,591  
Office equipment     46,562       64,579  
Automobile            
       158,968       395,170  
Less accumulated depreciation     (74,345 )      (307,781 ) 
     $ 84,623     $ 87,389  

Depreciation expense was approximately $33,000 and $20,000 for the years ended December 31, 2009 and 2008, respectively. The net book value of property and equipment disposed during 2009 and 2008 was nominal.

Note 10 — 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 expired in November 2009 and the Worden Patent will expire in February 2019.

Patents, related accumulated amortization, and cumulative impairment charges at December 31 were as follows:

   
  2009   2008
Patents   $   —     $ 2,400,000  
Less accumulated amortization           (878,418 ) 
Less impairment charges           (1,521,582 ) 
     $     $  

Given the substantial doubt regarding the Company’s ability to continue as a going concern and the fact that the Company continues to incur significant negative cash flows from operations, the Company determined that it may not realize the value of these patents and has concluded that their value has been fully impaired, resulting in a charge of approximately $1.5 million in the fourth quarter of 2008. This charge is reflected in the Impairment of goodwill and patents line of the Statements of Operations. The patent impairment charge resulted in an approximate $607,000 net increase to the deferred tax assets, but this increase was offset by a corresponding increase to the valuation allowance and therefore had no effect on the Company’s provision for income taxes. Amortization expense was approximately $151,000 in the year ended December 31, 2008.

Goodwill represents the excess reorganization value over the amounts allocable to identifiable assets upon the Company’s emergence from bankruptcy in 2002. The Company completed its most recent annual evaluation for impairment of goodwill as of December 31, 2008 and determined that goodwill was fully impaired, resulting in an impairment charge of approximately $2.0 million in the fourth quarter of 2008. This charge is reflected in the Impairment of goodwill and patents line of the Statements of Operations. This determination was primarily attributable to the substantial doubt regarding the Company’s ability to continue as a going concern, the fact that the Company continues to incur significant negative cash flows from operations, the significant decline in the Company’s market capitalization, and the overall deterioration in the global economy and financial markets. This assessment was supported by the findings in the annual independent valuation that the Company commissioned as of December 31, 2008. The goodwill impairment charge is not deductible for income tax purposes.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 11 — Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following at December 31:

   
  2009   2008
Trade payables   $ 185,483     $ 263,544  
Accrued compensation and benefits     216,179       481,884  
Accrued professional fees     364,886       209,800  
Accrued royalty fees     261,964       334,300  
Other payables     9,382       35,797  
     $ 1,037,894     $ 1,325,325  

Note 12 — Income Taxes

Income tax benefit (expense) for the years ended December 31, 2009 and 2008 consisted of the following:

   
  2009   2008
Current:
                 
Federal   $     $  
State            
Deferred:
                 
Federal     58,000       392,000  
State     3,000       53,000  
Net operating loss carryforward     1,274,000       1,936,000  
Valuation Allowance     (1,335,000 )      (2,381,000 ) 
Total income tax (expense) benefit   $     $  

Significant components of Cytomedix’s deferred tax assets and liabilities consisted of the following at December 31:

   
  2009   2008
Deferred tax assets:
                 
Stock-based compensation   $ 3,727,000     $ 3,554,000  
Amortization of patents     108,000       126,000  
Other     52,000       146,000  
Total deferred tax assets     3,887,000       3,826,000  
Deferred tax liabilities            
Net deferred tax assets     3,887,000       3,826,000  
Net operating loss carryforwards     12,155,000       10,881,000  
       16,042,000       14,707,000  
Less valuation allowance     (16,042,000 )      (14,707,000 ) 
Total deferred tax assets   $     $  

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 12 — Income Taxes  – (continued)

The following table presents a reconciliation between the U.S. federal statutory income tax rate and the Company’s effective tax rate:

   
  2009   2008
U.S. Federal statutory income tax     35.0 %      35.0 % 
State and local income tax benefits     3.8 %      5.1 % 
Nondeductible goodwill impairment           (9.2%)  
Other           0.2 % 
Valuation allowance for deferred income tax assets     (38.8%)       (31.1%)  
Effective income tax rate     0.0 %      0.0 % 

The Company had loss carryforwards of approximately $31,800,000 as of December 31, 2009 that may be offset against future taxable income. The carryforwards will expire between 2021 and 2029. Utilization of these carryforwards may be subject to annual limitations based upon previous significant changes in stock ownership. Management has determined that realization of the net deferred tax assets is not assured and accordingly has established a valuation allowance of $16,042,000 and $14,707,000 at December 31, 2009 and 2008, respectively.

The Company’s source of income before expenses is exclusively domestic.

The Company does not believe it has any uncertain income tax positions as described in its discussion of Income Tax accounting policy in Note 3.

Note 13 — 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.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 13 — Capital Stock  – (continued)

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.

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 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, 2009 and 2008, no Series C remained outstanding.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 13 — Capital Stock  – (continued)

Warrants and Options

The Company had the following outstanding warrants and options at December 31:

   
  # Outstanding
Equity Instrument   December 31,
2009
  December 31,
2008
D Warrants(1)     304,033       304,033  
Unit Warrants(2)     1,812,500       1,812,500  
Fitch/Coleman Warrants(3)     975,000       975,000  
August 2008 Warrants(4)     1,000,007       1,000,007  
August 2009 Warrants(5)     1,717,800        
Other warrants(6)     1,249,632       1,261,632  
Options issued under the Long-Term Incentive Plan(7)     4,616,554       4,020,388  

(1) 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, and expire on May 1, 2011. The Company may call up to 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.
(2) These warrants were issued in connection with the Unit offering (discussed later in this Note). As amended, they expire on March 31, 2010, and are voluntarily exercisable at $1.51 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. They provide for a cashless exercise at the option of the warrantholder 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. The Company may call up to 100% of the outstanding Unit warrants, provided that the Company’s Common stock must have been trading at a closing price greater than $5.00 for a period of at least ten (10) consecutive trading days prior to the date of delivery of the Call Notice and 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 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 up to 100% of these warrants, provided that the closing stock price is at or above the following call prices for ten consecutive trading days: Group A — $4/share; Group B — $5/share; Group C — $6/share. If the Company exercises its right to call, it shall provide at least 45 days notice for one-half of the warrants subject to the call and at least 90 days notice for the remainder of the warrants subject to the call.
(4) These warrants were issued in connection with the August 2008 financing (discussed later in this Note), are voluntarily exercisable at $1.00 per share, provided that the exercise does not result in the holder owning in excess of 9.99% of the outstanding shares of the Company’s Common stock, and expire on August 29, 2012.
(5) These warrants were issued in connection with the August 2009 financing (discussed later in this Note), are voluntarily exercisable at $0.65 per share, provided that the exercise does not result in the holder owning in excess of 9.99% of the outstanding shares of the Company’s Common stock, and expire in February 2014. These amounts include 67,955 warrants issued to a placement agent on identical terms.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 13 — Capital Stock  – (continued)

(6) 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. They are voluntarily exercisable once vested. There is no call provision associated with these warrants, except as follows: one service provider warrant for 450,000 shares, as amended, contains a call provision identical to the one in Unit warrants discussed above.
(7) These options were issued under the Company’s shareholder approved Long-Term Incentive Plan. See Note 14 for a full discussion regarding these options.

Activity

The Company issued 3,311,005 shares of Common stock during 2009. The following table lists the sources of and the proceeds from those issuances:

   
Source   # of
Shares
  Total
Proceeds
Conversion of series B convertible preferred shares     11,326     $  
Issuance of shares pursuant to registered direct offering completed in Third Quarter 2009     3,299,679     $ 1,490,057  
Totals     3,311,005     $ 1,490,057  

The Company issued 2,035,835 shares of Common stock during 2008. The following table lists the sources of and the proceeds from those issuances:

   
Source   # of
Shares
  Total
Proceeds
Conversion of series A convertible preferred shares     5,827     $  
Issuance of shares pursuant to registered direct offering completed in Third Quarter 2008     2,000,008     $ 1,500,000  
Common stock issued in lieu of cash for fees earned by advisors     30,000     $ 12,000  
Totals     2,035,835     $ 1,512,000  

The Company has used the cash proceeds from these 2009 and 2008 issuances for general corporate purposes. The issuance of shares under the Company’s LTIP were registered by the Company’s Registration Statement on Form S-8 filed with the SEC on November 1, 2004 and subsequently amended on June 12, 2006, March 26, 2008, and September 25, 2009. All other offerings of the Company’s securities were either registered under the Securities Act or made in reliance on the private offering exemptions contained in Section 4(2) of the Securities Act and regulations promulgated thereunder, and in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering. None of these transactions involved any underwriters, underwriting discounts or commissions.

In 2009, the Company granted 663,500 options to purchase the Company’s Common stock with exercise prices ranging from $0.30 to $0.62 under the LTIP (see Note 14).

On September 17, 2009, pursuant to the Certificate of Designation filed with the Delaware Secretary of State, the Board of Directors authorized a stock dividend on the Company’s Series A and B Convertible Preferred shares. This dividend resulted in the issuance of 7,446 and 7,463 shares of Series A and B Convertible Preferred stock, respectively.

In August 2009, the Company entered into securities purchase agreements with certain investors for their purchase of 3,299,679 shares of Cytomedix’s Common stock at a purchase price of $0.44 per share, and 5-year warrants to purchase an additional 1,717,800 shares of Cytomedix’s Common stock at an exercise price of $0.65 (the “Financing”). Holders of the warrants may exercise warrants at any time on or after 180 days

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 13 — Capital Stock  – (continued)

following the issuance date through February 2014. The securities in this Financing were offered and sold pursuant to a prospectus dated March 26, 2008 and a prospectus supplement dated August 10, 2009, pursuant to the Company’s effective shelf registration statement on Form S-3 (SEC File No. 333-147793). As a result of this Financing, Cytomedix received gross proceeds of approximately $1,490,000 (before customary offering expenses of approximately $93,000, and excluding any proceeds that Cytomedix may receive upon exercise of the warrants). Certain officers and directors of the Company participated in this offering. Their purchase price per share was $0.57; all other terms and provisions were the same as those of the public investors.

During the year ended December 31, 2009, 67,334 options expired or were forfeited by contract due to the termination of the underlying service arrangement.

In 2008, the Company granted 1,235,500 options to purchase the Company’s Common stock with exercise prices ranging from $0.40 to $1.50 under the LTIP (see Note 14).

In December 2008, under the LTIP, the Company issued 30,000 shares of restricted Common stock to individual principals at Spencer Clarke, LLC, for investment advisory services. These shares were contractually restricted from sale through December 16, 2009.

In October 2008, the Company executed amendments to certain terms and provisions of its outstanding Unit Offering Warrants to purchase the Common stock of the Company, issued in the March 2004 private placement (the “Unit Warrants”) and of the FEQ Investments, Inc. warrant issued in April 2004 (the “FEQ Warrant”). Specifically, the Unit Warrant amendments were as follows: (i) the term of such warrants was extended from March 31, 2009 to March 31, 2010, (ii) the exercise price of the warrants was increased by 10% from $1.50 to $1.65 per share, and (iii) the call provision was amended so that such instruments are callable by the Company in the event the closing price of the Company’s securities is in excess $5.00 per share for at least 10 consecutive trading days. The FEQ Warrant was amended so that (i) its term was extended from April 1, 2009 to April 1, 2010, (ii) the exercise price of the warrant was increased by 10% from $1.00 to $1.10 per share and (iii) a call provision identical to the one added to the Unit Warrants was added to the FEQ Warrant. The amendment to the FEQ Warrant resulted in approximately $78,000 of non-cash equity based compensation expense in the fourth quarter of 2008. The foregoing amendments to the warrants were approved by the requisite vote of the warrant holders and are effective as of October 31, 2008.

On September 18, 2008, pursuant to the Certificate of Designation filed with the Delaware Secretary of State, the Board of Directors authorized a stock dividend on the Company’s Series A and B Convertible Preferred shares. This dividend resulted in the issuance of 14,859 and 6,895 shares of Series A and B Convertible Preferred stock, respectively.

In August 2008, the Company entered into securities purchase agreements with certain investors for their purchase of up to 2,000,000 shares (subject to rounding for partial shares) of Cytomedix’s Common stock at a purchase price of $0.75 per share, and 4-year warrants to purchase an additional 1,000,000 (subject to rounding for partial shares) shares of Cytomedix’s Common stock at an exercise price of $1.00. Holders of the warrants may exercise warrants at any time through August 29, 2012. The securities in this financing were offered and sold pursuant to a prospectus dated March 26, 2008 and a prospectus supplement dated August 22, 2008, pursuant to the Company’s effective shelf registration statement on Form S-3 (SEC File No. 333-147793). As a result of this Financing, Cytomedix received gross proceeds of approximately $1,500,000 (before customary offering expenses of approximately $55,000, and excluding any proceeds that Cytomedix may receive upon exercise of the warrants). Certain officers and directors of the Company participated in this offering on the same terms and provisions as public investors.

During the year ended December 31, 2008, 509,799 options expired or were forfeited by contract due to the termination of the underlying service arrangement.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 13 — Capital Stock  – (continued)

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:

   
  2009   2008
Series A Preferred Stock   $ 3,945     $ 3,653  
Series B Preferred Stock     3,340       3,590  
     $ 7,285     $ 7,243  

As of December 31, 2009, the balance of unamortized stock-based compensation for warrants granted to non-employees was $0.

Note 14 — Long-Term Incentive Plan and Other Compensatory Awards

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 6,500,000 shares of stock under this LTIP. At December 31, 2009, 1,387,246 shares were available for future grants. Of all options granted through December 31, 2009, 496,200 had been exercised and 4,616,554 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 November 12, 2019.

A summary of option activity under the LTIP as of December 31, 2009, and changes during the year then ended is presented below:

       
LTIP Options   Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
Outstanding at January 1, 2009     4,020,388     $ 1.63                    
Granted     663,500     $ 0.52                    
Exercised     0                          
Forfeited or expired     (67,334 )    $ 1.60              
Outstanding at December 31, 2009     4,616,554     $ 1.47       6.5     $ 15,150  
Exercisable at December 31, 2009     3,717,059     $ 1.64       5.9     $ 13,650  

The following table summarizes information about stock options outstanding as of December 31, 2009:

         
  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
$0.30 – $1.50
    3,066,554       6.8     $ 1.02       2,287,059     $ 1.15  
$1.51 – $3.00
    1,480,000       5.8     $ 2.22       1,360,000     $ 2.28  
$3.01 – $4.50
                             
$4.51 – $6.00
    70,000       6.0     $ 5.20       70,000     $ 5.20  

The weighted-average grant-date fair value of stock options granted under the LTIP during the years 2009 and 2008 was $0.47 and $0.72, respectively. No stock options were exercised under the LTIP during the fiscal years ended December 31, 2009 and 2008.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 14 — Long-Term Incentive Plan and Other Compensatory Awards  – (continued)

As of December 31, 2009, there was approximately $344,000 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 1.7 years. The total fair value of stock options granted under the LTIP that vested during the fiscal years ended December 31, 2009 and 2008 was approximately $444,000 and $490,000, respectively.

Additionally, the Company has issued certain compensatory warrants outside of the LTIP, in exchange for the performance of services. A summary of service provider warrant activity as of December 31, 2009, and changes during the year then ended is presented below:

       
Warrants to Service Providers   Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
Outstanding at January 1, 2009     2,268,900     $ 1.54                    
Granted     0                          
Exercised     0                          
Forfeited or expired     (44,268 )    $ 1.07              
Outstanding at December 31, 2009     2,224,632     $ 1.55       2.9     $ 0  
Exercisable at December 31, 2009     2,224,632     $ 1.55       2.9     $ 0  

The following table summarizes information about compensatory warrants outstanding as of December 31, 2009:

         
  Warrants Outstanding   Warrants Exercisable
Range of
Exercise
Prices
  Number of
Outstanding
Shares
  Weighted
Average
Remaining
Contract Life
  Weighted
Average
Exercise
Price
  Number
Exercisable
  Weighted
Average
Exercise
Price
$1.00 – $1.50
    1,650,149       2.8     $ 1.24       1,650,149     $ 1.24  
$1.51 – $3.00
    419,483       4.4     $ 1.96       419,483     $ 1.96  
$3.01 – $4.50
    125,000       0.3     $ 3.14       125,000     $ 3.14  
$4.51 – $6.00
    30,000       1.0     $ 6.00       30,000     $ 6.00  

The Company has recorded stock-based compensation expense as follows:

   
  Year Ended December 31
Stock-Based Expense   2009   2008
Awards under the LTIP   $ 431,846     $ 591,699  
Awards outside the LTIP   $ 11,580     $ 134,665  
     $ 443,426     $ 726,364  
Included in Statements of Operations caption as follows:
                 
Salaries and wages   $ 374,544     $ 371,759  
Consulting expense   $ 11,580     $ 81,069  
General and administrative   $ 57,302     $ 273,536  
     $ 443,426     $ 726,364  

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 15 — Supplemental Cash Flow Disclosures — Non-Cash Transactions

Non-cash transactions for years ended December 31 include:

   
  2009   2008
Accrued dividends on 8% preferred stock   $ 14,951     $ 14,947  
Common stock issued in lieu of cash for fees earned by advisors           12,000  
Preferred dividends paid by issuance of stock     14,909       21,754  

Cash paid for interest was $13,000 and $12,000 in 2009 and 2008, respectively. There were no income taxes paid in 2009 and 2008.

Note 16 — Termination and Consulting Agreement

On June 5, 2008, the Company and Kshitij Mohan, the Company’s former Chief Executive Officer and Chairman of the Board of Directors, entered into a Termination and Consulting Agreement, pursuant to which Dr. Mohan agreed, among other things, to step down as the CEO and Chairman and to become a consultant to the Company effective June 30, 2008.

As part of this agreement, Dr. Mohan or his estate is entitled to the following compensation:

$500,000 to be paid in 24 equal monthly installments, beginning in July 2008
$5,000 toward legal fees incurred by Dr. Mohan related to this agreement
Continuation of health benefits under the Company’s health insurance plans through December 31, 2009

The Company recorded $510,000 in compensation expense in the second quarter of 2008 which represents the present value of the above outlined special termination benefits to Dr. Mohan. Additionally, in the same period, the Company reversed $192,000 in accrued bonus expense for Dr. Mohan. The net expense is reflected in the Salaries and wages line on the Statements of Operations. At December 31, 2008, $257,000 and $123,000, representing the short and long term components of the remaining obligation to Dr. Mohan, are included in the Accounts payable and accrued expenses and Other liabilities lines of the Balance Sheets, respectively. At December 31, 2009, $132,000, representing the total remaining obligation to Dr. Mohan is included in the Accounts payable and accrued expenses of the Balance Sheets.

Note 17 — Operating Leases

The Company leases its office space under an operating lease expiring in June 2011, with future minimum lease payments as indicated in the table below:

 
Years ending December 31:
        
2010   $ 62,000  
2011     31,930  
Thereafter      
Total future minimum lease payments   $ 93,930  

For the years ended December 31, 2009 and 2008, the Company incurred rent expense of approximately $68,000 and $67,000, respectively.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 18 — 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 and would result in the issuance of 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 warrant holder, 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 warrant holder, the liquidated damages may take the form of cash or additional shares of the Company’s Common stock. As of December 31, 2009, the Company has estimated the maximum undiscounted liquidated damages at $68,000. However, 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 its FDA clearance, the Company agreed to conduct a post-market surveillance study to further analyze the safety profile of bovine thrombin as used in the AutoloGelTM System. This study is estimated to cost between $500,000 and $700,000 over a period of three years, beginning in the third quarter of 2008. As of December 31, 2009, $111,000 had been incurred.

In September 2009, the Company renewed its operating lease for its office space in Rockville, MD which was set to expire in December 2009. Under the terms of the renewed lease, the new expiration date is June 30, 2011 and monthly rent expense is approximately $5,200 from January 2010 through December 2010 and approximately $5,300 thereafter.

In July 2009, in satisfaction of a new Maryland law pertaining to Wholesale Distributor Permits, the Company established a Letter of Credit, in the amount of $50,000, naming the Maryland Board of Pharmacy as the beneficiary. This Letter of Credit serves as security for the performance by the Company of its obligations under applicable Maryland law regarding this permit and is collateralized by the CD described in Restricted Short-Term Investments (see Note 4).

Note 19 — Subsequent Events

In February 2010, under the LTIP, the Company granted 190,000 stock options to board members for their upcoming service in 2010, 13,500 to new sales representatives, and 60,000 to a consultant. These options have an exercise price of $0.47, which was the closing market price on their date of grant and expire ten years from the date of grant. The board members’ options vest in equal monthly installments through December 2010, the other options vest over a period of approximately three years in equal annual installments.

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CYTOMEDIX, INC.
  
NOTES TO FINANCIAL STATEMENTS

Note 20 — Quarterly Financial Data (Unaudited) Required by Regulation S-X Item 3-02(b)

       
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
2009
                                   
Revenues   $ 539,137     $ 569,306     $ 538,313     $ 419,428  
Gross profit   $ 406,150     $ 451,333     $ 434,792     $ 315,104  
Net loss   $ (890,836 )    $ (886,794 )    $ (566,627 )    $ (1,094,327 ) 
Loss per common share – 
                                   
Basic and diluted   $ (0.03 )    $ (0.03 )    $ (0.02 )    $ (0.03 ) 
2008
                                   
Revenues   $ 627,393     $ 427,915     $ 499,371     $ 536,058  
Gross profit   $ 409,233     $ 321,314     $ 390,448     $ 368,722  
Net loss   $ (899,272 )    $ (1,249,858 )    $ (802,969 )    $ (4,708,650 ) 
Loss per common share – 
                                   
Basic and diluted   $ (0.03 )    $ (0.04 )    $ (0.03 )    $ (0.14 ) 

The Fourth Quarter of 2008 includes an impairment charge with respect to goodwill and patents of approximately $3,543,000.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T). 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 effective as of December 31, 2009.

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. Because of its inheren