Nuo Therapeutics, Inc. - Quarter Report: 2006 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

^{______________}

FORM 10-Q

^{______________}

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

For the quarterly period ended September 30, 2006

OR

¨       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}

^{______________}

CYTOMEDIX, INC.

^{(Exact Name of Registrant as Specified in its Charter)}

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)

^{______________}

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ¨  No ý

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý  No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 28,998,248 shares of Common stock, par value $.0001, outstanding as of October 31, 2006.

CYTOMEDIX, INC.

TABLE OF CONTENTS

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

CYTOMEDIX, INC.

BALANCE SHEETS

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

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CYTOMEDIX, INC.

STATEMENTS OF OPERATIONS – (unaudited)

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

2

CYTOMEDIX, INC.

STATEMENTS OF CASH FLOWS – (unaudited)

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

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1 — Description of Business

Cytomedix is a biotechnology company that develops, produces, licenses, and distributes autologous cellular therapies (i.e., therapies using the patient’s own body products), including Cytomedix’s proprietary AutoloGel™ System (the “AutoloGel™ System”) to produce a platelet rich plasma gel (“AutoloGel™”) for the treatment of wounds. To create AutoloGel™, the patient’s own platelets and plasma are separated through centrifugation and combined with several reagents. This process releases multiple growth factors from the platelets, creates a fibrin matrix scaffold, and forms a gel that is topically applied to a wound (under the direction of a physician). Upon topical application, the Company believes that AutoloGel™ initiates a reaction that closely mimics the body’s natural healing process. Cytomedix sells its products primarily to health care providers in the United States and licenses its patents to medical device and product suppliers in the United States. The Company was incorporated in the State of Delaware on April 29, 1998, and has its headquarters in Rockville, Maryland.

Note 2 — Basis of Presentation

The unaudited condensed financial statements included herein have been prepared by Cytomedix without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.

These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s 2005 Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2006.

Basic and diluted net losses per common share are presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share (“SFAS 128”), for all periods presented. In accordance with SFAS 128, basic and diluted net losses per common share have been computed using the weighted-average number of shares of common stock outstanding during the period. During periods of net losses, shares associated with stock options, stock warrants, and convertible preferred stock are not included because the inclusion would be anti-dilutive (i.e., reduce the net loss per share). The total numbers of such shares excluded from diluted net loss per common share were 10,237,312 and 11,422,155 for the nine months ended September 30, 2006 and 2005, respectively.

The Company adopted SFAS No. 123R, “Share-Based Payment,” as of January 1, 2006, using the modified prospective application. Under this method, all equity-based compensation awarded after the adoption date has been determined under the fair value provisions of SFAS No. 123R. Additionally, for all equity-based compensation awarded prior to the adoption date, compensation for the portion of awards for which the requisite service is performed after the adoption date is recognized as service is rendered.

Under the fair value method prescribed by SFAS 123R, the Company recorded $392,000 and $1,138,000, net of income taxes, in employee and director stock-based compensation for the three and nine months ended September 30, 2006, respectively. Had the Company continued to use the intrinsic value provisions under APB Opinion No. 25, employee and director stock-based compensation would have been $30,000 and $188,000, net of income taxes, for the three and nine months ended September 30, 2006, respectively. The change had no effect on the Company’s cash flow from operating, investing or financing activities, The change increased reported net loss and basic and diluted loss per share for the three and nine months ended September 30, 2006 by $362,000 and $950,000, respectively, and $0.02 and $0.03, respectively.

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 2 — Basis of Presentation – (continued)

Had compensation expense for the three and nine months ended September 30, 2005 been determined under the fair value provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” the Company’s net loss and net loss per share to Common shareholders would have differed as follows:

These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options would be amortized to expense over the vesting period and additional options may be issued in future years. The estimated fair value of each option granted was calculated using the Black-Scholes option pricing model. The following table summarizes the weighted average assumptions used in the model:

Note 3 — Capital Stock Activity

The Company issued 1,766,392 shares of Common stock during the nine months ended September 30, 2006. The following table lists the sources of and the proceeds from those issuances:

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 3 — Capital Stock Activity – (continued)

On May 1, 2006, the Company completed a Class D Warrant Offer whereby, for each $7.50 of Outstanding Warrants exercised by warrantholders during the offer period, the Company issued one Class D Warrant which the holder may exercise for one share of Cytomedix Common Stock at an exercise price of $3.50. These Class D Warrants have a five year term and are callable at the Company’s discretion if the closing price of the Company’s Common Stock is at least $4.50 for 10 consecutive trading days and certain other conditions are met. Through this offer, the Company received exercises of Outstanding Warrants totaling approximately $2,280,000 and issued 304,033 Class D Warrants. These Class D Warrants carry piggyback registration rights whereby the Company must include the shares underlying these Class D Warrants on any registration statement filed by the Company after the closing of the Offering.

On July 31, 2006, the Company’s common stock closed above $3.00 on the American Stock Exchange for the tenth consecutive trading day. As authorized by Section 8 of the Series C-1 Warrants and the Unit Offering Warrants, Cytomedix issued a Call Notice to call all warrants that were eligible and remained outstanding. As a result of an amendment to the terms of the warrant, which was accepted by a majority of the warrantholders, the exercise period was extended, giving the warrantholders until October 20, 2006 to exercise their warrants. The total number of warrants called was 1,605,734 at an exercise price of $1.50 per warrant. If all eligible outstanding warrants are exercised, the Company will receive approximately $2,400,000. As of September 30, 2006, 106,400 warrants were exercised pursuant to the Call Notice, resulting in proceeds of $159,600. The company will pay $0.01 for each warrant that is not exercised, for a potential total of approximately $15,000.

The following table summarizes the stock options granted by the Company during the three and nine months ended September 30, 2006. These options were granted to employees and board members under the Company’s Long-Term Incentive Plan.

Under the terms of his employment agreement, the CEO was entitled to 100,000 options as of April 20, 2006. These options are included in the figures above.

In May 2006, the Company paid a cash dividend on Series C Convertible Preferred shares at the rate of six percent per annum, amounting to $11,000. The dividends were calculated based on the number of days the shareholder held the Series C Convertible Preferred shares prior to conversion.

On August 30, 2006, as required by the Certificate of Designation filed with the Delaware Secretary of State, the Company declared a stock dividend on its Series A and B Convertible Preferred shares. This dividend resulted in issuance of 27,869 and 7,036 shares of Series A and B Convertible Preferred stock, respectively, and the issuance of 109 shares of Common stock, in lieu of preferred shares, to prior holders of Series A and B Convertible Preferred shares that were converted to Common stock prior to the payment of the preferred dividends.

No dividends were declared or paid on the Company’s Common Stock in any of the periods discussed in this report.

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 3 — Capital Stock Activity – (continued)

The Company had the following outstanding warrants and options at September 30, 2006:

Note 4 — Patent Settlement and License Agreements

During the second quarter of 2006, the Company entered into a Settlement and License Agreement with Biomet Biologics, Inc. (“Biomet”). Under the terms of the settlement agreement, Biomet is to make payments totaling $2.6 million to Cytomedix. Of this amount, $1.4 million was paid in May 2006 with the remaining $1.2 million to be paid in $100,000 installments each quarter beginning with the quarter ended September 2006 and concluding with the quarter ending June 2009. These payments are not tied to any performance commitments by Cytomedix and are not dependent on Biomet sales.

The Company recorded other income of approximately $2,453,000 (present value of the $2.6 million payout) for the Biomet agreement. This income, net of the present value of associated costs of approximately $783,000 consisting of royalty and contingent legal fees payable by the Company, is reflected as “Patent litigation settlements, net” on the Statements of Operations. Of the approximate $2,453,000 income recorded, $1,400,000 had been received as of September 30, 2006. The short and long term portions of the remaining balance are reflected under the “Patent settlements receivable” lines in the respective current and long-term assets sections of the Balance Sheets. Of the approximate $783,000 in related fees, $448,000 had been paid as of September 30, 2006. The short and long term portions of the remaining balance are reflected under the “Accounts payable and accrued expense” and “Other liabilities” lines, respectively, in the current and long-term liabilities sections of the Balance Sheets.

Note 5 — Commitments and Contingencies

The Company is prohibited from granting a security interest in the Company’s patents and/or future royalty streams under the terms of the Series A and B Convertible Preferred stock.

Under the Company’s plan of reorganization upon emergence from bankruptcy in July 2002, the Series A Preferred stock and the dividends accrued thereon that existed prior to emergence from bankruptcy are to be exchanged into one share of new Common stock for every five shares of Series A Preferred stock held as of the date of emergence from bankruptcy. This exchange is contingent on the Company’s attaining aggregate gross revenues for four consecutive quarters of at least $10,000,000 prior to July 2009 and would result in the issuance of approximately 350,000 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 in the event that the registration statement relating to the shares underlying the warrants becomes ineffective. The Company has estimated the maximum discounted liquidated damages at $91,000. Additionally, the Company has estimated that this amount does not exceed the difference between the fair values of its registered and unregistered securities and has therefore not recorded a liability.

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 6 — Related Party Transactions

BDR, Inc. (“BDR”) is a consulting firm owned solely by Jimmy D. Swink, Jr. The Company entered into a consulting agreement with BDR, dated July 11, 2002. Under this agreement, the Company granted BDR stock options representing the right to purchase 300,000 shares of the Company’s Common stock at $1.50 per share (the fair market value on the date of grant). Additionally, in February 2004, the Company issued 10-year warrants to purchase an additional 200,000 shares of Common stock at $1.50 to BDR, in connection with the consulting agreement. All such options and warrants are fully vested as of September 30, 2006. Pursuant to extensions, this consulting agreement expired on August 31, 2006. Under the consulting agreement, BDR received compensation totaling $35,000 and $158,764 (of which $77,764 was equity-based compensation) for services rendered in the first nine months of 2006 and 2005, respectively.

Note 7 — Income Taxes

No provision for income taxes has been recorded as there are no taxes payable due to the Company’s significant net operating loss carryforwards. Because the Company has determined that the realization of future benefit from the net operating losses is not assured, the Company has reserved for the entire remaining benefit.

Note 8 — Reclassification

For comparability purposes, certain figures for prior periods have been reclassified where appropriate to conform with the financial statement presentation used in 2006. These reclassifications had no effect on the reported net loss.

Note 9 — Subsequent Events

The exercise period resulting from the Company’s Call Notice to call all Series C-1 Warrants and the Unit Offering Warrants that were eligible and remained outstanding expired on October 20, 2006. Between October 1 and October 20, 2006, proceeds from the exercise of these warrants amounted to $243,750. The remaining 1,336,834 warrants that were not exercised have expired and were cancelled by the Company. Per the terms of the warrant agreements, the Company will remit $0.01 for each expired warrant, or approximately $13,000 in the aggregate.

At September 30, 2006 FEQ Investments, Inc. (“FEQI”). was the holder of 775,000 consultant warrants it had received for services previously rendered to the Company. On October 1, 2006, FEQI exercised these warrants and simultaneously entered into a Negotiable Term Promissory Note and related Security Agreement (the “Note”) with the Company. The exercise price for these options was $1 per share or a total of $775,000. The Note provides for the exercise proceeds to be delivered to the Company in installment payments ending on February 15, 2007. The Note bears interest on the outstanding balance at 6% per year. The Company holds the stock certificate resulting from the exercise as collateral.

On October 4, 2006, the Company entered into an addendum to the employment letter agreement with Mr. Andrew Maslan, the Company’s Chief Financial Officer. Pursuant to the addendum, Mr. Maslan’s annual base salary was increased to $155,000, his target bonus percentage was increased to 25%, and he was granted, under the Company’s Long Term Incentive Plan, an option to purchase 50,000 of the Company’s Common Stock at an exercise price of $2.73 per share. Additionally, Mr. Maslan would receive six month’s severance upon termination without cause and is required to provide 60 days notice to the Company prior to resignation.

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

The terms “Cytomedix” and the “Company”, as used in this quarterly report, refer to Cytomedix, Inc. The following discussion and analysis should be read in conjunction with the financial statements, including notes thereto, filed under Item 1 of this report and with the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, including the financial statements and notes thereto, and all other reports filed with the SEC. The Company’s financial condition and results of operation are not intended to be indicative of future performance.

The reader is cautioned that this Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When the words “believes,” “plans,” “anticipates,” “will likely result,” “will continue,” “projects,” “expects,” and similar expressions are used in this Form 10-Q, they are intended to identify “forward-looking statements,” and such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Furthermore, the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of management and the Board.

These forward-looking statements speak only as of the date this report is filed. The Company does not intend to update the forward-looking statements contained in this report to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may occur as part of its ongoing periodic reports filed with the SEC.

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

Overview of Business

Cytomedix is a biotechnology company that develops, produces, licenses, and distributes autologous cellular therapies (i.e., therapies using the patient’s own body products), including Cytomedix’s proprietary AutoloGel™ System (the “AutoloGel™ System”) to produce a platelet rich plasma gel (“AutoloGel™”) for the treatment of wounds. To create AutoloGel™, the patient’s own platelets and plasma are separated through centrifugation and combined with several reagents. This process releases multiple growth factors from the platelets, creates a fibrin matrix scaffold, and forms a gel that is topically applied to a wound (under the direction of a physician). Upon topical application, the Company believes that AutoloGel™ initiates a reaction that closely mimics the body’s natural healing process.

Company-sponsored studies indicate increased percentage of healing with AutoloGel™ as compared to traditional wound treatment modalities and competing treatments for diabetic foot ulcers, the Company’s initial focus within its target market.

Multiple growth factor therapies have not been widely used in the traditional healthcare setting because such therapies have generally not been available or widely known by clinicians. Until a few years ago, the autologous process of securing multiple growth factors from a patient’s blood products was, substantially, an exclusive treatment available through outpatient wound care centers affiliated with Curative Health Services (“Curative”). In January 2001, the Company purchased certain technology, assets and intellectual property rights associated with autologous platelet releasates from Curative and has since refined the product to a more marketable state.

Market

Cytomedix’s primary target market is the multi-billion dollar, chronic, non-healing wound market. Such wounds typically arise from one of three etiologies: diabetic foot ulcers, venous stasis ulcers, and pressure ulcers. The following table lists the prevalence of these wound types:

Breakdown of Chronic Wound Market
(number of wounds in millions)
Source: Growth Factors: Indications, Products, and Markets;
Kalorama Publications, Oct. 2003

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This prevalence is linked directly to increased aging demographics, vascular diseases, venous insufficiency, and excessive pressure and diabetic neuropathy.

Strategy

The Company has developed a three-pronged strategy to leverage its intellectual property and capitalize on the market for its AutoloGel™ System:

·

Obtain broad reimbursement from third-party payers

·

Enforce rights under the Company’s patents

·

Target the non-reimbursement sensitive market

Reimbursement and Clearance

The Company believes the full market potential of AutoloGel™ cannot be achieved without broad third-party reimbursement. Additionally, the Company believes a necessary predicate to securing this broad reimbursement is obtainment of a national reimbursement code from the Center for Medicare and Medicaid Services (“CMS”). While not an official precondition for a reimbursement code, the Company believes that securing Food and Drug Administration (“FDA”) clearance of the AutoloGel™ System for specific clinical indications, such as for the treatment of non-healing diabetic foot ulcers, will be heavily weighed by CMS when making its decision.

In 2005, the Company completed its prospective, randomized, blinded, controlled, multi-center clinical trial designed to prove the efficacy and safety of its AutoloGel™ System for the treatment of non-healing diabetic foot ulcers. The audited results yielded 40 patients who met the trial protocol. Analysis of the size of wounds in the study shows that 35 out of the 40 patients (88%) had wounds that were less than or equal to 7 square centimeters in area and 2 cubic centimeters in volume. For these most common wound sizes in the study, the healing rate of the AutoloGel™ group was 81.3% and that for the control group was 42.1%. The difference of 39.2% between these groups is clearly statistically significant, with a p-value of 0.036. Within the full cohort of the 40 patients, 68.4% of the patients treated with AutoloGel™ achieved full wound closures versus 42.9% of those patients treated in the control group. The difference of 25.5% between the healing rate of the AutoloGel™ group versus the control group is approaching statistical significance with a p-value of 0.125. The Company believes that the healing rates of AutoloGel™ at 81.3% for the most common wound sizes in the study and 68.4% for all wound sizes appear to be better than any other wound care products cleared by the FDA and covered by Medicare reimbursement with which the Company is familiar, although this comparison is not as reliable as a head-to-head study. The control group patients were not on placebo; rather, they were treated using a saline gel cleared by the FDA for wound treatment. If the control group patients healed at the originally anticipated rate of 20-30% for standard treatments for diabetic foot ulcers, the difference between the healing rates in the AutoloGel™ group versus the control group would have been even more strongly statistically significant.

These data reflect the results following an independent audit of the data by a former FDA branch chief responsible for Bio-Research Monitoring. During the audit, Cytomedix discovered that some patients originally included in the trial had not met the inclusion criteria or were not provided treatment according to the study protocol. This audit was conducted at the request of Cytomedix when preliminary data were inconsistent with independent and Company retrospective studies.

Based on the favorable audited results of the trial, and other favorable data compiled by the Company, in late January 2006 Cytomedix submitted a Pre-market Notification (“510(k)”) to the FDA seeking clearance of its AutoloGel™ System for diabetic foot ulcers and other indications. While AutoloGel™ is regulated by FDA under the Medical Device Amendments of the Food, Drug and Cosmetic Act, the FDA Center for Biologics Evaluation and Research (“CBER”) has the jurisdiction for reviewing such products. FDA assigned CBER as the primary center that reviewed and approved the Investigational Device Exemption (“IDE”) under which this clinical trial was conducted. On October 13, 2006, the FDA denied Cytomedix’s claim that AutoloGel™ is substantially equivalent to predicate devices, as asserted in the 510(k), and delivered to Cytomedix a Non-Substantial Equivalence (“NSE”) determination letter.

Based on the information contained in the NSE letter and conversations with the FDA, the Company believes that the primary grounds for rejecting the claim of substantial equivalence concern the use of bovine thrombin which is used to activate the platelet rich plasma (“PRP”) in the AutoloGel™ System. Bovine thrombin is a clotting agent

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derived from cows that has been used extensively on humans in surgery and other instances to stop bleeding. It is also used along with platelet gel therapy products that have been cleared by FDA for use in surgery. However, CBER cites published articles that contend that bovine thrombin creates antibodies that may decrease a patient’s Factor V count (a clotting agent naturally found within blood) which could cause a bleeding tendency.  The analysis and clinical interpretation of the data in Cytomedix’s submission to the FDA had concluded that the data from the clinical trial does not demonstrate this complication.  No statistically or clinically significant differences were noted between the PRP gel and control from baseline to endpoint laboratory shifts in hematology, clotting factors, and Factor V tests. Additionally, no clinically important changes in clotting factors that would cause concern about the effect of the PRP gel or control on Factor V activity were found during an independent monitor review of the medical records, including concomitant medications.

FDA also raised concerns relating to the clinical trial and the number of protocol violations which resulted in a lack of statistical significance in the results of the “intent-to-treat” patient cohort and the subset analysis that showed full statistical significance in the results for 88% of the wounds which represented the per protocol majority wound group within the trial. The Company believed that, during face-to-face meetings with the FDA and in subsequent formal responses to FDA questions, it had addressed these concerns to the FDA’s satisfaction, although they were still listed in the NSE letter from the FDA.

The Company disagrees with the decision as expressed in the NSE letter and, in response to an offer made by the FDA, has initiated an appeal via an informal review with an official in the Office of the Center Director for CBER. Cytomedix views this as a continuation of the consultative process that has been going on with the FDA since the submission of its 510(k) in January 2006. Cytomedix is pursuing this appeal not in any adversarial manner, but merely as a desire to continue the consultative process of review for which, perhaps, there might not have been adequate time for the FDA to review all data and analysis relevant to its concerns.

The Company also plans to make the necessary submissions to CMS, the American Medical Association, and any other public or private professional groups for evaluation of the data in connection with granting reimbursement codes and further strengthening the general clinical acceptance of this therapy. In order to facilitate the reimbursement process, the Company has already initiated a pharmaco-economic study to evaluate the cost effectiveness of the AutoloGel™ System. Such studies are performed to present scientific, demographic and economic information to justify to CMS and other payor organizations that a particular product and therapy is clinically safe and effective and cost effective with respect to its alternatives. Preliminary results of the pharmaco-economic study suggest a favorable comparison of AutoloGel™ over competing treatments in both clinical and cost effectiveness. Furthermore, the Company has had the results of its clinical trial published in a peer-reviewed journal. The article, entitled “A Prospective, Randomized, Controlled Trial of Autologous Platelet-Rich Plasma Gel for the Treatment of Diabetic Foot Ulcers,” was published, as the feature article in the June, 2006, issue of Ostomy/Wound Management (“OWM”). OWM is the premiere journal for information on wound care and the related, overlapping fields of skin care, ostomy care, incontinence care, and nutrition, and is the only peer-reviewed, multidisciplinary publication specifically targeted to the advanced wound care practitioner. The Company believes that publication in peer-reviewed journals is generally regarded as a necessary precursor to a favorable reimbursement decision from CMS and also is an important step toward building broad clinical awareness and acceptance of AutoloGel™. Should the Company be successful in its efforts to obtain reimbursement, third-party payors, including CMS, would permit payment for the AutoloGel™ System for use in certain types of chronic wounds. If this is accomplished, AutoloGel™ could then be positioned as a reimbursed alternative treatment for the estimated 4.5 million chronic wounds that are treated each year in the United States. In addition, to raise the scientific awareness of the use of AutoloGel™, posters and oral presentations of the clinical trial results have been accepted for presentation at multiple scientific/medical meetings including:  American Diabetes Association, American Podiatric Medical Association, and the Clinical Symposium on Advances in Skin and Wound Care.

The Company currently sells a treatment commercially, as the AutoloGel™ Component Kit for use as an autologous wound therapy performed under the physicians’ practice of medicine. This approach represents the practice currently prevalent in the platelet gel therapy industry, both in the treatment of chronic wounds as well as the use of platelet gel therapies in the operating room in fields such as orthopedic and cardiovascular surgery. However, without FDA clearance, the Company’s ability to make claims for the AutoloGel™ System regarding its use to treat or heal wounds is limited. The Company believes this is a significant barrier to broad clinical and market acceptance of the Company’s product. It is also possible that at some point the FDA may require companies to conduct clinical trials on all specific clinical therapies and uses for which their products can be used, whether or not they make a

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specific labeled claim to that effect. Further, it is also possible that FDA could require companies to stop marketing platelet gel therapies until FDA clearance or approval for specific wound healing claims is obtained.

Patents and Licensing

The Company has initiated a broad based patent and licensing strategy intended to (i) enforce the rights under the Company’s patents in order to ensure that Cytomedix shareholders derive economic benefit from the Company’s intellectual property, and (ii) assist the Company in establishing a dominant market position for the AutoloGel™ System within the market for autologous growth factor products used for the treatment of chronic wounds. In 2005 and 2006, the Company identified and successfully pursued numerous companies, both small and large, that currently market products similar to AutoloGel™, that the Company believed were infringing or inducing infringement of its intellectual property rights. Settlements have been achieved and licenses have been granted to these companies resulting in a royalty stream for Cytomedix. The primary license agreements are listed below:

——————

(1)

Cytomedix has two license agreements with DePuy Spine, Inc.. The original license agreement was dated March 19, 2001, amended March 3, 2005, and provides for the license to the use of applications under Cytomedix patents in the fields of diagnostic and therapeutic spinal, neurosurgery and orthopedic surgery. The second license agreement is dated March 4, 2005 and applies to all fields not covered in the original license agreement as amended.

(2)

Certain minimum royalties may apply to certain agreements and other royalty percentages may apply to future products covered under selected license agreements.

(3)

Some of these amounts are payable over a period of time as defined in executed notes payable to Cytomedix.

(4)

These dates reflect the expiration of the license in the U.S., which coincides with the expiration of the Knighton Patent in the U.S. In some cases, the licensing agreements applicable to territories outside the U.S. extend to the expiration of the patents in the respective foreign countries.

(5)

The Settlement and License Agreement with Biomet Biologics, Inc. (“Biomet”) called for a $2.6 million payout from Biomet to Cytomedix. This payout took the form of $1.4 million payable upon execution of the agreement and $100,000 payable at the end of each of 12 consecutive quarters beginning with the quarter ending September 2006. These payments are not tied to any performance commitments by Cytomedix and are not dependent on Biomet sales.

Since Cytomedix’s licensing activities are recent, it is premature to predict the resulting royalty streams from these licensing agreements.

The Company’s ongoing patent enforcement strategy is being conducted on a full contingency basis by the law firms Fitch, Even, Tabin & Flannery and Robert F. Coleman and Associates, both based in Chicago, Illinois.

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The Company expects to incur “Cost of royalties” (consisting of royalty expense and contingent legal fees) in the range of 30-50% of on-going royalty revenues relating to these and future settlements.

The Company intends to press forward aggressively in other instances of infringement with aggressive legal and business actions to defend its intellectual property and, where possible, arrive at equitable settlements with infringers.

Non-Reimbursement Sensitive Market

The Company is also working to penetrate the segment of the national market that is not sensitive to direct reimbursement for the Company’s product. This includes capitated environments such as skilled nursing facilities, long-term care facilities, long-term acute care facilities, health maintenance organizations and home health as well as government agencies, (e.g. the Veterans Administration) and universities.

The Company is addressing various parts of this market via distributors,independent sales representatives, and internal sales representatives.

Results of Operations

Summary

Increased revenues driven by higher royalties and wound-related services provided under a limited term contract, higher gross margins, and reduced operating expenses, primarily as a result of a reduction in equity-based compensation and the completion of the Company’s clinical trial, contributed to a $1.2 million (55%) reduction in net loss, comparing the third quarter in 2006 to the same period a year ago.

Increased revenues driven by higher royalties, higher gross margins, reduced operating expenses (primarily as a result of reduction in equity-based compensation, professional fees and the completion of the Company’s clinical trial), and an increase in other income (primarily as a result of increased net patent litigation settlements) contributed to a $4.3 million (74%) reduction in net loss, comparing the first nine months of 2006 to the same period a year ago.

Revenues

Revenues rose $128,000 (29%) to $574,000 and $448,000 (44%) to $1,471,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year. Revenues are normally generated from two sources: the sale of disposable kits and reagents and royalties received from licensing activities. In the third quarter of 2006, the Company also recognized $117,000 in revenue related to comprehensive wound services provided for a government agency under a limited term contract. This service revenue is not expected to continue.

For the three month period, the increase was attributable to increased royalties of $60,000 and increased sales of $117,000 related to the services mentioned above, partially offset by a $49,000 decrease in product sales. Increases in royalties were due to an additional license agreement entered into during the fourth quarter of 2005. Product sales decreased primarily due to decreased sales to nursing homes, government agencies, and Medicaid customers.

For the nine month period, the increase was attributable to increased royalties of $487,000 and increased sales of $117,000 related to the services mentioned above, partially offset by a $156,000 decrease in product sales. Increases in royalties were due to six new license agreements entered into during 2005. Product sales decreased primarily due to decreased sales to nursing homes, government agencies, and Medicaid customers.

Gross Profit

Gross profit rose $100,000 (40%) to $351,000 and $292,000 (62%) to $761,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year. For the same periods, gross margins rose to 61% from 56% and to 52% from 46%, respectively.

For the three month period, the increase in gross profits was primarily due to the service related revenues described above.

For the nine month period, the increase in gross profits is primarily attributable to the licensing agreements entered into after March 31, 2005 which carry a greater gross margin than previously existing licensing agreements.

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Royalties from the licensing agreements with DePuy Spine, Inc., inclusive of the amortization of deferred revenue associated with the initial deposit of $750,000, generates a gross margin of approximately 20%. The Company expects gross margins generated from all other licensing agreements to be in the range of 50-70%.

Operating Expenses

Operating expenses fell $1,217,000 (46%) to $1,447,000 and $2,909,000 (42%) to $4,016,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year. The Company relies heavily on the use of equity-based compensation to various employees, consultants and other parties that provide services to the Company. Due to the magnitude of this non-cash expense, the exhibits below highlight the impact of this equity-based compensation on the Company’s operating expenses. These exhibits present the Company’s operating expenses in accordance with generally accepted accounting principles (“GAAP”), the amount of equity-based compensation expense included in the respective line items, and then the operating expenses without the equity-based compensation, which is not in accordance with GAAP (“NON-GAAP”). The following exhibits are presented as an additional tool to evaluate the Company’s operating expenditures between years:

Operating Expense Information Not in Conformity with Generally Accepted Accounting Principles

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Salaries and Wages

Salaries and wages fell $912,000 (64%) to $510,000 and $576,000 (23%) to $1,957,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year.

For the three and nine month periods, the decrease was primarily due to lower non-cash equity-based compensation ($832,000 and $534,000, respectively) and fewer employees.

Consulting and Related Party Consulting Expenses

Consulting and related party consulting expenses rose $42,000 (219%) to $61,000 and fell $144,000 (49%) to $149,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year.

For the three month period, the increase was primarily due to consulting fees associated with the Company’s Sarbanes Oxley Section 404 compliance efforts and FDA 510(K) Pre-Market Notification, partially offset by reduced fees due to the expiration of a related party consulting contract.

For the nine month period, the decrease was primarily due to lower non-cash equity-based compensation ($99,000) and the overall reduction in use of outside consultants.

Professional Fees

Professional fees fell $15,000 (8%) to $187,000 and $486,000 (55%) to $396,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year. Professional fees consist primarily of legal and accounting services.

For the three month period, the change was nominal.

For the nine month period, the decrease was primarily due to decreases in patent litigation related expenditures ($315,000) due to the successful completion of several patent infringement actions in 2005, decreases in fees to securities and general counsel attorneys ($92,000) due primarily to reduced current period activity related to the Company’s listing on the American Stock Exchange, and decreases in accounting fees ($79,000).

Clinical Trial Related Expenses

Clinical trial related expenses fell $430,000 (100%) to zero and $1,325,000 (96%) to $62,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year. The Company completed the active phase of the trial in 2005 and in the first two quarters of 2006 incurred only limited expenses associated with the close out of the trial. The Company does not expect to incur any future expenditures related to this trial.

General and Administrative Expenses

General and administrative expenses rose $98,000 (17%) to $670,000 and fell $378,000 (21%) to $1,395,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year.

For the three month period, the increase was due primarily due to increases in equity-based compensation to the board of directors and outside service providers ($98,000). Beginning in 2006, equity-based compensation for the board of directors is calculated using the fair value method per current accounting guidance.

For the nine month period, the decrease was due primarily to decreases in equity-based compensation to the board of directors and outside service providers ($122,000), reduced travel related expenditures ($117,000), reduced AMEX filing fees ($52,000), and reduced investor services ($51,000), partially offset by increases in marketing related activities ($46,000).

Other Income/Expenses

Other income fell $68,000 (52%) to $64,000 and rose $1,001,000 (124%) to $1,808,000 comparing the three and nine months ended September 30, 2006, respectively, to the same periods last year.

For the three month period, the decrease was primarily due to decreases in patent litigation settlements ($115,000, net), partially offset by higher interest income ($55,000) as a result of higher interest rates and larger cash balances.

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For the nine month period, the increase was primarily due to increased interest income ($85,000) as a result of higher interest rates and larger cash balances, increased patent settlement income ($697,000, net), and a one time charge ($228,000) in 2005 recorded for the issuance of 65,000 shares of the Company’s Common stock in return for a full settlement and release of all claims from a lawsuit brought against the Company relating to its emergence from bankruptcy.

Modified EBITDA Information Not in Conformity with Generally Accepted Accounting Principles

Throughout this report, the Company has presented income statement items in conformity with GAAP, except where otherwise noted. Given the magnitude of non-cash expenses, the Company utilizes a modified EBITDA (earnings before income taxes, depreciation and amortization and other non-cash items) to evaluate and monitor the results of operations. Although EBITDA is a non-GAAP financial measure, the Company believes that this information will allow for an additional clarification of the Company’s performance and provides the readers of the Company’s financial statements an additional tool to evaluate the comparative performance of the Company. Following is a reconciliation of the comparative net income (loss) to Common shareholders to modified EBITDA for the three and nine months ended September 30, 2006 and 2005:

——————

(1)

Consists of 65,000 shares of the Company’s Common stock (market value $227,500) issued in return for a full settlement and release of all claims from a lawsuit brought against the Company relating to its emergence from bankruptcy and 8,673 shares of the Company’s Common stock (market value $35,000) issued for executive search fees.

Liquidity and Capital Resources

The Company’s operating revenues do not cover the costs of its operations. The cash position of the Company at September 30, 2006 was $4,665,000. The Company believes that it will have adequate cash on hand to fund operations for the next twelve months. However, additional cash may be required if operating revenues do not materialize, the cost of operations increases, or if the Company’s efforts to appeal the FDA’s decision prove unsuccessful and a change in strategy requires significant short-term funding.

The Company has no material commitments for capital expenditures.

Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. All working capital required to implement the Company’s business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company.

Prospects for the Future

Cytomedix’s success is directly dependent on the success of AutoloGel™, which the Company believes has a very good chance for success in the marketplace.

The Company is aggressively addressing the reimbursement market. The Company believes that in order to capture a significant share of this market, it must first obtain a CMS reimbursement code. Obtaining this code may be more likely if FDA clearance is obtained. As discussed earlier in this Item 2, under the subheading Reimbursement and Clearance, the Company is currently in the process of appealing the FDA’s denial of its claim of substantial equivalence in its application for marketing clearance. The Company cannot predict whether the NSE decision will be reversed, but Cytomedix continues to believe that its high levels of safety and effectiveness indicated by the data

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from the clinical trial more than meet the level of “reasonable assurance of safety and effectiveness” and demonstrates substantial equivalence to the predicate devices. The Company hopes to share additional information with the FDA, or agree on mitigating measures such as restrictive labeling, that will allow the FDA to provide marketing clearance. Furthermore, the Company is completing a pharmaco-economic study and is optimistic of favorable results. However, even if FDA clearance is obtained, there is no guarantee the Company will receive a CMS reimbursement code. If CMS reimbursement is obtained, it is more likely that reimbursement may be obtained from the various commercial third-party insurers as well, which will help facilitate broad penetration into the reimbursement market. The Company refers the reader to a more detailed discussion regarding the clinical trials and reimbursement earlier in this Part I Item 2 under the heading Reimbursement and Clearance.

If the Company is ultimately unable to obtain marketing clearance for its AutoloGel™ System, the Company’s ability to obtain broad reimbursement for its treatment and execute on its primary business strategy may be placed in significant jeopardy. There are steps the Company could conceivably pursue if its appeal is unsuccessful, but the Company will need to better identify and assess the viability of those options. Also, the Company could pursue other activating reagents such as recombinant thrombin or human thrombin to potentially remove the FDA concern surrounding the Company’s use of bovine thrombin. However, while the Company intends to explore such potential strategic business adaptations, it is currently focusing the large majority of its resources on pursuing the appeal in order to provide the best opportunity for success.

In capitated environments, which are not sensitive to direct reimbursement for AutoloGel™ (e.g., long-term care, long-term acute care, home healthcare), the weekly use of AutoloGel™ saves much of the labor costs associated with daily and multiple dressing changes, while at the same time increasing the percentage of healing as compared to traditional treatments. The Company believes that data from its retrospective studies and current reports from clinicians, and the greater proportion of wound healing as compared to an enhanced control as evidenced in its recently completed clinical trial, prove greater efficacy than any competing treatment with FDA approval or clearance. The Company expects that both the facility/agency providing the care as well as the wound patient will realize direct benefits from the use of AutoloGel™. Cytomedix is actively pursuing this market, primarily through its distributor, NWT. The Company may also look to more narrowly focus its approach to this market to increase the likelihood of success in the short term. The Company does not believe that its efforts in this “non-reimbursement sensitive” market will be impacted by the recent FDA decision.

Finally, Cytomedix believes it has a very strong patent position in the platelet gel arena. The Company expects royalty revenues to continue through the life of its process patents and will continue to pursue licensees for its technology where it feels there is a strong business case. The Company also does not believe that its royalties and license agreements are affected in any way by the FDA decision.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not enter into financial instruments for speculation or trading purposes. In accordance with the Company’s investment policy, cash is to be invested in bank and institutional money market funds, or in T-Bills or short-term T-Notes. At September 30, 2006, the Company’s cash balance of approximately $4.7 million was maintained primarily in bank and institutional money market accounts. These accounts are sensitive to changes in the general level of interest rates. Based on the Company’s cash balances at September 30, 2006, a 100 basis point increase or decrease in interest rates would have an approximately $47,000 impact on the Company’s annual interest income and net loss. Actual changes in rates may differ from the hypothetical assumption used in computing this exposure.

Item 4. Controls and Procedures

The Company’s CEO and CFO have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934). Based on their evaluation, they have concluded that as of September 30, 2006, the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Cytomedix in its reports filed with the SEC is recorded, processed, summarized, and reported within the governing time periods.

Cytomedix is subject to Section 404 of the Sarbanes Oxley Act (“SOX404”) for the year ending December 31, 2006. The Company has engaged an outside consultant to assist in its compliance with SOX404 and is in the process of making the necessary preparations.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There were no material changes from the risk factors as previously disclosed on the Company’s Form 10-KSB filed with the Securities and Exchange Commission for the year ended December 31, 2005, except as discussed below.

There Is No Guarantee That The Company Will Be Able to Obtain FDA Marketing Clearance for AutoloGelTM

On October 13, 2006, the FDA issued a Non-Substantial Equivalence determination letter to the Company in response to its 510(k) application for marketing clearance submitted in January 2006. Although the Company is appealing this decision, there is no guarantee that its efforts will be successful and there is a risk that the Company may not be able to obtain marketing clearance based on the results of its clinical trial. There is also no assurance that a new trial, alterations to the Company’s treatment, or other measures would result in marketing clearance. The inability to obtain such a clearance could significantly jeopardize the Company’s ability to obtain reimbursement from Medicare and/or other third-party insurers and could significantly jeopardize the Company’s ability to execute its strategic goals, including the ability to sustain itself from on-going operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company issued 1,766,392 shares of Common stock during the nine months ended September 30, 2006. The following table lists the sources of and the proceeds from those issuances:

——————

(1)

The issuance of the shares under the Company’s Long-Term Incentive Plan was registered by the Company’s S-8, which was originally filed on November 1, 2004 and amended on June 12, 2006.

The Company has used the cash proceeds from these issuances for general corporate purposes. All shares were issued in private offerings exempt from registration pursuant to Section 4(2) of the Securities Act, except as described in footnote 1 to the above table.

On May 1, 2006, the Company completed a Class D Warrant Offer whereby, for each $7.50 of Outstanding Warrants exercised by warrantholders during the offer period, the Company issued one Class D Warrant which the holder may exercise for one share of Cytomedix Common Stock at an exercise price of $3.50. These Class D Warrants have a five year term and are callable at the Company’s discretion if the closing price of the Company’s Common Stock is at least $4.50 for 10 consecutive trading days and certain other conditions are met. Through this offer, the Company received exercises of Outstanding Warrants totaling approximately $2,280,000 and issued 304,033 Class D Warrants. These Class D Warrants carry piggyback registration rights whereby the Company must include the shares underlying these Class D Warrants on any registration statement filed by the Company after the closing of the Offering.

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On July 31, 2006, the Company’s common stock closed above $3.00 on the American Stock Exchange for the tenth consecutive trading day. As authorized by Section 8 of the Series C-1 Warrants and the Unit Offering Warrants, Cytomedix issued a Call Notice to call all warrants that were eligible and remained outstanding. As a result of an amendment to the terms of the warrant, which was accepted by a majority of the warrantholders, the exercise period was extended, giving the warrantholders until October 20, 2006 to exercise their warrants. The total number of warrants called was 1,605,734 at an exercise price of $1.50 per warrant. If all eligible outstanding warrants are exercised, the Company will receive approximately $2,400,000. As of September 30, 2006, 106,400 warrants were exercised pursuant to the Call Notice, resulting in proceeds of $159,600. The company will pay $0.01 for each warrant that is not exercised, for a potential total of approximately $15,000.

The following table summarizes the stock options granted by the Company during the three and nine months ended September 30, 2006. These options were granted to employees and board members under the Company’s Long-Term Incentive Plan.

Under the terms of his employment agreement, the CEO was entitled to 100,000 options as of April 20, 2006. These options are included in the figures above.

No dividends were declared or paid on the Company’s Common Stock in any of the periods discussed in this report. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future, but instead will retain any earnings to fund growth. The Company is prohibited from declaring dividends on its Common Stock as long as any shares of Series A, B, or C convertible preferred stock are outstanding unless all accrued dividends on these classes of preferred stock have been paid. Once there are no shares of Series A, B, or C convertible preferred stock outstanding, any decision to pay cash dividends on the Common Stock will depend on the ability to generate earnings, the need for capital, the overall financial condition, and other factors the Board deems relevant.

Item 3. Defaults Upon Senior Securities

N/A

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

A majority of the warrantholders of the Series C-1 Warrants and the Unit Offering Warrants accepted an amendment to extend to October 20, 2006 the exercise period resulting from a Call Notice issued by Cytomedix on July 31, 2006 to call all such warrants that were eligible and remained outstanding.

Item 5. Other Information

N/A

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are furnished as part of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signed originals of this written statement have been provided to Cytomedix, Inc. and will be retained by Cytomedix, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT INDEX

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